<div>How should shortage be handled? By increasing supply. How should imports be reduced? By encouraging domestic production.<br /><br />These answers are obvious but become critical, if the product in question is petroleum. But despite a crippling dependence on imports, a ballooning import bill and rising retail prices, government policies are actively discouraging domestic production of oil and gas.<br /><br />Rising petroleum prices bring economic and political crises. The import bill for petroleum for India was over $140 billion in 2011-2012. The previous year it was $100 billion. This 40 per cent increase was a result of an increase of $27 per barrel. By 2035, the import bill could be $300 billion. Retail prices reflect the sharp jump. Petrol costs over Rs 70 per litre in most states. It is not too difficult to predict a price of Rs 200 per litre.<br /><br />So what is the government’s approach to reduce dependence on imports and volatile global pricing? Discouragement of domestic production of oil and gas.<br /><br />Strange though it may sound, the government has does not believe that exploration and production of oil and gas is critical enough to be described as infrastructure industry. It is not about the nomenclature. It is about making it easier for companies to invest in production of domestic oil and gas. <br /><br />According infrastructure status to oil & gas production would allow funds to flow to this sector with relaxed terms. Raising resources for reducing import dependence would be far easier.<br /><br />Current lending norms set by the Reserve Bank of India say that if a project does not start commercial operations within 6 months of financial closure, the loans will be treated as non-performing asset. This would then force the lender to review the loan or hike the interest rates. Now the time between exploration and commercial production is almost always more than 6 months. So the companies involved in this have to either take high cost loans or struggle to manage with internal accruals, if at all.<br /><br />But lending to infrastructure sectors allows banks to give two years to the borrower to launch commercial operations. For domestic oil companies, this is critical. They get more time and cheaper funds. Cheaper funds also imply a lower cost of production.<br /><br />Strangely, the government has given infrastructure status to oil pipelines and storage sector. The policy is encouraging the transfer and storage of oil, but not its production. <br /><br />The Cabinet Committee on Infrastructure approved the list of industries to be granted infra status based on recommendations by the Finance Ministry, a few weeks ago. The matrix used by the Ministry included several conditions that any sector should meet to be defined as infrastructure.<br /><br />These conditions included issues of monopoly, high-sunk costs and non-tradability of output. But despite the comprehensive exercise, production of oil and gas was excluded from the final list of sectors defined as infrastructure.<br /><br />Experts in the oil and gas sector say that petroleum production meets all the conditions, but somehow pedantic considerations appear to have trounced practical realities.<br /><br />Even the environment ministry is confused about the impact of on-shore oil and gas production. The environment ministry has not been able to differentiate between mining and petroleum exploration. While mining affects large tracts, petroleum production does not. Production involves deep drilling within a small area. As a result of this attitude, getting green clearances for on-shore exploration and production is much tougher than for off-shore. About a third of the reserves are on-shore and the government can’t afford to ignore its potential.<br /><br />Domestic petroleum cost is a quarter of that of imported petroleum. There can’t be a bigger argument for encouraging domestic oil and gas industry.<br /><br /><br /><em>(Pranjal Sharma is a senior business writer. He can be contacted at pranjalx@gmail.com)</em><br /> </div>
