Monday, January 27, 2014

Step towards Energy Independence – Key Actions Penned by Kelkar Committee…

The Kelkar Committee had been set up with primary idea of chalking out the way forward towards reducing import dependency in the Indian Hydrocarbon Industry by 2030. In order to create a vibrant Hydrocarbon Industry that could attract the required investments and human resource pool in order to boost domestic E&P activities and thereby enhance domestic production of oil & gas, the committee has come up with a remarkable yet simple set of recommendations for the short to mid term in the first phase of its submission. The committee had been entrusted with the difficult task of delving deeper into the complex issues of framing and administration of the existing as well as upcoming contractual framework to create an enabling operating environment for the Indian E&P Industry and to suggest possible changes in the existing fiscal structure, policy environment, institutional and contractual framework and other operational aspects. The recommendations made by the committee in its first phase of submissions can be broadly categorized as outlined below:


Increase Information Availability & Transparency

The committee is of the view that in order to encourage participation of international oil companies in the domestic hydrocarbon industry, immediate roll out of Open Acreage Licensing Policy (OALP) is necessary with the need to collect data for prospective basin areas that are perceived to be of high risk, and that have so far attracted limited or no capital investments by building the National Data Repository. The committee feels that availability of high quality basin information collected through speculative surveys is quintessential to attract investments due to the inherent risks involved with E&P investments. The committee has also proposed that the possibility of a multi-client speculative survey model should be explored and developed and enabling reforms should be formalized and rolled out at the earliest so that participation from international oil companies is encouraged while estimating the potential of basin areas that are perceived to have high risks associated with the investments.
The committee has also called for implementation of reforms to improve accessibility to information and transfer of data related to Indian basins by formulating guidelines for more simplified and seamless modes for data transfer, in line with global best practices. The committee has suggested that the data residing in the NDR should be used for the OALP as well as for marketing of promising Indian sedimentary basin areas to others. The seamless access to data and information on Indian sedimentary basins is expected to generate more interest in global players.

Formulate Enabling Policy Environment

The committee is of the opinion that the fiscal policy environment in which domestic as well as international oil companies are operating in India needs urgent consideration. In line with global best practices all forms of hydrocarbon assets should be given tax holidays for the minimum duration of 7 years while hydrocarbon assets falling in the category of deepwater, ultra deepwater, North East, high temperature high pressure categories should be eligible for 12 years of tax holiday period from the date of first production. This would not only ensure additional investments in the higher risk hydrocarbon asset class, but also offer a better risk reward spectrum to the industry.
Since oil & gas operations are complex and requires best-in-class technological interventions, often requiring expatriates to be involved, the Govt. should promote and encourage companies to involve such skills through hiring of expatriates by relaxing social security and provident-fund norms for expatriates. This would help Indian companies provide oil field services that require expatriate personnel in a cost effective manner and will reduce the expense burden on companies thereby encouraging them to involve such experts when necessary.
Applicability of service tax on cash calls has been a grey area leading to multiplicative tax implication on transactions involved in carrying out E&P operations of PSC operating under the consortium structure. To avoid such double taxation, the Government should further issue clarification reiterating the non-applicability of service tax levied on cash calls made by the operator to other partners in a consortium thereby reducing the fiscal implications on the E&P operations.
Moreover, the committee has called for reduction in the rate of dividend tax paid on income earned internationally by subsidiaries of Indian oil and gas companies. Under current tax laws in India, the remittance of dividends by an overseas subsidiary to its holding company is effectively taxed at a rate of 16.99 percent. Reducing the tax on dividend paid will ensure that the companies have more funds available with them to further re-invest in building their portfolio of assets. Also, the committee has reiterated that the applicable tax regime is revised to ensure that Indian firms are not disadvantaged when operating in host countries on production sharing contracts in cases where the host countries do not impose taxes on international players as the underlying PSCs already accounts for the government’s proceeds. Since E&P operations require huge investments, rationalizing the tax structure will leave the companies with more cash on hand to re-invest it on developing its technological capabilities as well as investing more in prospective areas.
The committee has also called for the Government to reduce the burden of under-recoveries being currently shared by the E&P National Oil Companies as it believes that the upstream companies should not be required to subsidize under recovery of downstream companies. To achieve this goal, the committee has advised the Government to start the process of de-regulation of petroleum fuels such as diesel and kerosene with immediate effect or else if it decides against this mechanism, it should be ready to shoulder a higher share of the under-recoveries through its revenue receipts. Moreover, the committee has called for urgent implementation of Kirit Parikh committee recommendations on calculation of under-recoveries to rationalize the quantum of subsidy being borne by the industry.

