Upstream drive

2009 was a year of transformation for the Indian oil & gas industry, particularly the upstream segment.  While private producer Cairn India started production from its Rajasthan oil field, Reliance Industries started production at the largest onshore oil discovery in India — the prolific D6 block off the mouth of the Godavari in the Bay of Bengal.

Both were the fructification of many years of effort and contributed to India’s energy security more than any other event since the discovery of the Bombay High field in 1974.

After remaining almost stagnant for a decade, gas production during 2009 increased by more than 50% and oil by around 11%.

The year was kind to state-owned oil retailers. For the first half of the financial year, crude prices remained benign as the uncertainty over economic growth saw oil demand dip for the first time in years.

Even private refiners such as Essar and Reliance Industries could once again compete with state-owned retailers as the government-determined price for petrol and diesel afforded moderate profits at the prevailing prices of crude.

The built-in imbalances and flaws of the Indian downstream sector, however, came to the fore during the second half of the year.

While crude prices, which had jumped to $70-80 a barrel, started resulting in thousands of crores of rupees in losses to the government sector, they made life almost impossible for the private retailers, who had no hope of compensating their losses through government support.

While the uncertainty over oil demand brought runaway oil and exploration asset prices firmly back to the ground, it also impacted levels of investment into the segment. Upstream service providers, who had seen their rates double in a year, suddenly found no takers for their high-priced rigs and helicopters as companies cancelled or froze expansion.

The uncertainty also left a negative impact on alternate energy sectors such as solar, biofuels etc, which also saw investments and backers disappear or withdraw.

On the bright side, however, many exploration projects in India, which had been cancelled due to high service cost, were restarted during the year.

Meanwhile, most of the regulatory issues that affected the Indian oil & gas sector continued as they were. The most vexing one, apart from the lack of pricing freedom for the retailers, continues to be the government’s interpretation that only oil and not gas is covered by the seven-year tax holiday announced in 1999.

While the government did extend the benefit to gas discovered in blocks auctioned in 2009, it remained stingy about extending the privilege to previous rounds.

The year also saw the government pull the rug from under the Petroleum and Natural Gas Regulatory Board, whose chairman ruffled many feathers by requesting those who had been allotted licences by the government recently to reapply under the new rules. Both the gas and the regulator controversy continue to play out in the courts.

As for the upcoming Budget, previous experience seems to have shown the industry the virtues of keeping their expectations low. Neither the downstream segment, which continues to crib about huge losses due to government-fixed prices, nor the gas producers will be holding their breath when finance minister Pranab Mukherjee rises up to present India’s annual Budget on February 26.