What now for Nelp

Significantly,this is the first time that the Nelp regulatory regime has been subjected to such in-depth legal scrutiny. If there was clarity,on the rights of the government and the contractor,in laws relating to exploration and production,the matter would never have come before the apex court in the first place.

It is good from investors viewpoint that these laws have been interpreted by the countrys highest court,which has settled,once and for all,the issues relating to the governments right to frame gas utilisation policy and set pricing in blocks awarded through Nelp bidding.

Significantly,oil and gas exploration is a highly risky business and requires long-term investment. Private players,especially overseas ones,are always cautious while making investments. While overseas oil companies are keen to invest in the Indian exploration sector,they cannot be taken for granted because there is competition among countries to offer incentives to attract these companies. If investors lose confidence in Indias exploration sectors regulatory regime,they may well turn their attention to other countries.

It is true that India is not the only country in the world where the government intervenes in the natural gas market and caps prices. Countries like Egypt also follow similar policies. However,the difference is that such countries come much higher than India in the investors global rankings on hydrocarbon prospectivity. Moreover,these countries do not make any claim of allowing marketing freedom to contractors and so companies can factor in this disadvantage while planning to invest in these countries.

Significantly,the Indian hydrocarbon exploration and production was dominated by the public sector companies like ONGC and OIL until 1991. Blocks were awarded to these companies through the nomination route. However,there was no marketing freedom given to contractors who won the awarded blocks. But in 1999,the government introduced the Nelp regime for the auctioning of acreages. The government assured marketing freedom to contractors under the new regime.

Nelp has attracted investment of over $10 billion in the Indian hydrocarbon exploration and production sector. Reserves of more than 600 million tonnes of oil equivalent have been added. Not only this,big discoveries made in the Nelp blocks have helped raise Indias profile on the world exploration map,further improving the prospect of investment inflows into the sector.

But because of the governments ad hoc policy relating to tax benefits for gas producing blocks,international oil companies are already cautious about the fiscal stability assured by the Indian government under Nelp. The Supreme Court verdict may further dampen their enthusiasm about investing in India. If that happens,it would be a big setback to the Nelp regime.

The success of the Indian democratic system is a great comfort to overseas investors looking to invest in the oil and gas exploration sector here. The country has been getting a premium ranking from overseas investors for this reason. However,regulatory stability is the most crucial factor in oil and gas exploration. That is the reason overseas oil and gas exploration companies have been quite keen on investing in India,even though it is supposed to be a comparatively low prospective area. But now that the Supreme Court has ruled that the government can intervene in pricing and allocation of natural gas from Nelp blocks,investors might be forced to review their options.

Apart from expediting domestic exploration,India has been trying to increase gas availability by negotiating deals for import of the fuel through transnational pipelines. But it has not achieved any tangible success in this direction so far. Meanwhile,the countrys gas demand is projected to rise fast in the coming years because of stagnation in domestic production of coal,which has been the bedrock of Indias energy security so far. India plans to increase the share of gas-based power generation capacity to deal with the growing shortage of domestic coal. It has been importing LNG to meet the domestic gas shortfall. Here too,it has not been able to tie up enough LNG under long-term contracts. Spot LNG prices are closely linked to international crude oil prices. So meeting the LNG requirement through spot cargoes is not an option for a price sensitive sector like power.

India has envisaged GDP growth of 8% over the long term. What must be underlined is that it cannot achieve this goal unless it ensures adequate availability of power for its industry. But the government does not seem prepared to meet the challenge.