Improve Contract Administration

After reviewing the Indian PSC models and its operations, the committee felt that given the alignment between the government's and contractors’ interests under the PSC system, more emphasis should accorded on prudential and fiduciary oversight of technical dimensions than the fiscal dimension which has been the case of late as in the case of KG-D6 block. The committee has urged that the Petroleum Ministry and DGH should restrict its involvement only to the prudential and fiduciary oversight of the E&P operator. As already provided in the PSCs, the Contractors are expected to adopt Good International Petroleum Industry Practices (GIPIP) while developing discoveries and the DGH should focus on ensuring such adherence. Since in principle, the basis for computation of profit petroleum under the PSC is similar to the computation of taxable profit under the Income Tax Act, the committee is of the view that the fiscal dimensions, including computation of profit petroleum, should be under the purview of the revenue authorities and bring the calculation of Profit Petroleum and profit sharing, as stipulated in the PSC, under the purview of the Income Tax Department, under the jurisdiction of Finance Ministry.
Moreover, the committee feels an urgent need for standardizing the clearance requirements as much as possible by creating a single window clearance system for oil and gas projects along with adopting a concurrent approach for statutory approvals to minimize the total time taken. The committee also feels that establishing an IT based workflow system and moving to E-governance practices will further drive efficiency in the entire process of contract administration.

Strengthening Institutional Framework

The committee in its report has called for clear demarcation of responsibilities in ensuring that E&P operations through administration of PSCs are non-disruptive and the entire institutional system works as efficient machinery. To ensure this, the committee has reiterated that any financial audits relating to PSC should be carried out based on accounting records and financial statements prepared under the provisions of the PSC in Chartered Accountants of India.
The government may conduct the audit through firms of Chartered Accountants or through the Comptroller and Auditor General (CAG), or through international auditors with assistance from management consultants and other experts with relevant experience in auditing oil and gas operations. Such an audit – whether conducted by the CAG or others – should not include performance or efficiency auditing that lies beyond the scope stipulated by the ICAI. This clearly entails that CAG is not authorized to conduct performance audits of E&P operations under the ambit of PSCs and task is essentially restricted to auditing the books of accounts. However, in the event of any report of irregularities, the government may determine the need for a forensic or investigative audit in addition to the annual audit.
The Petroleum Ministry may further establish an inter-ministerial panel to whom it may entrust the dispute resolution mechanism for a flexible dispensation depending on the circumstances to ensure timely resolution of issues concerning PSCs arising out of such forensic or investigative audits or any other event.

Encourage Participation of Global Technology Partners

The committee feels that the NOCs should be encouraged to adopt progressive small and marginal fields’ policies for rapid development of small and marginal fields. To enable such progressive action, NOCs should have the flexibility to bring in an experienced partner for IOR/EOR schemes to ensure implementation of the best practices. NOCs should also be allowed to put small and marginal fields out to global tender and form contracts with interested parties for the same purpose to enable use of the best technology available across the globe to ensure efficient exploitation of such resources. Moreover, small and marginal field projects should receive international prices of oil and gas, and not be subjected to contribution towards downstream under recoveries.
Moreover, to encourage companies in exploiting the resource potential of unconventional hydrocarbons, the committee believes that the Government should put in place a policy for private players to permit them to explore shale oil and gas resources under the PSC regime. Current policy permits NOCs to explore shale oil and gas resources from onland blocks that were allotted to them on nomination basis. The committee has also called for Coal India Limited to seek to engage with private players and NOCs to develop capabilities in gas extraction, to exploit gas from CBM.

Develop Human Resource Pool

The Committee has called for strengthening of DGH and its capabilities by using the funds made available through OIDB cess collection. The committee has emphasized the need for DGH to create an HR pool by hiring the best talents. In order to achieve this, DGH should have the freedom to recruit and or deploy international experts at global compensation levels as required.
The committee also believes that to further enable the DGH to carry out-best-in class technical feasibility assessments; it should have the freedom to employ external agencies for carrying out technical feasibility assessment as required.

Conclusion

Bringing in necessary transparency and accessibility to data and information on Indian sedimentary basins through OALP and NDR, coupled with strengthening of the institutional framework to clearly demarcate responsibilities of DGH, the Petroleum Ministry and the auditing agencies will definitely prove to drive more investments and higher efficiencies in administration of contracts. Moreover, tax reforms coupled with initiatives for granting greater freedom and flexibility to the DGH in building human resource and technical capabilities will further create an enabling operational environment for the industry.

