Home >companies >news >Panel backs spinning off ONGC tech services arm

New Delhi: Spinning off the technical services arm of state-owned Oil and Natural Gas Corp. (ONGC) into a separate entity, stronger energy diplomacy, a reduced role for the Directorate General of Hydrocarbons (DGH), continuation of the production sharing contract (PSC) regime and market pricing for gas are among the key recommendations of a 10-member expert committee tasked with finding ways to reduce India’s import dependence in hydrocarbons.

“The technical services arm of ONGC should be spun off into a separate entity. The ONGC services arm should compete with other OFS (oilfield service) providers for its share of business from ONGC and should be free to render technical services to other E&P (exploration and production) providers," said the panel, formed in March 2013 and led by economist and former finance secretary Vijay Kelkar, in its final report titled Roadmap for Reduction in Import Dependency in the Hydrocarbon Sector by 2030 which was put on the petroleum ministry’s website last month.

Over 3-5 years, this entity should compete for business from ONGC and should be free to render services to other firms.

Over a week ago, the petroleum ministry suspended Shashi Shankar, director, technical and field services, citing allegations of misconduct in a procurement. While queries emailed to an ONGC spokesperson remained unanswered till press time, in response to Mint’s query over the phone, Shankar said that he would revert. No response was received till press time and Shankar didn’t respond to a text message left on his cellphone.

“Such vertically integrated oil companies are a legacy of the Soviet era," the panel said.

ONGC, which invested 22,700 crore during the 10th Plan (2002-07) and increased it to 1.7 trillion in the 11th Plan (2007-12), is planning to spend 2.65 trillion in the ongoing 12th Plan (2012-17).

The panel also recommended forming a group represented by core ministries and energy companies to make concerted efforts to develop a “a country-specific value proposition". It suggested setting up a think tank focused on West Asian countries, given India’s energy imports from the region. It also suggested posting energy diplomats or specialists at global energy hubs.

India imports 80% of its crude oil and 18% of its natural gas requirements. The country follows the US, China and Russia in energy use, accounting for 4.4% of global energy consumption. The recommendation comes in the backdrop of competition between India and China to control natural resources and energy assets to fuel growth.

The DGH, the petroleum ministry’s technical arm, currently manages petroleum resources, monitors PSCs and assists the government in auctioning energy fields. It is manned by staff drawn from state-owned energy firms. The panel recommended that the DGH restrict itself to technical oversight of contractors and be “an independent regulator for the upstream oil and gas sector".

The report said the primary responsibility of the management committee and DGH should be oversight of energy resources. They should focus only on ensuring adherence to standards and best practices “and not get involved in the cost assessment or fiscal oversight of the contract", the report said.

“Safeguarding the fiscal interest of the state... should be the primary responsibility of the revenue agencies," it added.

The centre’s plan to start hydrocarbon exploration stems from broader concerns that India’s energy import bill of around $150 billion is expected to balloon to $300 billion by 2030.

The report, though, said it’s possible to cut annual import bill by as much as $70-80 billion with policy reforms and institutional measures.

Production sharing vs revenue sharing

The committee also recommended the continuation of the PSC framework, citing “global best practices and the suitability to the Indian geological context". PSC allows for cost recovery by exploration and production (E&P) companies before they pay the government its share. The panel has effectively contradicted the recommendations of another committee headed by C. Rangarajan, former chairman of the Economic Advisory Council to the Prime Minister, which favoured a revenue-sharing regime. Explorers want the existing PSC regime to continue.

“The committee has reservations against accepting the ‘biddable’ Revenue Sharing Contract (RSC) model due to the inherently misaligned risk-return structure which leads either (i) to lower levels of production due to resultant reduced exploration efforts and lower recovery ratios or (ii) to high windfall gains to operators encouraging contract instability due to political economy factors," the report said.

This comes in the backdrop of allegations levelled by the Comptroller and Auditor General that Reliance Industries Ltd (RIL), under PSC, overstated its expenses at the KG-D6 basin, resulting in loss of revenue to the exchequer. “The committee has proposed two fiscal regimes either of which could be deployed: i. Model I: PSC linked to Investment Multiple, with modified contract administration including self-certification of costs by the contractors ii. Model II: PSC with ‘biddable’ supernormal profits tax," the report added.

Two members—B.N. Talukdar, director general of hydrocarbons, and S.V. Rao, former director (exploration), ONGC—opposed the recommendation. Talukdar wrote, “There is no mention about the third model i.e. draft Revenue Sharing Contract Model which has been prepared in line with the recommendation of the Rangarajan Committee. This draft Revenue Sharing Contract is being discussed at Govt. level after obtaining various comments from the stakeholders. This alternative model could very well be the third possible model in addition to the above two".

“If Operator interest wavers, as it is repeatedly assumed, a final call could be taken for Model II, after an improved mechanism for the trigger is in place," Rao wrote in the report.

Spokespersons for the petroleum ministry and RIL didn’t respond to emailed queries.

The panel has also recommended “transition to market-determined gas prices by 2017 or next pricing period." The NDA government last October revised the current price of natural gas to $5.6 per mmBtu from $4.2 mmBtu. The prices will be revised every six months.

The other recommendations include providing 7,000 crore to DGH from the oil industry development cess for setting up a National Data Repository and including oil and gas under the proposed goods and services tax framework.

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