Oil & gas vs Indian economy, experts say close call

GAIL BSE | NSE 31/05/12 Are Mutual Funds betting on GAIL?

With CNBC-TV18's Siddharth Zarabi, Dr SC Sharma, the OSD for petroleum at the planning commission of India, BC Tripathi, the Chairman and managing director of public sector GAIL , L Mansingh, the Chairperson of Petroleum and Natural Gas board of India and Bazmi Hussain, the managing director of ABB in India, discuss India's most crucial sector -  petroleum and natural gas sector.

Tripathi says that the Indian economy is largely dependent on import of petroleum products. Therefore, he says, "We need the infrastructure available to receive those products to process them, transport them, and bring it to the consumer level." Hussain, adds that the efficiency levels of production, transportation and consumption needs to be improved.

Below is a verbatim transcript of the panel discussion. Also watch the accompanying video.

Q: You come from a company that is one of the largest stakeholders as far as India is concerned, when it comes to the gas sector. What is your take on this crucial sector?

Tripathi: The way we look at it, if India has to grow at the rate of 7% to 8% for continuously next 10 years as the major policy makers are projecting, the energy needs are also going to grow almost three to four times what it is today, by 2020. Now to have these kinds of energy supplies, you definitely need large amount of infrastructure redevelopment activity in our country. At this stage, we are largely dependent on import of petroleum products, at least the crude and natural gas, and to support that, we need the infrastructure available to receive those products to process them, transport them, and bring it to the consumer level.

While we are talking about the infrastructure, we have to see that are we in a position to source these raw materials and these commodities in a price that is really affordable by the Indian economy, whether we can set in pace with the growth rate that we are looking at in this country. So, infrastructure development is in one side, the reforms which are required in the energy markets, especially, in the petroleum markets in the electricity regulations and all those things also needs to be discussed to support this kind of growth.

Q: What do you have to say about this particular issue at this point of time?

Mansingh: In India, the independent statutory regulatory authorities have come up as part of the reform process, because as sector after sector of the India economy has opened up.  There was a need to ensure investors' confidence that there is a regulator who is not dependent on the government to provide a level paying field.

Petroleum and Natural Gas sector was a last sector to be opened up. We were constituted on 1st October 2007, and ever since then, we have been trying to put in place a transparent non-discriminatory, predictable regulatory framework that would ensure that the large amount of investment required in this sector flows in for the rapid expansion of the infrastructure.

Q: Your company is a key infrastructure supplier. You are a vendor, who has operations across the world and therefore, when it comes to Indian regulatory environment, what is your perspective and understanding of this entire matter?

Hussain: It is clear that for India's growth, we need a lot of energy. Energy needs will continue to grow, especially the petroleum, oil and gas sector, is going to be needed more. We don't have that many resources or deposits of our own; hence, there will be large amount of imports. So, it is important that the efficiency of the system also has to be looked at. Efficiency from our own production side has to be improved. Efficiency of transportation and consumption has to be improved. Also, the growing focus of environmental concern means that this has to be done in a sustainable way.

Q: We have a huge market, so that part of project risk is taken care of. In terms of supplies, the picture is a little bit mixed. Just like in every other sector, we see a deficit in our abilities and capabilities to deliver and ensure timely execution. Is infrastructure the key issue across the country?

Mansingh: The timeline for execution of these projects is important, because we simply cannot afford a cost or time overrun, since, the consumer is going to pay for it and already there is consumer resistance or political resistance to any increase in the energy prices, we are a poor country.

The state governments are keen to have pipeline infrastructure, because suddenly gas has become a political issue in almost every state.  As I interact with the state governments at the level of chief minister and the senior officer, I emphasize that if you want gas infrastructure develop in your state, you have to ensure timely execution, for which you have to provide single window clearance, have a senior-officer and have pre-clearance of the projects.

Q: There is a bit of Gail in every person's life, at least in the developed part of this country. Clearly, it must not be easy doing this business. You must be facing a lot of hurdles and bottlenecks when it comes to project delivery. Take us through what are the key difficulties that you face?