               Infraline Energy Oil & Gas Knowledgebase Team

Monday, January 20, 2014

Back to Square One: PPP Model mooted for Coal Mining

It was always going to be this way!

After the discrepancies of coal block allocation were brought to light following the CAG report which in turn prompted the ongoing CBI investigations, coal - mainstay of India's energy - has become a hot potato with no official willing to sanction clearances or allocate new blocks. The scam and subsequent ban on mining as well as de-allocation of blocks has damaged businesses across the board. But following years of production deficits, the Indian government will now seek public-private partnerships (PPP) in the coal sector to boost domestic production. Even after several failed attempt in reviving defunct mines, it seems Ministry of Coal still wants to tread on the same path. Ministry of Coal has galvanized producer Coal India Limited (CIL) to rope in private mining companies to revive defunct coal mines, and to complete the process by March 2014. According to the Ministry, this would mark a significant step in permitting private domestic and foreign coal mines - in a sector reserved for government miners - through private-public-partnership (PPP) based on common model concession (MCA) agreements. As per directive from the Ministry, CIL would have to invite private miners and get the defunct mines operational within definite timelines. Planning Commission has been quite vocal on the issue for several months now and its officials believe since Coal India is struggling to meet domestic requirement, it is best to involve private players, who will produce faster and cheaper coal.
Under existing law, private enterprises may mine for coal under captive consumption contracts issued by the government, but the scheme’s restrictive measures have limited private participation in the program. Currently, the Coal Mines Act (1973) only allows captive consumption by private entities, so the bill must be amended before the government can solicit PPPs. The new model will allow private enterprises to enter into a partnership with the Indian government, granting these enterprises access to the country’s mines. While control of the mines and coal will remain with the government, the private enterprises will be paid a mining charge based on the amount of coal retrieved, which will incentivize greater production.   

The gap between demand and availability of coal in the country is expected to rise every year. As per the XII Plan, the estimated demand of coal will rise to 980 MT by 2016-17 and 1373 MT by 2021-22 while the supply of domestic coal is expected to be 795 MT by 2016-17 and 1102 MT by 2021-22. Under current conditions, the plan forecasts production to reach 795 million tons by that time, still leaving a large deficit that must be imported or met through growth in the sector. There is a general sentiment among India Inc that the Government is clearly buoyed by the recent surge in the Index of Industrial Production (IIP), which grew by 2 per cent in September 2013 showing increase in growth from 0.4% growth recorded in August 2013. The Indices of Industrial Production for the mining and electricity sectors for the month of September 2013 recorded growth of 3.3% and 12.9%, respectively as compared to September 2012. Electricity generation increased by 12.9% growth in September and a cumulative growth of 5.9% during April-September. Despite the debatable aspect of these IIP numbers, one thing is absolutely clear that policy makers are trying every method available in the ‘coal book’ to augment country’s coal production.
 If I had to point to a segment of the natural resources sector with the lowest investor sentiment right now, it might well be coal. Years of corruption and a bureaucracy as thick as pea soup have hobbled production of the country's mineral riches -- natural gas, iron ore and especially thermal coal. A consequence of this was that India has struggled to grow its domestic coal production -- at a time when demand from its burgeoning power sector is surging. Policy makers have again turned their eyes towards private sector and are calling for infusion of latest technology, which could pep up production to meet the rising needs of various sectors.  As much as there is a need for PPP in coal mining, this could very well turn out be a last throw of the dice for de-regulation of coal sector.

To sum it up there is a “dire need to revamp the entire coal sector in the country”.
                                                                                                                                          
     Infraline Energy Coal Knowledgebase Team

Wednesday, January 15, 2014

PPP in Road Development Prospects & Challenges Ahead

Availability of quality infrastructure is a pre-requisite to achieve broad based and inclusive growth on a sustained basis. In order to have sustained 7-10% GDP growth in India over next 20 years, highways sector will have to be a main contributory sector, with at least 30-40% capacity addition in near term (2013-18), and thereafter a sustained growth of 20-30% over next 15 years.
 The XII Five Year Plan (2012-2017) has an ambitious target of infrastructure investment and is envisaged at USD 1 trillion (or about INR 41 lakh crore, about 10 per cent of GDP). This projected investment is about twice the investment envisaged in the XI Plan and 27 per cent of the gross domestic savings.

