Father, forgive them, for they know not what they do

It is truly ironic that, at a time when the Prime Minister of India is enthusiastically promoting the “Make in India” brand, one of his key Ministries has set in motion actions that, if carried to fruition, will ensure that a critical energy resource will be increasingly imported, at tremendous cost to the Indian nation. I refer here to the attempts by the Petroleum Ministry in Delhi to reframe the terms and conditions for the award of acreages for exploration for oil and gas in India. A contractual model that has stood the test of almost three decades and led to the discovery of petroleum reserves in India for the first time since independence by private investors, both Indian and foreign, is sought to be replaced by a revenue-sharing regime that has been hastily cobbled together on the basis of a report (the Rangarajan Committee Report) drafted by a Committee that had few members with any long term experience of the petroleum exploration sector, especially its contractual arrangements. For the lay reader, who would not be familiar with the jargon of petroleum contracts, I will discuss the issues in generic terms of what the actions imply for private investment in this sector.
Probably because of its experience in recent years with certain companies, where there were reductions in annual gas production in relation to estimates, the government wants companies to commit to a certain level of annual production, with penalties payable for production shortfalls beyond a certain level. This approach betrays a fundamental lack of understanding about the behaviour of petroleum reservoirs, scarcely what one would expect of a Petroleum Ministry! There is also a stipulation that revenues from oil and gas production will first flow into an escrow account, with government having the first right to revenues from this account. Any financial dispute between the company and the government can lead to choking off the access of the company to revenues from petroleum production, hampering its cash flows and hindering its future production plans. Not only that, no banker in her right senses would advance loans to a company which is insecure about its revenues from production. The revenue-sharing model itself suffers from some glaring infirmities — it is neither fiscally progressive nor does it provide any incentive to companies to develop marginally profitable oil and gas fields. Finally, the absence of contractual stability means that companies are dependent on the munificence of the government to not impose onerous fiscal terms on them in the future, again a sureshot recipe for hesitation in the financial community to fund such ventures, given the potential uncertainty of future cash flows.
In essence, what all the above adds up to is an exercise in contract micromanagement by the government, exactly what companies were exercised about over the last decade. The pervasive environment of distrust that the intended petroleum regime is set to engender will drive away potential investors. In all this, the government (and, more specifically, the Petroleum Ministry) has done no introspection on how its errors of commission and omission have contributed to a lukewarm investment climate in this sector, seeking instead to blame the existing contractual regime and so-called rapacious companies. Whether through oversight or design, the Directorate General of Hydrocarbons (DGH) was never developed into a highly professional regulatory organisation on the lines of the Norwegian Petroleum Directorate. Staffing of the DGH never took into account its multifarious tasks, which included functioning as a central repository for geological/geophysical data, strategising the bidding process for exploration acreages and managing the issues subsequent to award of contracts, ranging from coordination of grant of licences/leases by different governments, interpreting and handling contractual issues and effectively monitoring petroleum operations at every stage. As it transpired, confidence was never reposed by the government in the DGH to carry out its regulatory functions, with the result that, at every point, the DGH referred contractual issues to the government for decisions, although there was a Management Committee structure in place in the existing contracts. With the Ministry seeing a succession of generalist bureaucrats flitting in and out of the exploration desks, there was no overarching policy for dealing with issues raised by companies. The result was ad hocism of the worst sort, compounded by the ideological predilections of whoever happened to be the Petroleum Minister at the time. Add to this cauldron of indecision a cocktail of uninformed public and parliamentary criticism, ex-post facto comments from the Comptroller and Auditor General (CAG) and Central Bureau of Investigation (CBI) enquiries and you had a perfect recipe for bureaucrats reaching the conclusion that “no decision is the best decision”. Decisions on gas pricing and the like were kicked upstairs to the Group of Ministers while decisions on permitting additional exploration work programmes, approving development plans and costs incurred by companies on operations were tossed around in the Ministry. No effort was made to use dispute resolution mechanisms in the contract (sole experts, arbitration, etc.) to resolve issues. Finally, the government took the safest, time-honoured course of action: it set up an Expert Committee to overhaul the entire contractual system.
We are, therefore, in a situation today where the attitude of government towards private investment in the petroleum sector appears to be one of maximum revenue extraction, in contrast to the philosophy prevailing in the Petroleum Ministry corridors in the 1990s, when it was recognised that, to encourage risky exploration ventures, government had to be ready to forego some early revenues in the interests of promoting energy security. Unfortunately, in the atmosphere of mistrust and “trial by media” that exists today, any such approach would be immediately categorised as a sellout. The bureaucracy, habitually cautious by nature, sees no reason to stick its neck out and spend the next twenty years giving reasons in different fora for its decisions. The country is the ultimate loser in three ways: (a) not being one of the high potential petroleum-endowed countries, the present approach will drive away investors and reduce private domestic and foreign direct investment in this sector, thereby reducing chances of adding to petroleum reserves and putting greater strain on foreign exchange reserves, more so with the inability of the two national oil companies to make any significant petroleum discoveries in the last 25 years; (b) the total lack of clarity on gas pricing, and the subsidising of inefficient fertiliser and power producers through artificially keeping gas prices low, will adversely affect the economic viability of developing renewable energy sources, which remain uncompetitive, harming the future of both energy and ecology in India; and (c) the combination of (a) and (b) above will severely hamper energy security by dampening private enthusiasm to develop energy sources like shale gas and coal bed methane which (as the USA has shown) can completely alter the energy scenario in a few years. With the Middle East becoming more and more volatile by the day, India has to start seriously worrying about how its future energy needs are going to be met. Unfortunately, there does not appear to be any vision of the future guiding and informing the actions of the Petroleum Ministry mandarins. One can only wring ones hands and echo Jesus Christ “Father, forgive them, for they know not what they do”.

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