The Cabinet Committee on Economic Affairs (CCEA) on 10 March 2016 approved revised policy on gas production from deep water, ultra deep water and high pressure-high temperature (HPHT) areas.
The revised policy seeks to grant marketing and pricing freedom for new gas production from these areas so that domestic gas production is improved and dependence on imports is reduced.
Salient features of the revised policy
• The producers will be allowed marketing including pricing freedom. It is applicable to all the discoveries in these areas which are yet to commence commercial production as 1 January 2016 and for all future discoveries also.
• To protect user industries from any market imperfections, this freedom would be subject to a ceiling price on the basis of landed price of alternative fuels.
• The ceiling shall be based on publicly available prices of substitute fuels and shall be calculated as lowest of the - Landed price of imported fuel oil, weighted average import landed price of substitute fuels (namely coal, fuel oil and naphtha) and landed price of imported LNG.
• The Ministry of Petroleum and Natural Gas will notify the periodic revision of gas price ceiling under these guidelines.
This revised policy is in addition to the Hydrocarbon Exploration Licensing Policy (HELP) which was approved by the CCEA on 10 March 2016. The policy, among other things, provided for concessional royalty regime for deep water and ultra-deep water areas.
As per the provision, these areas shall not have any royalty for the first seven years and thereafter shall have a concessional royalty of 5 percent in deep water areas and 2 percent in ultra-deep water areas.
Benefits of the revised policy
• The decision is expected to improve the viability of some of the discoveries already made in such areas and also would lead to monetization of future discoveries as well.
• The associated reserves are valued at 180000 crore rupees.
• There would be substantial employment generated during the development phase of these discoveries and a part of it would continue during the production phase of the block.
• By keeping the domestic gas price below import parity price, user industry will be benefitted to a large extent.
In terms of macro-economic impact and also in terms of energy security, it is of paramount importance that domestic production of hydrocarbons be increased. This revised policy is expected to achieve this objective.
Why the revision in the policy?
• Much of the unexploited oil and gas available in India is in areas characterized by deep water/ultra-deep water or high pressure/high temperature.
• Recognizing the need for incentivizing gas production from these areas, the CCEA, in October 2014, approved premium on the gas produced from these areas.
• However, in the subsequent period, due to the fall in the global oil gas prices affected the attractiveness of the sector to potential investors. As a result, there are a number of discoveries of gas in these areas which have not been developed.
• ONGC and other operators are also requesting a higher price for gas to be produced from such fields, without which they may not be economical to bring to production.
• Meanwhile, domestic gas production is showing a declining trend in recent years. It has witnessed a decline of 17 percent in two years from 40.66 BCM in 2012-13 to 33.65 BCM in 2014-15.
• With the economy growing at over 7 percent, demand for petroleum products including gas is increasing.
• Thus, the sector is facing a situation of rising demand, falling production and consequently rapid increase in hydrocarbon imports which occupy a large share of India’s total imports.
• Currently, over three-quarters of the domestic requirement of crude oil and approximately a third of domestic requirement of gas are met through imports.
Against this backdrop, the CCEA felt that rather than fixing a premium, it would be more appropriate to provide marketing and pricing freedom to the gas to be produced from the deep water, ultra deep water and high pressure-high temperature areas.
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What: Approved by the CCEA
When: 10 March 2016