Energy Sector Reforms

Context: Energy Sector Reforms is an important topic for UPSE PRELIMS and GS Paper3.

Petroleum

• Crude petroleum occurs in sedimentary rocks of the tertiary period.
• It consists of hydrocarbons of liquid and gaseous states varying in chemical composition, colour and specific gravity.
• It is an essential source of energy for all internal combustion engines in automobiles, railways and aircraft.
• Its numerous by-products are processed in petrochemical industries such as fertiliser, synthetic rubber, synthetic fibre, medicines, vaseline, lubricants, wax, soap and cosmetics.
• Venezuela, Saudi Arabia, Canada, Iran, Iraq, Kuwait, Russia are some major countries with the largest oil reserves.
• Digboi, Naharkatiya and Moran in Assam, Ankleshwar, Kalol, Mehsana, Navagam, Kosamba and Lunej in Gujarat; Mumbai High in Maharashtra are important oil-producing areas in India.

Natural Gas

• Natural gas is found with petroleum deposits and is released when crude oil is brought to the surface. It can be used as a domestic and industrial fuel.
• Russia, Norway, UK and the Netherlands are the major producers of natural gas.
• In India, Jaisalmer, Krishna Godavari delta, Tripura and some areas offshore in Mumbai have natural gas resources.
• The Gas Authority of India Limited was set up in 1984 as a public sector undertaking to transport and market natural gas.

Oil and Natural Gas Corporation

• Oil and Natural Gas Corporation (ONGC) is a Maharatna Public Sector Undertaking (PSU) of the Government of India.
• It was set up in 1995 and is under the Ministry of Petroleum and Natural Gas.
• It is the largest crude oil and natural gas company in India, contributing around 70% to Indian domestic production.

Benefits:

• Development of support services.
• Employment generation.
• Transfer of advanced technology.
• Reducing import dependence.
• Improve energy security of the country.
• Save the precious foreign exchange on imports.

Kirit Parikh Committee-

The Kirit Parikh panel was set up by the Petroleum and Natural Gas Ministry to suggest a methodology for pricing of diesel and cooking fuel.

Recommendations of Kirit Parikh Committee:

• The Government-appointed Kirit Parikh Committee has recommended a price increase of Rs. 5 per litre in diesel, Rs. 4 per litre in kerosene, and Rs. 250 in LPG cylinder with immediate effect.
• Subsidised LPG cylinders should be reduced from the present nine to six per annum to each household. It has called for capping the subsidy on diesel at Rs. 6 per litre. At the same time, it has called for elimination of subsidy on diesel within one year. This would cut the subsidy bill (or save the exchequer) by Rs. 72,000 crore.
• The panel has said that the Government should take steps to pass on the impact of rise in price of diesel to consumers, and move rapidly towards making the price of diesel market-determined.
• In view of high under-recovery of Rs. 10.51 per litre on diesel, HSD (High Speed Diesel) prices should be raised by Rs. 5 per litre with immediate effect. The balance under-recovery should be made up through a subsidy of Rs. 6 per litre to public sector oil marketing companies (OMCs).
• In future, OMCs should be permitted to revise the prices above the subsidy cap on their own.
• The committee is of the view that the PDS kerosene price should be comparable to diesel price to prevent diversion and adulteration. This can be accomplished if PDS kerosene is priced at full market price, and the benefit of the subsidy to the deserving consumers i.e. BPL families, is given through direct cash transfer mechanism. The direct transfer of subsidy to BPL families country-wide should be fast-tracked, and completed within the next two years. Till this is implemented, price of kerosene should be increased by Rs. 4 per litre immediately, and thereafter be revised from time to time at least in line with growth in the per capita agriculture GDP.

C. Rangaranjan Committee on Fuel Pricing Reforms-

• The panel chaired by the Prime Minister’s economic adviser C. Rangaranjan recommended that the domestic gas price be indexed with international prices, implying that the present practice of the administered price mechanism be scrapped.
• At the same time, it has proposed doing away with the existing production sharing formula for hydrocarbon excavation, and replacing it with the sharing of revenue between the contractor and the government.
• The committee’s recommendation, if accepted, is likely to bring about paradigm shift in the pricing of gas, a key input, and may lead to an increase in input costs for power and fertilizers.
• The new gas price will be calculated on the basis of an average of prices at exporting countries and at prices at international hubs such as the US’s Henry hub, the UK’s National Balancing Point and Japan’s custom cleared rate.
• The present production sharing contracts (PSC) between government and contractors have run into trouble and has resulted in delay of projects. We have suggested four major steps and it will result into speedy implementation of projects and more bids. But this will only be applicable on new contracts. Some people are calling it a win-win situation.
• There will be a single gas price...and the arm’s length price thus computed as the average of the two price estimates would apply equally to all sectors, regardless of their prioritization for supply under the gas utilization policy.

