As deregulated by the government domestically produced crude oilProducers will now have the option to sell their oil in the domestic market, including private companies, to whoever pays the highest price. This decision will encourage investment in the upstream oil and gas sector. The new rules will be effective from October 1. Here’s what the current rules are, what the new rules say, and how they’ll impact companies, government revenue, and consumers:
What are the current rules?
At present, there is a condition in the Production Sharing Agreement (PSC) for crude oil producers to sell oil to the government or its designated or government companies. Also, the government decides the quantity of crude that each buyer can choose. This limits the scope of price negotiation. For example, Oil and Natural Gas Corporation (ONGC) currently has to sell its Bombay High crude oil to state-owned oil marketing companies HPCL and BPCL.
What do the new rules say?
The condition of Production Sharing Contracts (PSCs) for selling crude oil to the Government or its designated or Government companies will be accordingly waived off. All exploration and production (E&P) companies will now be free to sell crude from their fields in the domestic market. Now, manufacturers can e-auction crude oil to any Indian refinery that can pay the highest price. Refineries convert crude oil into fuels such as petrol and diesel.
What will be the impact on consumers, companies and government revenue?
Since companies will now have the power to negotiate price with buyers, their realization will improve. This is expected to increase the center’s royalty and cess income as they are charged as a percentage of the price.
The government said its revenue such as royalty and cess would continue to be calculated on a uniform basis across all contracts. Currently, the cess is pegged at 20 per cent, while the royalty is pegged at 20 per cent onshore and 10 per cent for offshore production.
Bhanu Patni, Senior Analyst India “This move will be positive for upstream companies as they will be able to freely market their crude, especially at outputs that are better in quality and can be sold at a premium,” Ratings & Research said.
However, Patni said the impact on oil marketing companies (OMCs) or the eventual consumer would be minor, as about 85 per cent of crude oil, which turns into petrol and diesel after refining, is imported and any pricing premium is needed. Paying small amounts won’t have a big impact.
This means that the impact of regulation on retail Petrol and Diesel Prices Will be only marginal in India as most of the crude oil is imported.
Announcing the decision of CCEA, 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 decision will further boost economic activity, encourage investment in the upstream oil and gas sector and will be based on a series of targeted transformational reforms since 2014. The production, infrastructure and marketing of oil and gas,” the government said. The policies relating to ease of doing business have been made more transparent with a focus on facilitating greater operational flexibility to operators/industries.”
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