New hope for India’s moribund energy sector after election
India’s next prime minister, Narendra Modi, has the chance to revitalise the energy sector and shape how the country engages with international investors
The party he leads, the Bharatiya Janata Party (BJP), made history with its landslide victory over the ruling Indian National Congress party, which has controlled Indian politics for most of the 60 years since India gained its independence. Voters delivered a crushing verdict on the corruption scandals and flagging economic growth that have plagued the country in recent years. By winning more than the 272 seats, the BJP received the strongest mandate of any party in 30 years and can form a government without brokering a coalition deal.
Modi, the Hindu nationalist and former tea seller, ran on expansive promises to revive India’s moribund economy, end corruption, create millions of jobs and lift millions of people out of poverty. His government is widely expected to take steps to boost investor confidence in the oil and gas sector too, which has been badly hit by policy decisions which were shelved for fear of displeasing voters.
It seems likely that the pro-business Modi government will finally implement much-needed gas price reform in India, continue the previous administration’s policy of cutting fuel subsidies and pursue a number of policies to encourage investment in oil and gas.
Faced with rising import costs and declining output, analysts at Wall Street research firm Bernstein believe India has no option but to raise gas prices, with or without Modi. Nonetheless, anecdotal evidence suggests that Modi is keen on the move.
Foreign investors hope the new government heralds a change in direction too. Just before the election results, BP issued a legal challenge over a protracted gas pricing dispute, together with local partner Reliance Industries, the energy and petrochemicals conglomerate controlled by billionaire Mukesh Ambani. The high-profile complaint sees BP join a growing list of international companies looking abroad for resolution to disputes with India’s government.
Reliance and BP have been involved in a series of rows over bureaucratic and political delays relating to the Krishna Godavari (KG) D6 field, whose discovery in 2002 was hailed as India’s largest offshore gas find. BP snapped up a 30% stake in the block as part of a $7.2 billion deal, India’s biggest-ever foreign investment, in 2011.
But the estimated value of BP’s investment has plunged in the face of production declines. More investment, which will require higher domestic gas prices, is needed to develop the field. “Without this (gas price) clarity, the parties (companies) are unable to sanction planned investments of close to $4bn this year,” said Reliance, BP and Canadian independent Niko Resources in a joint statement. They said they were planning to invest a total of $8bn to $10bn in the KG D6 Block over the coming years.
The trio hopes to avoid arbitration, a process that typically takes many years. Instead, their challenge is in effect a plea to the new prime minister, to push through the increase in gas prices. But it remains to be seen how quickly the new government can tackle the controversial issue of revising domestic gas prices, which would have nearly doubled from $4.2 per million British thermal unit (Btu) to $8.4/m Btu had the Rangarajan formula been implemented as planned on 1 April. The Election Commission put the reform on hold in March, saying it could affect the outcome of the elections.
Moody's had projected combined revenues of the upstream companies in India to rise by up to $2.8bn had the price rise been implemented in April as scheduled. The ratings agency estimates the companies will lose about $10m to $12m of revenue for every billion cubic metres of gas produced each month the reform is delayed.
Reliance claims India will lose around $20bn per year if gas price reforms are not implemented, as rising energy demand will be met using costly fuel imports. PS Bami, president of power sector lobby group India Energy Forum, said: “Modi is a strong man and we would expect bold and quick decisions from him. Be it about right pricing of fuel products or fast-tracking clearances for stalled or new projects.”
Indeed, low gas prices have deterred much-needed offshore exploration, while several foreign players have also exited fields because of regulatory hurdles. The previous government's indecisiveness crippled its ability to harness the nation's upstream potential and slash rising import costs.
In spite of an announcement in January that the government would invite bids for exploration blocks, the auction failed to go ahead due to bureaucratic deadlock. Slow project clearance has also stalled the sector’s expansion.