Hydrocarbon Exploration and Licensing Policy

• India is the 3rd largest consumer of crude oil and petroleum products. India's oil import bill is subject to global prices swings as the country is dependent on imports for around 80% of its crude demand.
• HELP was approved by government in March 2016 replacing New Exploration Licensing Policy (NELP).
• The new policy promises simpler rules, tax breaks, pricing and marketing freedom and is part of a government strategy to double oil and gas output by 2022-23.

Key Features of the New Hydrocarbon Policy-

1. Uniform Licensing
   1. HELP provides for a uniform licensing system that will cover all hydrocarbons such as oil, gas, and coal bed methane.
   2. Under NELP separate licenses were issued for exploring different type of hydrocarbons. This leads to additional costs, as a separate license is required if a different type of hydrocarbon is found while exploring a certain type.
2. Revenue Sharing Model
   1. HELP provides for revenue sharing model, the government will receive a share of the gross revenue from the sale of oil, and gas, etc and will not be concerned with the cost incurred.
   2. The NELP was profit sharing model, where profits are shared between Government and the contractor after recovery of cost. Under it became necessary for the Government to scrutinize cost details of private participants and this led to many delays and disputes.
3. Pricing
   1. HELP has marketing and pricing freedom. Before HELP, contracts were based on production sharing with possibility of gold plating (incorporation of costly and unnecessary features) the investment and causing loss to government by ‘manipulating profit’. To reduce the complexity of handling contracts, it was changed to revenue sharing.
   2. Under the new system, a graded system of royalty rates will be introduced. Under this system the royalty rates will decrease from shallow water to deep water to ultra-deep water areas.
   3. While fixing royalties, the present system does not distinguish between shallow water fields (where cost of exploration and risks are lower) and deep water fields (where cost and risks are higher).
4. Open Acreage Licensing
   1. Under HELP, oil companies can select blocks of their choice under this Open Area Licensing (OAL) regime. Earlier it was the government which selected the blocks where oil exploration can be carried out. It will enable a faster coverage of the available geographical area.
   2. Under NELP exploration of hydrocarbons was limited only to the blocks which have been put on tender by the government.
5. National Data Repository
   1. National Data Repository (NDR) is an integrated data repository of Exploration & Production data of the Indian sedimentary basins.
   2. NDR will provide an important data resource In line with the Digital India initiative.
   3. A bidder (an Indian or a foreign company) after studying the data through NDR can propose an Expression of Interest (EOI), throughout the calendar year in two windows without waiting for announcement of bids.

EDITORIAL- Fuel price optics

Levies must be cut further to offset the effect of the continuing surge in global oil prices

• The Centre finally decided last week to relent and act on the advice of monetary policymakers by cutting the excise duty on petrol and diesel by ?5 and ?10 a litre, respectively.
• The duty reduction, announced on the eve of Deepavali, immediately helped lower the retail prices of the two fuels by at least about 5% and 11%, respectively. And on the Government’s urging, more than 20 States and Union Territories also reduced the VAT levied on the fuel products, thereby enhancing the relief provided to consumers from record pump prices.
• While the Centre asserted that the decision was to impart a fillip to the reviving economy, as well as easing inflationary pressure, the political significance of its timing was hard to overlook, coming a day after the ruling BJP suffered electoral reverses in some legislative and parliamentary bypolls.
• That the Government was keen to make political capital out of its belated reduction of levies was made obvious two days later, when it sought to call out the States — almost all ruled by Opposition parties — that were yet to make commensurate VAT reductions.
• With a clutch of crucial State elections, including to the prized U.P. Assembly, due early next year, the BJP is keen to regain control of the narrative, especially given the heightened public concern over inflation and the surge in fuel prices.
• As far as the economy is concerned, the reduction in fuel bills is bound to have a salutary impact on inflation as diesel is the main fuel for freight carriage and impacts the cost of everything requiring to be transported.
• The softening in transportation costs ought to provide some cushion to the manufacturing sector, which has had to cope with surging input prices at a time when demand is still tenuous.
• The additional cash left in the wallets of consumers may also provide a small bump in consumption though the durability of this stimulus will hinge on how global oil prices behave in the coming weeks and months.
• Global oil prices have been on a boil this year and the World Bank group projected last month that average crude prices would end 2021 with a gain of about 70%.
• With the Indian crude basket having risen on average almost 62% in the 10 months through October and the historical trend suggesting a firming of prices towards the year-end when the northern hemisphere’s winter usually pushes up energy demand, there is a real risk that Indian refiners may be left with little option but to continue raising retail prices.

Way Forward

The onus would then be again on the Centre to make further cuts to the duty it had raised last year. States run by other parties should take the cue from Tamil Nadu and Punjab and bring down the prices at the outlets, and not hold back for political or revenue reasons.