Private Players Wary of Oil and Gas in India due to an Unfavorable Climate

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Private Players Wary of Oil and Gas in India due to an Unfavorable Climate PR Newswire NEW DELHI, September 6, 2012 NEW DELHI, September 6, 2012 /PRNewswire/ -- CNBC TV 18 Organized a Panel Discussion Where a Group of 6 Experts Discussed the Long Term Strategy to I n d i a ' s Energy Security Concerns About 93% of India's energy comes from fossil fuels and Oil and Gas accounts for about 43% of the total energy produced from the same. Of this 43%, a large part comprises of imports of oil and gas which has created an uncomfortable situation for a large developing economy like ours. Over the last decade, increasing the domestic production and encouraging exploration has been a focus area. Nonetheless, the oil and gas reserves of the country remain largely unexplored, primarily due to huge capital requirements. Exploration and production of Oil and Gas is a risky proposition where the inputs are generally deterministic, relatively independent of the quality and quantity of reserves. On the other hand, outputs are probabilistic, subject to probability of finding reserves of suitable quality. Therefore, only an attractive investment regime can attract domestic as well as foreign investor's risk capital to India. Domestic players lag behind, and poor prospect from profitability point of view has made foreign players apprehensive. An investor-friendly climate can only be created if regulatory bodies ensure reasonable returns and relatively risk-free environment to operate.

Informations

• Publié par: cnbc-tv-18
• Nombre de lectures: 128
• Langue: English

Extrait

Private Players Wary of Oil and Gas in India
due to an Unfavorable Climate
PNRE WN eDwEsLwHirI,e September 6, 2012

NEW DELHI
,
September 6, 2012
/PRNewswire/ --

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to
India's
Energy Security Concerns

About 93% of
India's
energy comes from fossil fuels and Oil and Gas accounts
for about 43% of the total energy produced from the same. Of this 43%, a
large part comprises of imports of oil and gas which has created an
uncomfortable situation for a large developing economy like ours. Over the last
decade, increasing the domestic production and encouraging exploration has
been a focus area. Nonetheless, the oil and gas reserves of the country remain
largely unexplored, primarily due to huge capital requirements.
Exploration and production of Oil and Gas is a risky proposition where the inputs
are generally deterministic, relatively independent of the quality and quantity of
reserves. On the other hand, outputs are probabilistic, subject to probability of
finding reserves of suitable quality. Therefore, only an attractive investment
regime can attract domestic as well as foreign investor's risk capital to
India
.
Domestic players lag behind, and poor prospect from profitability point of view
has made foreign players apprehensive. An investor-friendly climate can only
be created if regulatory bodies ensure reasonable returns and relatively risk-
free environment to operate.
With the New Exploration Licensing Policy (NELP), a major thrust was given to
bring in the much needed capital and state-of-the-art technology to
the exploration sector.
It was aimed to create an investor-friendly climate and was marked by
attractive fiscal and contractual features. The policy also addressed the
underground risks involved in exploration of sedimentary basin. However, risks
over the ground, mainly due to policy inaction and unfavorable investment
climate have made investors wary.
According to Deepak Mahurkar, Director and Leader, Oil and Gas industry,
PricewaterhouseCoopers India, "Over a period of time, what we now observe is
that not only the underground risks remain as it is, except for few excellent
discoveries, but the above aground environment has also not improved much."
Political uncertainty, frequent changes in policy and stricter policy controls have
already made the foreign investors apprehensive about
India
. If not addressed
immediately, these would also start affecting the domestic players in next few
years.
Talking about the government's public-private partnership (PPP) model, Shyam
Saran, Chairman of the Research and Information Systems for Developing
Countries and Former Foreign Secretary pointed out, "We have not been able
to create a regulatory or an incentive regime."
Being a highly regulated sector until recently, the government has also not

Being a highly regulated sector until recently, the government has also not
done enough to facilitate PPP in this segment and has not been able to attract
private oil and gas exploration companies in tapping new blocks.
The crux of
India's
energy security challenge lies in pricing. Price regulations
have limited the attractiveness of the sector. Distortion in pricing have waned
the investor sentiment. Moreover, lower prices have resulted in little or no
demand-discipline on consumer side, which contributes to a huge wastage of
power. Higher gas prices are a necessity for the sector. Unless higher prices
are given to the producers, private sector investors will not invest.
Further, subsidies provided to sensitive petroleum sector contradicts the
freedom granted to companies under Administered Pricing Mechanism. There
appears to be a wide gap between the objectives, policy and implementation,
especially for Oil and Gas in
India
.
"If you have administered price mechanism, which does not take into account
the need for ensuring that there should be adequate returns, then obviously
expectation that foreign capital will come in or foreign private capital will invest
is I think a pipe dream," Saran added.
Government attempts to micro-regulate the sector, specifically production and
exploration, are unlikely to be successful due to lack of institutional capacities
to support such intents. The process involves 60+ licenses to be acquired - a
cumbersome and costly process in terms of time and money. This is a major
drawback in
India's
investment climate and a major hindrance in attracting
foreign investment.
Given the grim outlook, policymakers need to make timely decisions in order to
avoid impending policy paralysis. Failure to do so would result in a serious crisis
in the power sector in near future. Government should maximise energy
production and focus on energy security rather than maximizing revenues.
"You cannot afford to have policy paralysis for a day longer. Next time a crisis
hits us, the payoff will be so enormous that we will not be able to come out of it
as simply and as quickly as we came out in 1991," FICCI Secretary General Rajiv
Kumar comments.
Primary Media Contact: Baani Grewal, [e-mail], 91-
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