Hydrocarbon policy: what’s in it for investors?

The government announced a slew of measures in the hydrocarbon sector on Thursday that are expected to have a positive impact on the Indian energy sector in the long run


The blocks under the new policy will be awarded through an open-acreage policy, which will enable E&P (exploration and production) companies choose the blocks from the designated area.
The blocks under the new policy will be awarded through an open-acreage policy, which will enable E&P (exploration and production) companies choose the blocks from the designated area.

The government announced a slew of measures in the hydrocarbon sector on Thursday that are expected to have a positive impact on the Indian energy sector in the long run. Importantly, there will be a uniform licensing system which will cover all hydrocarbons, i.e. oil, gas, coal bed methane, etc., which should help companies explore all kinds of oil and gas resources under one licence.

The blocks under the new policy will be awarded through an open-acreage policy, which will enable E&P (exploration and production) companies choose the blocks from the designated area. Also, there is a shift to a revenue-sharing model, which will be easy to administer for the government. The measures announced are positive for the sector and are expected to simplify licensing rules and accordingly boost investments in the sector.

What’s in it for investors?

One of the key announcements made is allowing pricing and marketing freedom for natural gas produced from difficult terrain. This would be applicable to all discoveries in deep water/ultra-deep water/high temperature/high pressure areas which were yet to commence commercial production as on 1 January 2016 and for all future discoveries in such areas.

However, there is a ceiling price, which means that prices will not be totally free. According to analysts, the ceiling price based on new guidelines, starting 1 April works out to $6-6.5 per million British thermal units (mmBtu). Domestic gas prices are at $3.82 per mmBtu currently. That looks attractive but it’s important to realize that the benefits from this development are not going to be visible in the near future.

As Nitin Tiwari, an analyst at Antique Stock Broking Pvt. Ltd, says, the new pricing for production from difficult fields could be beneficial for Oil and Natural Gas Corp. Ltd (ONGC) when its KG-DWN-98/2 starts production. Similarly, Reliance Industries Ltd (RIL) too could benefit when it starts production from its R-Cluster and satellite fields. “However, production from the above mentioned fields may start by FY19 or beyond, which means benefits from the development are accordingly going to accrue in the longer-run, than in near term,” points out Tiwari.

Secondly, “the state of the macro environment and commodity (crude/NG/FO) prices would also be crucial for above mentioned developments as policy itself is not a sufficient condition to facilitate investment,” he adds.

The government has also said that in case of pending arbitration or litigation pertaining to gas pricing covering such fields, the new rules will be applicable only on the conclusion/withdrawal of such litigation/arbitration. This does not augur well for RIL, which is currently in a legal battle with the government over gas pricing. On Thursday, the ONGC stock had increased marginally, while RIL’s share price declined about 3%.

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