The cabinet’s decision last week to engineer a much-needed makeover for oil and gas exploration is expected to unlock resources worth $39 billion (Rs 2,61,000 crore) by simplifying rules and offering incentives, but the real deal is in the manner it has recognised risk-sharing and boosted transparency in a sector where the state and the private sector are locked in an inevitable embrace that is best not reduced to a stifling bear hug.
The new system, symbolically called HELP (Hydrocarbon Exploration and Licensing Policy), shifts away from the current regime of profit-sharing, which has left a messy trail in the tussle between Reliance Industries Ltd and the government in the RIL-operated Krishna-Godavari D6 field.
The contract that involved producers to first recover costs and share future revenues as profits was difficult to police for the government functioning virtually as a sleeping partner after auctioning off licences to a low-cost, high-revenue bidder.
The new regime will have upfront revenue share for the government. The formula-linked free pricing and marketing freedom given to oil producers also dismantles a controlled regime that led to ugly disputes that hurt the investment climate. It is more difficult for producers to fudge market prices than back-end accounts, and hence the new regime’s transparency is one to be lauded in the battle against corruption involving the government on the one hand and the potential to cheat the government of its legitimate revenues on the other.
The new policy also unites various hydrocarbons (oil, gas and coal-bed methane) under a common licensing regime that gives enhanced flexibility to explorers. At the same time the government has wisely protected users like fertiliser and electricity producers from future spikes in fuel prices by imposing a price cap linked to imported fuels.
No doubt, there are winners and losers in every regime, and the new framework may well aid some entrenched incumbents such as RIL or ONGC, but the saving grace is that unseemly disputes may be avoided in future. The annual auction has been replaced by an anytime-bidding regime based on available data. We cannot think of a better framework under the circumstances. However, the government would do well to keep an eye on the state of competition among bidders to avoid a handful of companies forming a cartel of sorts to exploit oil riches. Big is not always beautiful.