Tripathi: Lot of states, industrial sectors and especially the common man is sensitized by the use of gas. It is happening slowly and of course, the recent gas discovery has further strengthened the confidence that the gas will be available.

Q: Will it be available at affordable price?

Tripathi: Gail is executing in almost 16 states and largely, pipeline projects, petrochemical and city gas projects. The biggest problem that we are facing today is the land acquisition. You know how the major projects have been shifting from one state to other state because of the land. The land acquisition is the major problem that is creating a major hurdle for executing the project in time and in cost.

Q: For a company like yours, you need continuity. It is not just one parcel of land that you need.

Tripathi: Pipeline projects cannot be done in confined location. We are changing the village, it changing the district, we are going to the new people, the stakeholders are changing, so, it is a difficult job for us to take them into confidence and convince them to open the right way to construct the pattern. It is a major challenge for us to execute the project in time and cost.

Q: How can the issues be solved?.

Sharma: We do have large number of statutory clearances and also the land acquisition problems are there. We developed the LNG project way back in 2000-2004 and then subsequently expanded it. Those days land acquisition and the cost of land was not that big problem. However, there were issues on other clearances and also the tie-up issues existed with a lot of international supplies on the equipment side, on the sanctity of equipment because none of us was experienced in developing LNG terminal in the country. However, since we were dedicated, we could develop this entire project and today it contributes about 22% of the total gas supplies in the country.

We have two of the biggest refineries projects have been come up in lowest timeframe in the country. The Reliance has two refineries that have come up in the lowest timeframe at the benchmark efficiencies and at the benchmark cost. So, certainly, project development is a tough challenge for the people, however, you can go along the clearances, the statutory clearances or other tie-ups that you come across.

Q: So what you are saying Mr. Sharma is that there is some element of get on with it that is involved?

Sharma: Yes, you have to get on with to complete the project. You have to be really convinced that yes, I can do it.

Q: Is there an element that comes in play here and this has to do with moving on with newer management practices - newer technologies and not just being conscious only of ensuring that the project is done at the lowest possible price so to say?

Mansingh: They both are not separate. Our approach as a regulator and that of other stakeholders has been to take a quantum jump in this country. We are in a unique position that you don't have to go through the intermediate phases. You go to the best that is go available anywhere in the world and I have been seeing it all around me that companies like GAIL are now innovating. They are adopt the best technology, management practices, material that you can deliver whatever you have to do, at the least cost and in the most efficient manner that is crucial to this country.

Q: What is your comment Mr. Tripathy on that?

Tripathi: About land and this statutory provisions that cannot happen, you want to go for the radical development of the infrastructure in the country and you say you just, get along, which may not be a right approach today. Look at the national highway, metro projects, major airports and how these issues effect. These are important aspects. As regard to technology, there is a limitation in the role it plays. You have the best of the technology available, best of the environmental discharge system, the environmental protection system available. However, technology cannot come in the land acquisition.

Q: Does India need to continue to pursue a benign policy of price regulation with part deregulation? Or is it time that we listen to all the expert committee reports that have come in the past and free it up completely and let the market and the consumer achieve equilibrium?

Sharma: It's certainly well understood that the prices have been agreed, in principle to be deregulated. LPG and kerosene are the two products which are being used by masses and there is a phase deregulation which has been considered for these two products.

Q: As a producer, what do you think of the administered price mechanism, in whatever forms and shapes, it prevails at this point of time?

Tripathi: The bitter reality is considering the socioeconomic condition of our country you cannot say that the state will not play a role in this and it will be left to the market. That will be unfair on our part as a citizen of the country. We are those fortunate people in that 5% to 10% racket we don't feel a pinch of it. However, in a country like ours where 40% of people are living below poverty line and we have been talking about all this in various conferences, how can we ignore this aspect from the government perspective and from a larger social perspective?

From the industry point of view, it needs to strike a fine balance between both the requirements - the requirement for the industry to prosper and deliver and at the same time to meet the requirements of those people. Therefore, my personal view is that the government will have to play a role in this to protect those people who are not having access to this form of energy.

Q: What your comments Mr. Hussain about the overall pricing economics of this sector?

