The country’s oil and gas sector has once again been engulfed in the inconsistencies that marked policy directions given during the licence-permit raj. The recent development where the government has decided to change the terms of oil and gas contracts mid-way by seeking higher earnings for itself clearly shows that the sector still largely remains controlled. Policies continue to be designed to suit the interests of the government rather than companies who are required to pump in billions of dollars in investment with no surety whether oil and gas would flow from exploration blocks and start providing them returns. This is one reason why the investment climate in the sector has remained subdued. Despite the government’s best efforts to attract investment in the oil and gas sector, both local and global, through New Exploration and Licensing Policy (NELP), the results have been lacklustre so far.
In fact, fresh bidding for oil and gas blocks was suspended for almost seven years since the ninth NELP round of bidding in 2010 as not enough investors were interested in exploration under a cost-recovery production sharing contract (PSC) that offered them limited flexibility. All seemed to be changing last year when the government launched the new open acreage licencing (OAL) round under its new Hydrocarbon Exploration and Licencing Policy. This policy not only gave the freedom to explorers to decide their own blocks but also allowed them marketing and pricing freedom and put the bidding under revenue share mode instead of the earlier PSC.
In the midst this breakthrough reform, it has emerged that the government has taken the retrograde step of changing the terms of oil and gas contracts for producing blocks in the balance contract period to meet its revenue shortfall. The government has already told contractors of Ravva and Cambay blocks to fix its share of profit from the earnings even though it meant that companies would take longer to recover their investment and start earning profit. The companies have retaliated by threatening to stop fresh investment in producing blocks. This threat, if carried through, would have serious consequences on domestic oil and gas production and severely dent investor confidence and shatter hopes of attracting money through bids under OALP. The government still has time to correct its mistake as work programmes on oil and gas fields for FY19 are still getting finalised. If the changes proposed is withdrawn, it is expected that current investment would go unhindered while money would flow into fresh exploration of sedimentary basins of the country that would go a long way in ensuring that we reduce import dependence by 10 per cent by 2022.
Inconsistency in policy is one of the main areas of concern for foreign investors, some of who have already dragged the government into international arbitration on retrospective changes made in tax-related issues. Not surprisingly, one of the companies fighting the tax issue is from the oil and gas sector: UK-based Cairn Energy. Oil and gas is a high-capital-high-risk business that often needs the state’s support during the exploratory phase. It is thus important that the country put in place sound systems of contracts and commensurate rules and regulations that ensure fair play and give everyone a chance to flourish. This is one way to serve the national interest.