Given the enormity of the investment requirements and the limited availability of public resources for investment in physical infrastructure, it is imperative to seriously tap avenues for increasing investment in infrastructure through a combination of public investment, Public Private Partnerships (PPPs) and occasionally, exclusive private investment wherever feasible. The adjoining figure shows the increasing investment by private sector in different plan periods.


Around 18637 km of expressways have been identified by the Government for development in phased manner till 2022.The value of total roads and bridges in India is expected to grow at a CAGR of 17.4 percent over 12th plan to reach USD 19 billion shown in the figure below:


Present statistics of PPP (across various sectors or only roads sector) in India shows that 758 projects costing INR 3, 833 billion have been awarded so far. Under this arrangement Concessionaire bears the risks for operation, construction, technical and maintenance and other vital risks related to traffic risk and toll collection threat are assigned to the sanctioned highway authority in the PPP mode.

Risk sharing Model  for PPP projects
Mode of development
Development risk
Financing risk
Traffic risk and accrual of toll fee collection
Net cash outflow for the government
BOT-Toll-Premium
Concessionaire
Concessionaire
Concessionaire
No
BOT-Toll- Grant
Concessionaire
Concessionaire
Concessionaire
Yes
BOT-Annuity
Concessionaire
Concessionaire
Authority
Mostly Yes. Net payment to be made is the difference between the toll collection and the annuity payable. The annuity payments to be made to the developer mostly exceed the toll collections.
OMT
No development except in case of paved shoulders
Concessionaire
Concessionaire
No

Lack of good quality infrastructure is the biggest impediment to India’s growth story. To overcome this situation, development of roads and highways is the priority for the authorities. The roads sector has witnessed slowdown in construction activities recently. Government of India ambitious target of constructing 20 km of highway per day hit a roadblock as it was able to award only 1100 km of road against the target of 8800 km in 2012-2013(key reasons for this- policy issues, bureaucracy issues etc)
The sector is witnessing many issues and challenges. It was observed from recent past that some of the BOT highways projects are delayed up to 36 months and beyond for various reasons such as poor performance by some contracts and constraints faced by some contractors, environment and forest clearances, land acquisition, clearance of railways for ROB designs, shifting of utilities, arbitration matters etc.
For the concerns raised by major industry stalwarts like GMR and GVK the Prime Minister has appointed C Rangarajan committee to recommend reduction and deferment of premium to be paid to NHAI. The panel is likely to recommend for six- laning projects the reduction of 25 percent annual premium payment to NHAI and postpone 50 percent in the coming years.
According to Infraline research, the investment in BOT (Toll) mode would be around 68 percent, 8 percent in Annuity and 24 Percent in EPC mode. This trend of investment clearly indicates the level of private participation would be increasing over the period of time. The private sector is expected to contribute at least half of the over $1 trillion dollar (Rs. 41 lakh crore) investment planned in infrastructure in the XII plan (2012-17).
                                                                                                                                                                                                            Infraline Energy Road Research Team

Wednesday, January 8, 2014

Indian Coal Regulations – Learning from International Practices

Indian Coal Regulations – Learning from International Practices

India is a developing economy and is set to witness a huge surge in energy demand given the strong linkage between economic growth and energy demand. Coal is the pre-dominant source of energy in India and has the largest share in the energy mix. Despite recent focus on other sources of energy such as gas and renewable sources, coal is expected to dominate the energy mix for the next few decades or so owing to technical and economic factors.
At present, the Coal sector in India is facing numerous challenges such as inefficient mining practices, shortages in coal supply, monopoly of Coal India Ltd. in mining, improper pricing mechanism, contractual disputes between buyers and suppliers, lack of clear process for mine opening/mine closing and rehabilitation etc. The Government of India has approved the constitution of a Coal Regulatory Authority to address these issues and challenges. The Coal Regulatory Authority Bill 2013 was approved by the Cabinet Committee on Economic Affairs (CCEA) in June 2013 and tabled in the Parliament in December 2013. The scope of the proposed Coal Regulatory Authority includes development of regulations for the specific functions assigned to it in consultation with various stakeholders. The Authority is expected to establish guidelines and standards for grading of coal to be supplied, pricing mechanisms, ensuring adherence to FSAs and resolving disputes thereof, monitor and enforce mine closure plans and adherence to mining plans, advising various stakeholders in the sector and resolving grievance of coal producers and consumers. Figure 1 provides an outline of the scope of the proposed Coal Regulatory Authority.

