Oil on the boil | Business Standard Editorials

Clipped from: https://www.business-standard.com/article/opinion/oil-on-the-boil-121070800017_1.html

Domestic production of oil and gas has been lagging

Disputes within the Organization of the Petroleum Exporting Countries (OPEC) and OPEC+ have led to uncertainty about near-term crude oil production. Energy prices are likely to stay elevated due to demand from a rapidly recovering global economy, even if the energy exporters agree to an increase in production. This will mean pressure on India’s external account and higher inflation. In April 2020, the cartel of oil exporters had agreed to a two-year production cut to support energy prices as the world economy contracted. But the fast rollout of vaccination programmes, and a strong economic rebound have led to a fast recovery in energy demand.

Global crude prices rose by about 50 per cent in 2021, which led to a review of production quota by the oil exporters. However, the Saudis and the UAE cannot agree on the methodology for national quota allocation, and as things stand, global supply may not increase in August. Meanwhile, India is enduring record retail prices of petrol and diesel. Apart from hikes in retail prices by the oil marketing companies, there are high taxes and duties on petroleum products. The states and the Centre combined realised over Rs 6.7 trillion in tax revenues from the petroleum sector in 2020-21. This was higher than the Rs 5.5 trillion realised in 2019-20, despite the economic contraction and demand destruction caused by the pandemic and lockdowns. The contribution of energy taxes to the exchequer is likely to be even higher in the current fiscal.

High crude and gas prices invariably put pressure on the trade account, since India imports over 85 per cent of its crude, and 50 per cent of its gas requirements. This in itself is a reason for imposing high duties, despite the inevitable inflation push. In addition, there is the point that high duties are in effect a carbon tax. This creates an incentive to shift away to less environmentally damaging energy sources. However, India will stay heavily dependent on fossil fuels for many years, even as capacity builds up in renewable sources. Hence, it would be sensible for policymakers to also look at ways to ramp up the domestic production of oil and gas, and to encourage companies such as ONGC Videsh Ltd (OVL) to search for energy sources abroad. The domestic production of oil and gas has stagnated for five years. Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) have not made any new major discoveries, and existing fields are ageing. There have been some sensible policy changes. For example, the government has moved to an open acreage licensing policy. This makes it possible for explorers to examine geological data and bid for promising areas.

But successive auctions under the New Exploration Licensing Policy and its successor, the Hydrocarbon Exploration and Licensing Policy, have met with a lack of enthusiasm. Overseas energy firms claim there is still a daunting amount of red tape to be negotiated before foreign direct investment can enter, and the tax treatment of exploration and production operations continue to be complex. In addition to a review and possible simplification of tax and foreign direct investment norms, there is also the need to review the track record of state-run firms like ONGC, OVL and OIL. The minister concerned has threatened to auction un-monetised fields controlled by the public sector companies, but this will not necessarily lead to much improvement, given the lacklustre auction experience. The upstream energy public sector units must be encouraged, and given the necessary resources to improve their track record in exploration and production.

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