The unrefined truth about India's crude output decline

Whether India has significant hydrocarbon reserves to exploit is open to question. India is supposed to have less than 600 million tonnes of reserves, spread out across its vast landmass and offshore, within the country’s Exclusive Economic Zone. Bombay High remains the biggest find and still the largest source of crude. Brahmaputra Valley, where oil was first struck in colonial times, and Rajasthan’s Barmer are major onshore sites. The Cauvery and Godavari basins, as well as the area off the coast of Gujarat, are estimated to have decent deposits. But the point is to find them and pump the oil and gas out.

Since oil and gas are abundant in the geographic book-ends of the Indian sub-continent, the Persian Gulf in the West and Southeast Asia in the East, it stands to reason that India also contains large deposits that wait to be discovered. Geologists have been looking to the geography of continental drift to identify potential reserves in locations that once were adjacent to sites of proven, active reserves, such as Guyana and Equatorial Guinea. The point is to locate India’s reserves and pump oil and gas out of them.

This has not proved easy. The burden of producing the bulk of India’s crude output falls on the shoulders of ONGC. Over the years, ONGC has become a less efficient explorer and developer of hydrocarbons and more cash cow guided to make acquisitions, not all of which make economic sense. Its track record of finding oil and gas has been less than spectacular since the discovery of Bombay High. When ONGC announced last month its plan to spend ₹31,000 core on new finds, its share price tanked.

The last major find was by Cairn in Rajasthan, the field now called Mangala and owned by Vedanta. Otherwise, India has been trying hard to get foreign expertise and money into new hydrocarbon discoveries. In the latest round of open acreage auctions, three state-owned companies (ONGC, Oil India Ltd and GAIL) and a newbie private company Sun Petro took part. India has consistently failed to attract large global players into exploration and development.

India now offers reasonably attractive terms for new investors in the oil and gas sectors. It offers open acreage, meaning companies can identify and bid for blocks of their choice in a designated expanse, instead of bidding for blocks identified by the government. The country also offers revenue sharing, instead of production sharing after recovery of cost, as the method of remunerating developers. Cost recovery is open to charges of cost-padding, disputes by the Comptroller and Auditor General and the spilling of oil company revenues into the political domain. Revenue sharing is most suited for countries such as in the Persian Gulf where the likelihood of finding oil/gas is high. However, given the political economy of cost recovery, India can settle for revenue sharing, even if this could depress revenues — companies would bid low revenue shares to be handed over to the government, given the likelihood of having to spend lots on exploration before a decent deposit is located. The royalty companies have to pay has been lowered. In spite of all the prettying up of this particular bride, there are very few eligible suitors in the ring.

It is not inconceivable that the shoddy treatment meted out to Cairn has a role to play in deterring external players. Cairn, a specialist hydrocarbon discovery company, discovered oil and gas where other companies, including ONGC, had failed to find any. This includes the Barmer field as well. Yet, an internal reorganization of assorted subsidiaries to consolidate them into one single company, without any change in beneficial ownership, prior to an initial public offering, led to a retrospective demand for capital gains tax. The company disputed the demand. The government responded by seizing dividends, selling shares and withholding tax refunds. Cairn won an international arbitration award against this highhandedness. The government refused to honour the award. The company identified Indian assets abroad to be seized, and foreign courts started granting permission to seize the assets. The government, after the initial bluster, changed its posture on retrospective taxation and settled with Cairn.

This has left a bitter taste in the mouth of would-be investors in India. The experience of assorted companies with regard to India’s readiness to abide by international arbitral awards, ranging from Devas to Amazon in its dispute with Future, acting as a proxy for Reliance Industries Ltd, does not generate enthusiasm about the ease of doing business in India for foreign companies.

The arbitrary use of central enforcement agencies against political opponents might serve to cow minor leaders of the Opposition but has a chilling effect on external perception of fair play at the hands of the Indian state. India has dipped on a range of globally accepted indicators of quality of governance, ranging from press freedom, democratic integrity, hunger and malnutrition to religious freedom. These do not directly map on to crude production in the country but serve as disincentives for the deployment of serious capital and expertise in India with a longish period of lock-in, as in the case of investment in hydrocarbon exploration and development.

Till India changes its performance on such parameters, ONGC will have to learn the tricks it seems to have forgotten since the heady days of discovering and developing Bombay High. It would help if the government were to see ONGC as an oil major rather than as a financial investor who could take over companies and hand over cash to the government.