The government has taken a refreshing and progressive approach with respect to the unutilised natural resources locked away in the 69 small and marginal oilfields lying with the state-owned exploration agencies. The Union Cabinet has not only approved the auction of these oilfields to private, and even foreign, companies, but also initiated a new approach in the licensing and proceeds-sharing mechanisms. The first step was to move from a profit-sharing mechanism to a revenue-sharing one. This may appear to be a technical difference, but the effect on the ground is likely to be huge. The profit-sharing approach meant the government had to pore over the cost details of those undertaking the exploration, often leading to extended delays and disputes. The revenue-sharing approach is simpler, and is likely to earn the government more money. Under the new plan, companies will be allowed to sell crude oil or natural gas at market prices, without any interference from the government. The revenue and royalty-sharing mechanism will be pegged at this market rate. If companies are forced to sell at below-market prices, then the government will still get a royalty share pegged at the market rate. If, however, the company manages to sell at higher-than-market prices, then the sharing mechanism will be pegged to this higher price. That’s a win-win for the government: less oversight and an assured minimum income.
The other welcome step has to do with the licensing method. At present, companies need a separate licence to exploit each of the different hydrocarbon resources in a given field. Under the new scheme, they will receive a unified licence for all hydrocarbons, including conventional ones such as oil and gas, and non-conventional ones such as shale oil and shale gas. This goes a long way in the government’s move towards enhancing the ease of doing business. Apart from that, the simple act of auctioning oilfields is a step towards weaning India away from oil imports. The Oil Ministry says there are hydrocarbon resources worth Rs.70,000 crore lying unutilised in these fields. At the current crude price of $45 a barrel, the production of hydrocarbons from these new fields will be worth around Rs.3,500 crore a year. This may seem like a drop in the bucket compared to India’s total hydrocarbon imports of Rs.7.6 lakh crore in 2014-15, but every little drop counts. So far, these progressive steps are limited to the 69 oilfields on the block, but hopefully they will be extended to all the oilfields in the country. With growth in oil production slowing and natural gas production contracting, there is a sore need for steps like these to boost domestic production.
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