 | « Back to article | Print this article |
'Subsidised clean fuel is a necessity and for that, all citizens should be supportive. It is not a luxury.'
'India is vulnerable to imports on oil and gas and it needs lots of investment, from within and foreign investors.'
One company that has lit up with the recent announcement on the petroleum package is Cairn India. It is hopeful the government will extend its production sharing contract. Mayank Ashar, bottom, left, managing director and chief executive officer, tells Jyoti Mukul the reform momentum should continue and the industry should do its part too. Excerpts:
How do you view the extension of contract periods to 28 fields with enhanced government share?
Our Ravva field is part of this. I see a structure and process in this, versus a one-off decision. We expect that (the) Barmer (oilfield), critical for Cairn, will be next for extension. Once we have clarity on timeline and terms, we can invest further. We believe that our production sharing contract (PSC) with the government provides automatic extension at the same terms and conditions.
Are you agreeable to parting with a higher share?
Our PSC has its own language and agreement. I can understand the government desire for consistency. However, the government and Cairn are bound by the legal agreement. We would suggest they follow the agreement. There are two issues --- timely resolution and adherence to the agreement. Our belief is the legal agreement is clear. So, we are looking for a 10-year extension at the same terms. We will see how the government decides.
For Reliance Industries (RIL), the government’s condition is that it withdraw the litigation. Do you see this condition coming for Cairn, and going to court?
Hopefully not. Our case is different from RIL. I don’t think going to the court itself spoils the case. It is all about timing.
Should the price flexibility under a ceiling given to high pressure, deep water and high temperature gas be available to other fields?
We get a regulated price for our Ravva and Cambay production. All producers struggle with a lower gas price. The thinking behind regulated prices will be that you will get the international benchmarks by using Russian, American and Canadian prices. Correct in principle but in commodities like gold and aluminium that are freely traded, the principle makes sense.
In gas, Canadian gas is a third of European gas for the past five years. There are pockets in the world where supply is higher than demand and prices are extremely low. You have other pockets like those in Western Europe where supply is less than Japan.
In an attempt to keep prices very low, the government has used pockets of international prices that are very low. If they’d taken Japan, Western Rotterdam and another high price zone, they could have come up with a price two to three times higher. The issue is that these geographical centres do not accurately reflect the market prices.
Will the new norms for difficult fields help promote investment?
In terms of gas, it is a very good step, in continuum, to have an import equivalent for deep offshore, high pressure, high temperature. It gives clarity about investment and you have some sense of the market price. They are using as a market reference the import equivalent price of alternative fuel. However this is step one.
There is still some clarity required on whether this is a true measure of market prices. Any time you have export or import equivalent, you are getting a good signal. There is a danger in using geographic prices for commodities that cannot be traded without friction.
For example, look at crude oil. The price in the US for equivalent crude, West European and Latin America, would be broadly equivalent, adjusted for quality. Freight for oil is two to three per cent of the cost but it is hugely different in gas. Sometimes, it can be 100 per cent. Gas trade has a friction cost and there is a danger in using market references, as these are local references from somewhere.
I commend the government for using the principle of import and export parity. They use the same principle for diesel and petrol because that gives you a good market reference. Nobody has a crystal ball to know what the price will be but if you know you will get import or export parity, the investor can think about investing in India, whether domestic or foreign. Even if you don’t have full clarity, 95 per cent clarity on pricing means you could invest with confidence.
What will happen with old production is different but for new investment, it takes away the risk. Most investors will not invest where the domestic price is half of import and export price parity.
Fundamentally, it goes back to Adam Smith. Pricing is a very important signal for investors, citizens and the government (for the purpose of taxation). It prevents distortions that result in economic leakage, not only for investors and producers but even for citizens and the government.
The gas price for older fields has come down to $3.06, according to the 2014 formula. Does that worry your company?
I understand where the government is coming from but not necessarily agree. My sense is the government does not want to provide for windfall gains. There is also a segment of the citizenry that requires subsidised gas but there are other mechanisms to do it. I have empathy with the government because the absence of it results in premature death.
Subsidised clean fuel is a necessity and for that, all citizens should be supportive. It is not a luxury. The key is that even for the existing fields, when you have prices, we shouldn’t be afraid; there are other mechanisms to do it.
We shouldn’t be afraid of letting businesses earn a return. That is a good thing. A healthy, prosperous business that makes money because of good investments and proper use of technology, and proper taxation that is competitive with the international regimes, is a win-win.
What should be the next steps for the government?
India is vulnerable to imports on oil and gas and it needs lots of investment, from within and foreign investors. If you don’t get investment, you can’t make domestic production. India’s demand for oil is going to be nine million tonnes a day in the future, as big as Saudi Arabia. It is number three in the world in terms of demand and is going to be number two. We are not blessed with geography like the Middle East and will be importing for a long time.
The question is, do you want to import all of it or want to reduce dependence for energy security. To reduce dependence, you need investment, and to invest more, you partly need market prices, as the government is not going to incentivise the price. Also, a simplified structure and a competitive fiscal burden.
What I see with these reforms is many steps along that way. We appreciate that these measures are more radical in the past 12 months than perhaps the preceding five years. They are necessary but we suggest that if our goal is to have significantly higher production, we need to do more and continue this journey. That’s the government’s part and the industry also needs to do its part to bring technology and the know-how and best practices. We’re in it together. The pricing and the rules need to be extremely attractive. Don’t stop here; you will need investments.
Does the current oil price trend look good?
In 2014, it was a $120 a barrel world. In 2015, $60 was the high point. First quarter of 2016, prices have been sub-$30. At $30, the pain was very significant and we took the pain well. However, because our operational cost from core operations are so low, we were able to withstand that pressure -- Cairn is one of the most efficient producers in the world. The impact on cash flow was very significant and that’s why we cut back in capital and operational cost. I am cautiously optimistic on the future but at sub-$30, production is not viable over the world, except some fields in the Middle East.
What will be Cairn India’s business plan in such a low price regime?
We will continue to focus on our core fields --- Bhagyam, Mangala and Aishwarya. Then, we have Ragheswari deep gas, where we will continue with production. The third is tight oil, not economic at $30-40 but we continue to do field work and are hopeful that the government reforms will address this the same way they have addressed high temperature, high pressure -- in terms of ensuring there is sufficient investment incentive in difficult formations across India. We will be careful with capital.
Cairn India has bailed out Vedanta group companies with commodity prices hitting their balance sheets but now even oil prices are low. Is Cairn in a position to continue doing that?
The company board looks at the needs of all shareholders, Vedanta and others. I don’t really see a conflict. If you see what we are spending on capital, it is in line with what others are doing in any case for 2015-16. Compared to last year, prices are low, so we will be mindful of that but will continue to work on production growth, bring down costs and work on optimisation for tight oil.
Photograph: PTI
