NDA Govt's Oil and Gas Sector Reforms

Diesel decontrol

 

The NDA Government on Oct 19,2014 de-regulated the price of diesel

In a deregulated regime, oil companies will adjust diesel prices at periodic intervals to reflect the prevailing international price of oil, just as they do now in the case of petrol

With the Cabinet decision, the price of diesel, like petrol, would now stand linked to the market without any government intervention, with retail rates reflecting price changes in the global market.

It was a long-awaited reform measure but when the Narendra Modi led NDA Government eventually deregulated diesel pricing on Oct 19,2014, the timing, in the backdrop of falling global oil prices, was just perfect.
With oil companies wiping off the under-recoveries on diesel and going into surplus, the government could sweet-coat what is essentially a bitter pill with a cut in retail price of the transportation fuel

Direct bank transfer of LPG subsidy

The direct bank transfer of LPG subsidy and restricting the subsidy to 12 cylinders a year for a household has addressed, to a good extent, the problem of diversion of subsidised LPG cylinders to the black market.

This is good news for the OMCs — Indian Oil, HPCL and BPCL — which suffer under-recoveries in the first place and then get compensated, fully or partially, by the government through cash payment and by the upstream companies ONGC, Oil India and GAIL that provide them product discounts. The government compensation is often delayed, resulting in high borrowings and interest cost for the OMCs. Now, with under-recoveries shrinking, the scale of the problem is much lower. 

Formula for domestic gas price fixing
The domestic gas price formula announced  fell short of the formula recommended by the Rangarajan Committee. A weighted average price of four global gas benchmarks — the US-based Henry Hub, Canada-based Alberta gas, the UK-based NBP, and Russian gas — the new formula does not take into account the price of gas imported into India or into other Asian markets, where it is typically costlier. India’s gas imports come mostly from Qatar.

The formula has resulted in domestic gas price (currently $5.18 a unit) being lower than the price of imported gas.

With the international benchmarks under pressure, the domestic gas price which is reset every six months is set to decline further on the next revision in October. Market-linked price, a long-pending demand of the major producers ONGC, Oil India and Reliance Industries, can help boost output of domestic gas. Nearly a quarter of the country’s needs are now being imported. For many quarters, low gas availability has adversely impacted the operations of transmitter GAIL whose pipelines remain under-utilised.

Also, gas importer Petronet’s terminal at Kochi is severely under-utilised due to lack of pipeline connectivity.

Crystallisation of subsidy sharing mechanism

Unlike in the past, when the subsidy sharing mechanism was ad-hoc and the OMCs were also often left with a portion of the under-recoveries, the sharing mechanism for 2015-16 has been announced in advance. The government will shoulder ₹12 a litre on kerosene and ₹18 a kg on LPG cylinders; the rest will have to be borne by ONGC and Oil India (GAIL has been exempted). So, the OMCs will get fully compensated though there may still be delays on the government’s part