Oil Price Reform to Spur Investment in Energy Sector

NEW DELHI (Dow Jones Newswires), June 30, 2010

India's next round of auctions for oil and gas exploration blocks should get a "tremendous response" thanks to the government's recent decision to deregulate fuel prices, oil secretary S Sundareshan said Wednesday.

Previous auctions have been met with lukewarm interest from India and overseas, but officials expect the upcoming round to be different as companies will be more confident about investing in a sector where prices are determined by the market, rather than the state.

The next round of auctions, part of the India's New Exploration Licensing Policy, will involve 30-40 oil and gas blocks and is expected to be held in the July-September quarter, officials said Wednesday.

The federal government announced Friday that gasoline prices would be set by market forces, while diesel prices would be deregulated soon. It hiked gasoline prices by INR3.50 a liter and diesel prices were raised INR2 a liter.

Oil minister Murli Deora said Wednesday that companies committed an investment of $1.1 billion in India's latest oil block auction round, held in October 2009.

Following that auction, the oil ministry Wednesday signed production sharing contracts for 31 exploration blocks with companies including Oil & Natural Gas Corp., BHP Billiton, BG Group and Cairn Energy, added Sundareshan.

In addition to easing its control on gasoline and diesel prices, the government aims to boost exploration investment by eventually introducing a new auction system wherein companies can buy oil and gas blocks at any time of the year, Deora said.

He added that India also plans to introduce auctions for shale gas blocks within a year.

Besides supporting exploration, the new market-driven pricing policy for gasoline and diesel could spur investment in other areas of the hydrocarbon sector, which will help improve India's energy infrastructure at a time when demand for fuel is rapidly rising, officials said.

"By improving the financial health of state-run oil marketing companies, this would also lead to investment in new refineries, pipeline, storage terminals, port facilities and other infrastructure," junior oil minister Jitin Prasada said.

The fixed fuel pricing regime meant that state-run Indian Oil, Bharat Petroleum and Hindustan Petroleum suffered revenue losses as they had to sell fuels at discounted prices to help the government control inflation.

While they are partly compensated by the government and through discounts from state-run explorers, the companies have to bear some of the losses themselves, hurting their competitiveness.

Sundareshan added that recent decisions by the government and the apex court have "altered the atmosphere" and bolstered investors' trust in the country's hydrocarbon sector.

He noted that the government has recently nearly doubled the administered price of gas sold by state-run companies, while a recent decision by the apex court to uphold the "federal government's right over the country's natural resources" would also reassure investors.

Copyright (c) 2010 Dow Jones & Company, Inc.