A file photo of finance minister P. Chidambaram. In his speech, Chidambaram mentioned a shift from the prevailing profit-sharing system (that allows for upfront recovery of costs) to a regime that shares revenue (where costs are not “covered”) between the hydrocarbon contractor and the government. Photo: HT
A file photo of finance minister P. Chidambaram. In his speech, Chidambaram mentioned a shift from the prevailing profit-sharing system (that allows for upfront recovery of costs) to a regime that shares revenue (where costs are not “covered”) between the hydrocarbon contractor and the government. Photo: HT

A rational gas pricing policy

Will the new policy bring in improved exploration activity driven by better realization of gas prices in the markets?

The one area where the 2013-14 Union budget could have done with greater clarity was the oil and gas exploration sector. It does, however, give some pointers to the expected policy overhaul in the next few months.

In his speech, finance minister P. Chidambaram mentioned a shift from the prevailing profit-sharing system (that allows for upfront recovery of costs) to a regime that shares revenue (where costs are not “covered") between the hydrocarbon contractor and the government.

For another, the budget dwells on the marketing side of domestic gas. The accent, though, is on the development side of the gas market—the finance minister spoke of “uncertainties" that the forthcoming policy will eliminate. The specific issue relates to pricing of gas, which, under the current regime, is approved at one-third of global prices. The forthcoming policy seeks to link it with global prices.

The two pointers are likely to be the pivots of the new policy in the works. The question is: will this prescription bring the results that the government hopes to see—that of improved exploration activity driven by better realization of gas prices in the markets?

The Achilles’ heel is no doubt the proposed exploration policy: in principle, the new policy seems fine. By getting out of having to approve the costs involved in exploration and development activities, the government escapes the risk of the contractor billing more than the actual money spent—the incentive lies in claiming it from revenue from the fields.

On the face of it, for an honest contractor it ought to be a zero-sum game—all that has to be done is rework the math in the bids for blocks; the risk of non-recovery of costs is factored in upfront in the event of a discovery.

However, this argument gets blurred when the blocks in question involve very high exploration risk, either because of lack of data or the dismal outcome of its interpretation.

The above factors call for a dual-band approach. The government needs to devise a risk-calibrated policy. One option allows for cost recovery and the other does not.

Is it time to link domestic and global gas prices? Tell us at views@livemint.com

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