Figure 1 Scope of the Proposed Coal Regulatory Authority
To understand the views of various stakeholders on the proposed scope of the Coal Regulator, InfralineEnergy conducted a conference on “Developing Regulatory Framework for Indian Coal Sector: International Practices” on November 26th, 2013. With this background and on basis of discussions with various stakeholders, InfralineEnergy has commissioned a research study on policy and regulatory set up in the global coal industry named “Global Coal Regulatory Framework: Path-Setting for Developing Indian Regulations”. The report will examine the structure of coal industry, institutional bodies, policy- regulatory framework of eight countries and functions of various authorities administering and regulating the coal sector. These countries have been shortlisted based on various parameters such as maturity level of coal sector, emerging coal industry and presence of independent coal regulator. It presents a broad comparative analysis of regulatory practices in various countries and established best practices to eventually provide various stakeholders, including the Central Government and the proposed Regulator, with mapping of global practices as they join together to develop regulations for the Indian coal sector. InfralineEnergy strongly believes that the report will effective serve the above objective.
                                                                                                                                                                           
                                                                                                                                       
                                         Infraline Energy Coal Research Team 

Monday, January 6, 2014

Waste to Energy in India

With rising population and fast changing consumer habits giving constant boost to waste generation, scientific waste management assumes greater importance than ever before. Waste is thus increasingly being perceived as a resource, albeit wrongly placed. Not only reuse and recycling, but the use of wastes of one industry as inputs to another for further value addition is also being explored

Of late, rising waste quantities have been a cause of concern to developed and developing economies alike. An order of priority for handling wastes, as shown in Figure 1, is therefore gaining grounds in policy making and implementation circles. 
Figure 1: Order of Priority for Waste Handling

                                                            Source: Infraline Research

As is evident from the figure, non-generation of wastes is given highest priority followed by reduction in quantities of wastes generated. Reutilization of wastes as input to other industries like feedstock for energy generation comes next in order of priority. Treatment of wastes and their disposal in environment-friendly manner assume the least priority. Wastes, must therefore be reutilized as efficiently as possible.
In this context, the use of wastes for production of energy is also being explored. This option is particularly important for India, considering the rising demand-supply gap of availability of usable energy.
The Ministry of New and Renewable Energy (MNRE) estimates that India presently has potential to generate around 2,600 MW of energy from municipal wastes and another 1,280 MW from industrial wastes. The technology for waste processing and energy generation from wastes being essentially primitive, the successful installation of WTE systems does not pose much of a challenge. However, the sector being relatively nascent, the economics of each project would define its success.
With a number of policy level initiatives like the Municipal Solid Wastes (MSW) Management and Handling Rules 2000, the National Master Plan for Development of Waste to Energy in India, the Jawaharlal Nehru National Urban Renewal Mission (JnNURM) formulated by the Ministry of Urban Development (MoUD), the Programme on Energy Recovery from MSW formulated by the MNRE as well as state level policy initiatives for the promotion of alternative sources of energy; the Waste to Energy (WTE) sector in India has taken off well. An operational full scale commercial project at Timarpur-Okhla in Delhi using MSW as feedstock and a number of pilot projects operating across the country ensure the availability of replicable examples for the sector both technologically and economically. In addition, a number of facilitators and market based mechanisms like the Renewable Purchase Obligation (RPO) and Clean Development Mechanism (CDM) make the sector well poised for forward movement.
Internationally too, the sector has received policy level attention. Countries like Sweden, Denmark and USA among others have implemented quite a few WTE projects with success. Sweden, in particular, recycles and reuses 100 percent of its wastes for energy production. The country currently falls short of wastes to be used as feedstock to its waste processing industry. Countries in the European Union, particularly the Scandinavian nations have also put in place a mechanism to facilitate cross-border waste trade.
However, a number of factors like lack of well established standards for feedstock and absence of a well organized waste value chain pose challenges for the nascent industry, particularly in India.
Exploring these and many more aspects of the sector, Infraline Energy has come up with a publication titled ‘Demystifying the Waste to Energy Conundrum: Potential and Project Opportunities in India’.
The report encompasses project opportunities in the WTE sector in India, with special attention on technologies, project economics, policy and regulatory landscape, incentive structures, financing mechanisms, national and international experiences, successful cases studies in India and across the world etc around MSW. A combination of thorough primary and in-depth secondary research, the compendium is designed to facilitate informed decision making for stakeholders across the WTE value chain in India.
                                                                                                                                                     
                    
       Infraline Energy Renewable Research Team