• Lessons from soggy oil & gas auctions

    The response to India’s first open acreage auction for hydrocarbon exploration and development has not quite set the Yamuna on fire. No foreign oil major responded. Reliance kept away. Vedanta-Cairn has been recommended by an empowered committee of secretaries for award of 41of the 55 blocks on offer, and state-owned ONGC for two blocks.

    Open acreage, not distinguishing between oil and natural gas, revenue-sharing instead of the profit-sharing after cost-recovery model, ill-suited for India’s trust deficient political economy — these are all sound features of the auction. Yet, the response has been tepid. The government needs to introspect why.

    The way Cairn has been treated is an obvious deterrent for foreign majors. It is one company that can claim to have actually dented India’s oil import bill by discovering hydrocarbons in places that others had failed to. It undertook a consolidation exercise for assorted companies operating in India’s oil and gas sector, with prior official intimation and no change of beneficial ownership.

    Yet, a retrospective tax was slapped on the company for imputed capital gains. The tax dispute has dragged on, the government has frozen its assets and the uncertainty has hurt its global market valuation. Why should foreign oil majors rush to invest in India’s minefield of arbitrariness?

    It is also worth asking what the nation has gained from the emaciation of ONGC.

    It was made to take over GSPC, Gujarat’s costly misadventure into deepwater exploration, its coffers were raided for the make-believe disinvestment in HPCL, the government’s stake in the company being sold to ONGC, which had to borrow heavily to finance the acquisition, and it was also persuaded to make a huge dividend payment to the government, besides investing in Russia’s Rosneft.

    ONGC today lacks the financial muscle to play a muscular role in developing India’s hydrocarbon reserves. If the government is serious about slashing import dependence for oil, ONGC must be allowed to play its intended role, not serve as a cash cow for the government.

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