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Interview

with S. Sundareshan, Secretary, Ministry of Petroleum & Natural Gas of India

15.11.2010 / Energyboardroom

This Government is praised for having considerably improved public policy in the local oil and gas sector—contributing to what Minister Murli Deora has called “a silent revolution of the Indian oil and gas industry.” As you’ve been part of this government for years now, what would you highlight as your main achievements in office that have nurtured such revolution?

I’ve been part of the Ministry of Petroleum and Natural Gas for about four years now, as I was the Additional Secretary before I become Secretary in January 2010. I would say that our most important achievement over this period has been the liberalization of the marketing of petroleum products, for the first time since the nationalization of the Indian oil industry.

Today, India’s petrol prices are already market driven; we have also taken the decision to make diesel prices market driven, and we have increased the prices of LPG and Kerosene. Additionally, we have adjusted the price of Administrated Price Mechanism Gas (APM Gas) to correspond with current market level value. Therefore, India is now in a situation wherein the prices of natural gas produced from various sources are approximately equitable, and their market is not secured.

In the 9th Round of the NELP, in order to avoid any uncertainty, the Government decided to eliminate the rather ambiguous system of tax break incentives that was offered in past rounds of bidding. But are the reasons why you gave the incentives in the first place, now obsolete?

The nature of the tax breaks has actually changed. Before, we had a system wherein the incentives were given in a manner that correlated with profit, so we offered tax breaks on the profits that companies made on their production. Now the Government has introduced a new direct tax code, wherein there will be no profit-based incentives for any sector. In the past, these incentives used to be available for export-driven sectors or industries in special economic zones—not anymore.

There will certainly be tax breaks for investments that are made throughout the NELP rounds for exploration, or for production facilities. The important point is that, in the past, we had a certain level of ambiguity and this is not the case anymore. I believe it is the sovereign right of the Government to levy taxes; as long as there is clarity, investors will come.

The Indian Government is very happy to see that in the 9th round of the NELP there is absolute clarity on what incentives are available to investors. There is no room for any future interpretation on what is available and what is not. India’s Government is establishing parity with the finest world practices—in most mature economies, there are rarely income-tax-based exemptions for any particular sector.

Even though India now has a widely acclaimed level playing field for both public and private, and both national and foreign, investors, some critics say that the fiscal and technical criteria for your block tenders still somehow benefits local players. What is your assessment regarding the current block tendering model in India?

Regarding the level playing field environment for investors, I would like to reiterate that there is an absolute equality of opportunities for investors in India. The NELP gives no advantage to either a public sector undertaking (PSU) owned by the Government, or any Indian company, over foreign investors.

In regard to technical and fiscal competence and associated parameters: these aspects are weighted more heavily where they are most needed, such as in ultra-deepwater. Where technological expertise might not be as imperative, for instance in the S-type blocks (very small blocks), we are not insisting on a basic technical requirement. This is done in consultation with stakeholders. There has been absolutely no criticism, ever, that there is more emphasis on the financial parameters or less emphasis on the technical parameters. Investors have been very happy with the current mix of both.

In the wake of important IPOs involving some of India’s major energy PSUs, investors and shareholders seem concerned with issues such as delays in compensation for under-recoveries, and the associated impact on the attractiveness of company shares. What is the Indian Government doing to assure investors that such difficulties will not affect the profitability of India’s prominent PSUs?

Regarding the upcoming IPOs, the proposal for the current year is to have a 10% divestment of government stake in IOCL, and a 5% divestment in ONGC. Apart from that, there is going to be a fresh issue of 10% in IOCL, which will be very beneficial to the company. We expect to raise about 2.5 billion USD, to be injected directly into IOCL with this fresh issue. And we expect to gain another 5 billion USD for Government funds as a result of ONGC and IOCL’s divestments.

As you mentioned, the only issue being raised by the stakeholders of these companies is the state of compensation for under-recoveries caused by the price controls over diesel, LPG and kerosene. Historically, the Indian Government has repaid all under-recoveries to the relevant companies, and I see no reason for concern that the same will not happen this time. In the current year, the Government has already provided 2.3 billion USD as compensation for under-recoveries, and I am extremely confident that, as the year moves along, IOCL will be compensated for the under-recoveries they have suffered on account of diesel, LPG and kerosene—just as they have been compensated in previous years. I am sure that the upcoming IPO will be a resounding success; IOC is a profitable and strategic company, the jewel in the crowd of Indian oil PSUs.

