In what could be a morale booster for the government, after it simplified the future auction process, proposing a revenue sharing model to replace the current profit sharing model in oil and gas sector, the global rating agency Standard & Poor’s Ratings Services has said that the new price formula and calibrated marketing freedom for gas produced from fields in difficult terrain could help attract investments in India’s oil and gas sector.
The rating agency further said that the new policy approvals in hydrocarbon E&P could help bring in transparency and lower administrative complexities in the sector. It expects the pricing formula to almost double the prices of domestic gas from difficult fields to about $ 7 per million British thermal units (mmbtu), from the current $ 3.8 an mmbtu. At present, domestic gas prices are determined by a formula of average gas prices in gas surplus geographies.
S&P, however, said the decisions 'could help attract investments' in the difficult fields but it will take time, as some of the difficult fields are green field projects and many discoveries will need approvals for capital outlays and time to implement. It also said that the new policies are credit positive for Oil and Natural Gas Corp (ONGC) and Reliance Industries (RIL), but meaningful cash flows are a few years away, as the investments in the difficult fields will increase gradually and meaningful production from such fields will take much longer.
Under the new formula, gas prices would be capped at the lowest of the imported cost of fuel oil, landed price of liquefied natural gas (LNG), or weighted average of imported price of coal, fuel oil, and naphtha.These prices will be reset semi-annually and will be applicable for future discoveries and existing discoveries that are yet to start commercial production. In addition, all exploration and production (E&P) activities will require just a single license, and bidders will be free to choose areas for exploration from among the fields up for auction.
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