Lydia Powell, Observer Research Foundation
Oil & Gas
February was not the best of months for the Indian upstream oil & gas industry. The price of crude in the global market was below break-even prices but upstream companies announced that this was the right time to invest in deep sea exploration blocks as oil services have become more affordable. Talk on developing strategic reserves picked up as the opportunity cost of storing oil is relatively low now. The loading of Iranian crude on to an Indian tanker after the removal of sanctions on Iran is among the few interesting developments in the oil sector in February. The government announced that it is considering the development of an oil trading platform. This will enable companies to use the spot market rather than long term tender based crude purchase and thus enable them to take advantage of falling prices.
Refiners who thrive on margins had little to complain about as demand for fuels was reported to be growing at the fastest pace in three months. Indian refiners were also said to be joining forces to extract better deals from OPEC oil sellers. The inauguration of the IOC’s Paradip refinery offered photo opportunities for political leaders. Paradip also increased the prospect for shipping oil products to Bangladesh. One of the unexpected developments in the refining sector was the emergence of China as a major exporter petroleum products. This is unlikely to be pleasant news for export oriented private refineries.
The government is supposedly attempting to reintroduce taxes and levies such as the customs duty on crude imports that were withdrawn when oil prices were high in the budget to be announced next month. Refiners were said to be resisting the move to impose a tax of 5% on the import of crude as it will add to the tax on the import of products. On the other hand, the government is also said to be considering a change of the cess on petroleum to ad valorem basis. The government continued to exempt subsidy payments from PSU companies.
Natural gas prices continued to fall in the global market and consequently domestic prices that were linked to global prices in the hope that global prices will stay high also fell. Unless a new formula is devised that has a component that will increase with the increase in geological and technological complexity of the gas field the fall in domestic prices is unlikely to be arrested. The government is anxious to pursue subsidy auctions for gas based power generation and the hope is probably that they will get bids that will offer a premium to the government rather than a mere discount on the subsidy. The news item that may have puzzled many in the context of gas is that of an India Australia panel for supply of Australian LNG to Indian power plants. In an environment of subdued demand for power and falling prices of coal why would anyone want to use expensive Australian LNG for generating expensive power? Is it a strategy for Indian tax payers subsidising Australian LNG producers under the subsidy auction scheme?
There wasn’t much to celebrate on the coal front either. Coal block auctions seem to have just replaced an old set of problems with a new set of problems. Continued tinkering of auctions framework did not appear to be helping the situation. It is not without reason that they say markets grasp situations better than bureaucrats: markets have to put their money where their mouth is. The Minister in charge of coal and power sectors said that coal and power were a trillion dollar opportunity but once again markets may beg to differ! Coal imports continued to fall not only because of improvements in domestic production but also because of lower demand for coal.
A special forward e-auction for power producers and non-power producers that was supposed to have been implemented in February is said to have been deferred indefinitely. The official reason for such cancellation is not known but coal buyers are of the view that it was the result of poor demand probably on account of the fact that the base price was about 20% higher than the notified prices.
On the other hand, The Cabinet Committee on Economic Affairs, chaired by the Prime Minister approved the framework for auction of linkages of non-regulated sector. All coal allocations of linkages/Letter of Assurance (LoAs) for non-regulated sector i.e. cement, steel/sponge iron, aluminium, and others (excluding Fertilizer (urea) sector), including their captive power plants, are to be auction based with separate quantities earmarked for sub-sectors of non-regulated sector. The tenure of Fuel Supply Agreement (FSA) will be as decided by Ministry of Coal from time to time. The idea is to ensure all market participants of non-regulated sector have a fair chance to secure coal linkage, irrespective of their size. No new linkages or LoAs have been allocated to non-regulated sector since 2007.
Regarding new initiatives taken for quality improvement of coal, it has been made mandatory to supply 100 percent crushed coal of (-) 100 mm size to power sector consumers having FSA excluding pit head power plants of Northern Coal Fields and Eastern Coal Fields. To further strengthen the system, an independent Third Party Agency is to be empanelled by Central Institute of Mining and Fuel Research at the loading end on behalf of both the power plant and coal companies. The Parliamentary Consultative Committee attached to the Ministry of Coal reviewed the status of implementation of the mandate on coal washeries and measures being taken for improvement of quality of coal by Coal India Ltd (CIL) and its subsidiaries. However, the question of poor capacity utilisation of washeries remains.
The power sector did not make it to the headlines in February as there were no power cuts. There is nothing to celebrate because no power cuts does not necessarily mean power for all. Power that could have lit up over 16 million households remained unsold not because there was no access (wires) but because there was no demand. It is tempting to assign blame on state electricity boards (SEBs) for having destroyed demand but lack of demand for electricity is a clear sign of lack of development. Illiquid SEBs are a consequence of the lack of development not the cause of it. The states enlisting on the Government’s UDAY (Ujwal Discom Assurance Yojana) scheme for financial turnaround of Power Distribution Companies was reported. Though the scheme is being promoted as the answer to all problems at the distribution end of the power sector, there appears to be little that is new in the scheme that has not been tried before. Some of the more positive news from the power sector included news on India submitting the Instrument of Ratification of the Convention on Supplementary Compensation for Nuclear Damage, 1997 to the International Atomic Energy Agency (IAEA), the depositary of the said Convention which may pave the way for greater clarity on the nuclear liability regime in India. There was also positive news that the nuclear plant in Koodankulam had started generating after repeated delays on account of technical faults but by the end of the month it was reported that generation had terminated on account of yet another technical problem!
Apart from the routine stream of news on new renewable energy projects being proposed or implemented there was also news that the United States had won a ruling against India at the World Trade Organization after challenging the rules on the origin of solar cells and solar modules used in India’s national solar power program. So much for make in India!
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