Crude oil sector: The new rules give freedom to domestic producers to sell oil to any Indian refinery that can pay highest price; these will be effective Oct 1
As the government has deregulated the domestically produced crude oil, the producers will now have an option to sell their oil in the domestic market to whoever pays the highest price, including private players. This decision will incentivise making investments in the upstream oil and gas sector. The new rules will be effective from October 1. Here’s what are the current rules, what new rules say, and what will be their impact on companies, government revenue and consumers:
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What Are The Current Rules?
Currently, there is a condition in the production sharing contracts (PSCs) for crude oil producers to sell the oil to the government or its nominee or government companies. Also, the government decides the quantity of crude oil that each buyer can pick. This limits the scope for price negotiations. Oil and Natural Gas Corporation (ONGC), for instance, currently has to sell its Bombay High crude oil to state-owned oil marketing companies HPCL and BPCL.
What New Rules Say?
The condition in the production sharing contracts (PSCs) to sell crude oil to the government or its nominee or government companies will accordingly be waived off. All exploration and production (E&P) companies will now be free to sell crude oil from their fields in the domestic market. Now, the producers can e-auction the crude to any Indian refinery that can pay the highest price. The refineries turn crude oil into fuels, such as petrol and diesel.
What Will Be The Impact On Consumers, Companies And Govt Revenues?
As the companies will now have price negotiating power with the buyers, their realisation will improve. This is expected to boost the Centre’s royalty and cess income as they are charged as a percent of the price.
The government said its revenues like royalty and cess will continue to be calculated on a uniform basis across all contracts. Currently, cess is pegged at 20 per cent, while the royalty is pegged at 20 per cent for onshore and 10 per cent for offshore production.
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Bhanu Patni, senior analyst at India Ratings and Research, said, “The move will be positive for the upstream companies as they would be able to market their crude freely, especially on the outputs which are superior in quality and could be sold at a premium.”
However, Patni added that the impact on oil marketing companies (OMCs) or ultimately on the consumer will be marginal, as around 85 per cent of the crude, which is turned into petrol and diesel after refining, is imported and any pricing premium required to be paid on small quantities will not have major implications.
It means the impact of the deregulation on retail petrol and diesel prices in India will be just marginal as most of the crude oil is imported.
Announcing the CCEA decision, Information and Broadcasting Minister Anurag Thakur said, “India imports 85 per cent of its crude oil requirement. Only 15 per cent of the requirement is produced domestically through exploration and production, which stood at 30.49 million tonnes in 2021.”
The government said, “This decision will further spur economic activities, incentivise making investments in upstream oil and gas sector and builds on a series of targeted transformative reforms rolled out since 2014. The policies relating to production, infrastructure and marketing of oil and gas have been made more transparent with a focus on ease of doing business and facilitating more operational flexibility to operators/industry.”