Hussain: If you go back about 15 years, in 1996-1997 when APM for refineries was being taken down, we saw an interesting shift in the investment pattern. In India, most of the new investment used to go into capacity increases because that's how refineries could make more money because it was based on capacity. After it was announced, there was a clear shift of putting investment in productivity enhancement in our projects, terminal automation system, advanced process control systems, the investment in that dramatically increased.

In fact, prior to that India was one country which was quite different from any other part of the world, where all new investment was capacity. After that a significant amount of investment started moving towards productivity improvement. So, the right balance has to be brought, subsidies cannot be completely taken away but they need to go to the people that need it.

Q: Tell us your thoughts on this subject. Is this something that any government can ever fix in this country, if at all it needs to be fixed?

Mansingh: Can the government continue the way it is going on because this issue is directly linked whether we like it or not to the energy security of the nation? You mentioned the expert committee all the expert committees without exception opened up the sector give gist of price control and allow an independent regulator to regulate -that's how Petroleum and Natural Gas Regulatory Board (PNGRB) was constituted under the act of the parliament. Now not very surprisingly, the act does not give any part either to the regulator or to the government to regulate the price of the end product.

What the government is doing is sincerely administered price which incidentally Dr. Sharma didn't mention it was formally abandoned in April 2002. There is a normal notification of the government saying that dismantling it. The government is making a back door entry of that same thing which we have formally abandoned. It is a subjudice issue, so I don't want to go into the details. Under the act, we have an omnibus mandate the regulators shall ensure fair trade and competition amongst the entities for the protection of the consumer interest. It means subsidy essentially is in the political domain. No regulator should enter into that domain but it should be done in a manner which does not distort the market fortune.

Q: In terms of the long term evolution, what sort of steps would you want to see decisions being taken to bring in this fair equilibrium that all of you have pointed out is very necessary? No one in this panel has disagreed with that the fair equilibrium is a need.

Mansingh: Start with simple things. There can be no second opinion to gas, that it is the cleanest most efficient fuel. Your commitment to environment protection can only come about gas being distributed to the common man through the city gas distribution network.

Q: Yet process has been raised in the last one year?

Mansingh: There is a state and central tax angle - why should gas attract 20% sales tax in Uttar Pradesh and 12% or 14% in some other states. Why can't you reduce it to the lowest level of VAT, which is first thing?

Q: Even in the proposed GST it has been kept out of the unified framework?

Mansingh: We are facing problems in ensuring the spread out of the All India network because to optimize the infrastructure, which is a basic requirement in a poor country like ours, sales tax swapping of gas from different sources is not possible. So, you have to bring it under GST there is no other alternative.

For example, wherever pipe gas has been introduced it is cheaper than the subsidized LPG. There is no reason why urban middle class has to be subsidized, it is not even necessary. The bill will hardly come to Rs 200 to Rs 300 per month on a maximum. You roll back the subsidize LPG - give it through direct gas transferr, which is being attempted in this budget, to the people who require that subsidy. I would expect planning committee to take the lead in that regard.

Q: Your comment on this Mr. Tripathi?

Tripathi: I agree with Mansingh that this stage for this country is to absorb more and more gas. In domestic market, whatever gas is there is being full absorbed but from where we can bring in gas we have two options - either we bring in crude, process it and burn in the form of diesel LPG and all those and give subsidy or bring the gas in the form of LNG. In spite of our best effort or everybody's effort, there are so many other players in there. We are not able to buy LNG at the prevailing price, the reason being that the domestic market does not support it - if you talk to the all power producers the electricity is available at Rs 2, Rs 3 with these LNG price, no power plant will be able to sustain because production is Rs 5.

When it goes into the peak summer they have deficit, it becomes Rs 10 to Rs 11, so problem is that at the policy level, a lot of fiscal regime the way we have to create it has to enable an environment for us to import LNG. Cooling of price is another issue which planning commissioner is discussing, though Mansingh may not agree with this. It is one of the steps which this people are taking in this direction. Whether it is right or wrong, we must provide a sort of an environment where we are able to import more and more LNG at this stage.