The Indian oil and gas industry has entered into active process of internationalization in recent years, although this process is perceived as delayed when compared to other emerging-market players, such as China. What is the Government doing to accelerate India’s presence abroad, and guarantee the much-needed long-term security of the country?

I believe that each country and region has its own economic model, which tends to the needs of its own society, and I refrain from commenting on development models other than India’s. Having said that, it’s clear that the achievements of the Indian public sector, particularly, have not been sufficiently recognized. For instance, ONGC Videsh is the largest Indian investor abroad—of any sector—with 13 billion USD invested overseas. They are producing in eight different countries today. And Indian companies at large are turning out about 20% of the nation’s production abroad.

India’s PSUs acquired a 100% holding in a company in Russia, where we are employing more than 2000 locals in the oil fields of Siberia. We have also recently acquired assets in Venezuela. Following this line, OIL or ONGC Videsh aim to invest 3 to 4 billion USD abroad, and they are actively pursuing that target. The other PSUs also have assets abroad, and the Government wants to expand their international presence in a coordinated way. The Indian public sector has decisively started to expand worldwide, and we will see much more of such activity in coming years.

The Indian model has been very different from other models. If you look at Western countries, private companies carry all their investments. If you look at other players such as China, all their investments come from governmental funds, with the state’s backing. In India, our PSUs have been internationalizing on their own, using self-generated resources. There is no National Government contribution to this, but even without our explicit guidance, they have done a very good job guaranteeing India’s future energy security. We hope that the private sector will add more and more to this process, and help India’s fast-growing economy to secure that future energy need.

Mr. Mansingh, the head of the Petroleum and Natural Gas Regulatory Board (PNGRB), highlighted the fact that Indian demand for oil, and especially natural gas, is almost infinite—but the country’s poor infrastructure represents a major bottleneck in supplying such demand. How is India trying to overcome such challenges?

The increase in the production and consumption of Natural Gas in India has been one of the remarkable success stories of India’s recent past—production of natural gas has increased by 80% in the course of the last fifteen months. When the production of the KG-D6 fields started, and India began to switch to natural gas, many people doubted whether, all of a sudden, the country could absorb this significant amount of gas. But not only have we managed this supply with extreme efficiency, the increased supply has created extra demand for the product. Today, people want to see more and more gas-based industries and power plants. There has been an exponential increase in the demand for natural gas.

It is true that the demand for gas is pretty much guaranteed, but so far, its supply has been concentrated in the west and north of the country, due to the existing pipeline network. In response, we have undertaken an aggressive plan of pipeline expansion, building an additional 7000km of pipelines that will connect the western part of India to the south. We also authorized one of RIL’s subsidiaries to build pipelines in the east cost, from Kakinada to Chennai, and from Chennai to Bangalore and other cities. GAIL is also very active in building pipelines in that region, and it has already strengthened its network in the North of India. All of this is going to be completed before the end of 2012, so soon enough we will have a reasonable national gas grid all over India.

The PNGRB is also giving authorization for an increased number of pipelines. It is now their duty to deal with the creation of more pipelines. Very soon, we expect that there is going to be a very healthy pipeline network across the country. More importantly, additional capacity for LNG imports is being created in western India, and with this we expect LNG to contribute an additional 60 million standard cubic meters per day, building up 100 million tons of capacity. These additional pipeline networks, and increased LNG capacity, is crucial for the transformation of the Indian energy mix—into a more diversified, and cleaner, array.

Are all these transformations enough to justify the title of an undergoing ‘silent revolution’?

We say that the transformations in the Indian oil and gas industry represent a silent revolution because, besides allowing India to grow and improve the lives of hundreds of millions, it goes largely unnoticed. If you talk about refining capacity, you will see that India’s refining capacity jumped from 68 million tons, to 185 million tons, in only ten years, and it is likely to move up to 240 million tons before 2012.

Because of the excess capacity India has, we export about 40 million tons annually. When the capacity is further bolstered, we will be in a position to export more than 80 million tons annually. Indian demand for petrol has been growing, on average, 14% every year, and diesel and LPG, 10%. The revolution we talk about is seeing India supply this exploding demand—while conquering international markets at the same time.

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