Most will agree the new policy on allocating oil/gas acreage is better than the earlier one where the government picked blocks that oilcos then bid for. In the Open Acreage Licensing Policy (OALP), an oilco identifies the areas it wants and these are then bid for. But, when the government moves one step forward, it often also moves several steps backwards. That is especially unfortunate when, as compared to the plan to reduce import dependence for oil/gas by 10% by 2022, this is actually rising. India imported 77.3% of its crude oil in FY14 and this rose to 82.8% in FY18; in the case of natural gas, this rose from 33.2% to 45.4% .
Instead of making oil/gas exploration attractive, last month, the government put in a profit cap that made it unattractive to increase investment. Right now, the share of oilco profits that the government gets depends on the “investment multiple” (IM), or the oil/gas revenue divided by the capex—the lower the IM, the lower the government share. In other words, more capex will lower the IM and, so, lower the government’s profit share. While the government telling oilcos that the IM must not be allowed to fall resulted in protecting its revenue share, it also meant that oilcos were being encouraged to not invest more even though this would eventually lead to more production. Read More