New Delhi: Irritants in India’s policies, such as an ambiguity in tax holiday on natural gas production, are impeding foreign investments in oil and gas exploration and production (E&P), Oil and Natural Gas Corp. Ltd (ONGC) chairman and managing director R.S. Sharma said.
Hard talk: ONGC chairman R.S. Sharma said policymakers should urgently address issues of interpretation ambiguities to attract more international players into India’s largely untapped exploration sector. Harikrishna Katragadda / Mint
In an interview to NewsWire18 on Monday, the head of the country’s largest hydrocarbon producer said policymakers should urgently address such ambiguities to attract more international players into India’s largely untapped exploration sector.
“I feel policymakers must give more thought to the fact that the major E&P players have shied away because of minor irritants like controversy on Section 80-IB. In fact, this has been a controversy which should have been addressed much earlier,” he said.
According to the provisions of the Income-tax Act, 1961, companies commercially producing mineral oil are eligible for a 100% tax break for seven consecutive assessment years, including the initial year. In the budget for the fiscal year 2009, the finance ministry had limited the definition of mineral oil to only crude oil, not including natural gas.
However, the exclusion was not justified as E&P operations cover the entire hydrocarbon sector, and are not specific to oil or gas. A clarification on the issue is awaited.
The tax holiday was a major incentive to attract exploration companies into India and its withdrawal could keep investors away.
Last year, the deadline for oil and gas blocks auction under the seventh round of India’s New Exploration Licensing Policy (Nelp-7) was extended thrice due to this ambiguity.
This year, too, the government has deferred the deadline for the ongoing Nelp-8, as confusion prevails over the issue of tax holiday on gas production.
“If there is any ambiguity in the interpretation on the meaning of mineral oil, that ambiguity must be removed. In case we genuinely want international players to come and conduct exploration here, our policy has to be more investor-friendly,” Sharma said.
He said another irritant is the delay in implementing the long-pending drilling holiday for deepwater exploration blocks, which could send wrong signals to global upstream players and deter them from investing in India. “The government has considered drilling holiday, but that is not getting implemented. It will get implemented, as everyone has supported it. But this delay again causes chaos.”
The drilling moratorium, which is to come in retrospective effect from 1 January 2008, will give operators three more years to complete their minimum work programme committed under the production-sharing contracts signed with the government as a result of scarcity in deepwater and ultra-deepwater rigs worldwide.
Petroleum and natural gas minister Murli Deora had announced this moratorium as early as January 2008, but it is yet to get a final approval. Once implemented, it will give a huge relief to exploration firms such as Reliance Industries Ltd (RIL) and ONGC.
“What I’m saying may not be to the liking of certain policymakers. But I would like to be very candid. These are irritants, illogical irritants. And they need to be addressed,” Sharma said.
He said excessive accountability could be yet another factor that can drive away prospective foreign investors to countries that offer better value for their money.
“For instance, there was so much controversy over the pricing of Reliance’s D6 gas. That was unwarranted... Ultimately, what they have got now is no favour done to them... Such incidents create hesitancy on the larger group of players to come and operate (in India),” he said.
Despite crude oil prices having tumbled after hitting $147 (Rs7,306 today) a barrel last July, Sharma is confident the current weakness is short-term and prices will rebound steeply once the global economy recovers from the meltdown.
“I would still say this is a short-term phenomenon. Long-term phenomenon is based on fundamentals. So, based on fundamentals, prices are not going to remain (at) $50 a barrel,” he said.
He said global recession has led to some contraction in crude oil demand in the Organisation for Economic Co-operation and Development and other developed countries, leading to a fall in prices. “Once the economy comes out of this recession, demand will start rising and the supply capacity will not be able to meet that demand.”
According to Sharma, demand for oil will rise with the economic recovery leading to widening the demand-supply gap, as resources are drying up at an alarming pace. “The growth in demand has been quite fast. Ten years hence, supply capacity will not be able to cope with rising demand. The world will have to look for non-conventional and alternative sources of energy.”
ONGC has taken a long-term view of oil prices while drawing up its investment plans and has no intention to scale down its capital expenditure due the current weakness in prices. “We have not decided to slow down our activities like exploration, development, IOR/EOR (improved oil recovery/enhanced oil recovery) projects. These investments are taken on a long-term view, and I’m quite bullish on the long-term views,” he said.
The company has lined up a capital expenditure in excess of Rs19,000 crore in the fiscal year to 31 March. ONGC looks to maintain its position as the country’s top explorer and producer in the foreseeable future, Sharma said.
Besides, the company is also focusing on non-conventional forms of energy such as coal-bed methane and underground coal gasification, and has taken up pilot projects on developing shale gas, exploration of uranium and is supporting research on gas hydrates.
Sharma said the company is constantly assessing acquisition prospects, which could include overseas oil and gas assets or even a company. Earlier this year, ONGC Videsh Ltd, the overseas investment arm of ONGC, acquired the UK’s Imperial Energy Corp. Plc. with producing oil fields in Russia for around $2 billion.
“I don’t like to elaborate (on the prospective acquisition targets). But we are working on some other prospects,” he said.
Sharma said his company has tied up with RIL and Indian Oil Corp. Ltd (IOC) to bid for developing an oil block in Venezuela’s Carabobo region in the Orinoco oil belt.
“There is a huge opportunity. Almost $20 billion investments should take place there. We have joined hands with Reliance and IOC. Venezuelan crude is heavy, and to start production there you need an upgrader, a refinery,” he pointed out.
Sharma said the company is also pursuing an interest in Satpayev oil field in Kazakhstan and has registered itself for the Iraqi oil and gas block licence round.
He said the company’s financial performance during the year ended 31 March could be under pressure due to lower production and rising costs of services. “We did not get the upside of the high prices, production levels have been under pressure. So, I feel results will be under pressure (in 2008-09).”
The company will declare its earnings for the quarter to March and the full fiscal year by 30 June.
According to latest government data, ONGC’s crude production during the year fell 2.2% to 25.36 million tonnes, nearly 7% short of the company’s target. “In 2008-09, our oil production would have been 92-93% of our targets,” Sharma said. Natural gas production, however, inched up marginally by 0.7%.
He said the cost of services moved in tandem with the rise in crude oil prices early last fiscal year. “As a result of this, we did not benefit from high crude prices. Most services were contracted at high rates.”
Sharma, however, said ONGC has been achieving unprecedented exploration success over the past three-four years, and the reserve accretion in 2008-09 is likely to be the highest in the last two decades.
He said the government is expected to soon increase the price of natural gas produced from nomination blocks awarded to ONGC. This price is regulated by the government under the administered pricing mechanism (APM).
“Definitely, there is a need for increasing APM gas prices, and that proposal is currently being processed. I feel, it should come soon after the elections,” he said.
Shares of ONGC closed on Monday at Rs889.20, up 2.74%, on the Bombay Stock Exchange, on a day its benchmark Sensex index rose 6.41% to 12,134.75 points.