Producers’ output-cut pact was year’s defining moment for oil sector

As the world’s third-largest oil consumer, which imports over 80 per cent of its requirements, India was naturally concerned about producers talking of cutting output to halt the continuous fall in crude prices that had gone on for nearly two years.

Earlier this month, oil producers outside the Organisation of the Petroleum Exporting Countries (OPEC), led by Russia, agreed to reduce output by 558,000 barrels per day (bpd). This came in the wake of the 13-nation OPEC cartel’s November 30 decision to cut output by 1.2 million bpd for six months effective from January 1.

This is the first time since 2001 that OPEC and some of its rivals have reached a deal to jointly reduce output to tackle the global oil glut.

As a result, the Indian basket of crude oils gained more than $3 a barrel at $54.42 per barrel over the weekend of December 11-12, even as global prices surged to an 18-month high. The price on Wednesday, December 21, was $53.47.

OPEC Secretary General Mohammed Sanusi Barkindo, who was here earlier this month, was conveyed India’s viewpoint by Petroleum Minister Dharmendra Pradhan that the interests of consuming countries should be kept in mind when the cartel decides on issues of output cut and pricing.

Oil prices have fallen by more than 50 percent in less than two years, from levels of over $120 a barrel.

“The fall in oil prices in the last two years came as a timely relief for the Indian economy and consumers, which has helped us increase the penetration of cleaner fuel,” Pradhan said, inaugurating the 12th Petrotech conference here earlier this month.

“For the sustainability of the oil markets, we must strike a balance of interest between producers and consumers. In June last year at an OPEC event, I had submitted the viewpoint of India,” he said.

Meanwhile, the government last month received 134 e-bids from 42 companies for exploring small oil and gas fields under the Discovered Small Fields Bid Round 2016.

The government had put up 67 small oil and gas fields for auction under the new Hydrocarbon Exploration and Licensing Policy (HELP) approved in March, which is based on a revenue-sharing model as opposed to cost-and-output-based norms earlier.

The new model will replace the controversial production-sharing contract (PSC) that has governed the bidding under nine earlier NELP rounds. The PSC regime, which allows operators to recover all investments made from sale of oil and gas before profits are shared with the government, was criticised by India’s official auditor, who said it encouraged companies to keep inflating costs so as to postpone sharing of profits.

Now under HELP, eventual operators will be issued a single licence for exploration of conventional and non-conventional hydrocarbons and will have the freedom to sell oil and gas at “arms length” market prices.

The year also witnessed renewed emphasis on taking the country towards a gas-based economy. The government announced it plans to double India’s natural gas consumption from the current 120 million standard cubic metres a day (mscmd) to 240 mscmd in five years in a bid to boost India’s low gas consumption of six per cent in the energy mix, as compared to a world average of 24 per cent.

“The biggest bottleneck in boosting India’s low gas consumption was the issue of who will decide the pricing. So the biggest policy measure in this sector has been the deregulation of gas pricing by our government,” Pradhan said here earlier this month.

On the back of a major fall in global prices, the government, in October, cut the price to be paid to producers of natural gas by 18 per cent to $2.5 per million British thermal unit (mbtu) on gross calorific value (GCV). On net calorific value basis, the price is $2.78.

The rate compares to an average cost of production of about $3.59 per mbtu for state-run explorer ONGC and $3.06 for Oil India.

The Petroleum Ministry also announced a sharp reduction in cap price for undeveloped gas finds in difficult zones like deep-sea, high-temperature, high-pressure areas. The cap for October 1, 2016, to March 31, 2017, for gas from difficult areas will be $5.3 per mbtu, down from $6.61 in the preceding six-month period.

A caveat to this decision said the gas price for difficult areas will not apply to Reliance Industries’ (RIL) discoveries in their KG-D6 block unless the company withdrew its legal suit over gas pricing. Besides seeking arbitration on the gas price, RIL has sought arbitration over the government disallowing costs of $2.3 billion on grounds of shortfall in production by the company.

While the demand-supply situation has been a factor in falling oil prices, the other is financial market equations. The oil market in recent years has been sustained by cheap dollars flowing out in response to US Federal Reserve’s quantitative easing programme.

This situation, however, looks set to change as we move towards the new year, with the Federal Reserve increasing its key interest rate by 25 basis points in December, in the first rate hike in 2016 and just the second in a decade.