The new energy policy makes essential changes

It could signal market-oriented reforms that have been long overdue

Last week was a good one for the Narendra Modi administration. Complaints that it was merely tinkering around the edges of its reform agenda had been proliferating for a while. But it has pushed back now with two major moves. The real estate bill, as we wrote in these pages on Tuesday, has considerable potential. The other—the Hydrocarbon Exploration Licensing Policy, or HELP, which puts in place a new regime for oil and gas exploration—is even more significant. It could, in fact, signal one of the most important market-oriented sectoral reforms of the past two decades.

The new policy’s overarching theme is plainly to reduce government intervention at every stage of the upstream industry, from securing blocks to licensing to marketing. The open acreage aspect of the policy—allowing investors to bid for blocks of interest to them at any time—is a step towards casting the government in the role of an enabler.

The earlier process of a yearly auction of a cluster of blocks, on the other hand, saw it operate more as a heavy-handed gatekeeper. And the move towards a single licence for exploration and production of all forms of hydrocarbons is such an obvious prerequisite for streamlining regulation that it’s baffling it has taken as long as it did.

But perhaps the biggest gains in incentivizing investment stand to be made from HELP’S switch to a revenue-sharing model, wherein the government is not concerned with the cost of production. The previous profit-sharing model’s pitfalls became more obvious the longer the dispute with Reliance Industries Ltd over declining output from the KG D6 field dragged on.

If the government’s cut is to be calculated from a revenue minus cost of production base, it has a necessary interest in maintaining oversight of the latter—just as it becomes profitable for the investor to exaggerate cost. Cue micromanaging, endless rounds of audits and an antagonistic relationship from the get-go, with the government embroiled in a production process it has no business concerning itself with.

To see the full potential of these policy shifts and HELP’s other changes—like market-based pricing for hydrocarbons from deep water, ultra deep water and high-pressure-temperature areas where operations are difficult—they must be seen in context.

The commodities crash has boosted demand for refined products at a growth rate that hasn’t been seen in 15 years. That may be a short-term phenomenon—although it seems unlikely that oil prices will rise substantially any time soon—but the long-term trend of rising demand is well-established. According to the International Energy Agency, Indian demand will hit 10 million barrels per day by 2040, the steepest rise for any country.

An upstream sector that can keep pace with that demand is essential. For an idea of what happens in its absence, look back no further than 2013’s taper tantrum. Investor sentiment about emerging markets nosedived and the rupee hit a record low against the dollar—not good news for a country that relies on imports for three-quarters of its domestic crude requirements and a third of its gas needs. The government had to consider ideas such as banning night-time sale of fuel.

This vulnerability to the vicissitudes of the global economy and geopolitics aside, the import bill is a constant drain on the exchequer.

Nine rounds of the New Exploration Licensing Policy kicked off in 1999 have failed to enable the upstream sector adequately. Over 250 blocks were awarded in that time, but production remains comparatively anaemic. Investors have run into regulatory hurdles time and again.

Those hurdles and pricing controls have ensured international oil companies have been wary of wading into Indian waters as well. BP Plc’s $7.2 billion outlay in 2011 for a 30% stake in 23 oil and gas contracts operated by Reliance Industries in India, including the KG D6 block, has proved to be a less than advantageous buy-in.

Whether HELP will succeed in bringing in the necessary investment or not remains to be seen. But it sends out the right signal. There are other reforms that must be put in place for a truly coherent energy policy—scrapping the current method of having the various energy ministries operate in silos and merging them, for one—but this is a good start.

Will the new energy policy improve the health of the upstream sector

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