Indian Oil & Gas After the Election…The Road Ahead

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There is a lot riding on India’s new government. Tired of a lackluster economy, Indians have single-mindedly elected the BJP — led by Narendra Modi–in the hope that he will do what it takes to rev up the country’s engines.

Energy is obviously going to play a critical role as India’s economy shifts gear. So, what can the Indian oil and gas industry expect in the coming years? The answer: a lot.

The previous government had already started the process of reform in the industry, and the BJP is likely to take that forward full throttle.

As the party’s chief energy adviser Narendra Taneja put it: “It is the first time in history that we are going to get a prime minister who is so educated when it comes to oil and gas … who understands oil and gas issues almost like an oilman.”

And there are many issues that need to be dealt with, both in the upstream and downstream segments of the industry.

In the downstream, the single biggest issue to tackle–and perhaps the most difficult one–is that of subsidies, which not only eat into the central government’s budget, but also distort demand.

State level taxes account for almost 40% to 50% of the pump price of diesel (gasoline was deregulated a few years ago). So, one would think lowering taxes would help maintain fuel prices at reasonable levels even if the subsidy was removed. But the solution is not that simple given that these taxes are the largest source of revenue for several state governments.

In this regard, Modi’s plan of engaging with the leaders of various states in tackling the subsidy issue could have far-reaching effects. The plan is to discuss these issues with the various state governments and make them stakeholders in the decision making, Taneja said.

In the upstream, the BJP is first and foremost expected to implement a gas price hike that was due to take effect on April 1, but got shelved due to the elections.

That hike, which would double the price of gas to more than $8/MMBtu, is expected to, at the very least, unlock massive investments planned by Reliance Industries and BP in the deep waters of the Krishna Godavari basin.

Then comes the issue of fiscal regime to make exploration and production offshore India attractive, and removing the bureaucratic hurdles that have seen the likes of BHP Billiton and Eni quit India.

Thought seems to have already been given to these issues and India may finally have a fiscal regime that does not give the same treatment to onshore, shallow water, deepwater and ultra-deepwater acreages.

To sum it up, the Indian oil and gas industry can look forward to a lot. Change won’t happen overnight, but as long as policies are progressive and move in the right direction, Modi would have delivered.


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