What are the implications of allowing upstream oil companies the freedom to sell crude oil locally?
Answer
Answer
In a move that could have far reaching implications for upstream oil companies, the government has permitted the oil extraction companies to freely sell the oil in the local Indian market. This could be extremely beneficial for major PSU crude oil producers in India like ONGC and Oil India. Not just the PSU players, but even the private sector upstream oil companies like Vedanta (Cairn Energy) and Reliance Industries stood to benefit from the new system as it would give them better pricing and allocation.
One positive feature is that it could bring more investments into the sector. The new policy gives enhanced marketing freedom and leeway to domestic crude oil producers. To begin with, this freedom to sell is only limited to the Indian market. That means; the freedom would be restricted to the Indian market while oil extraction companies cannot export crude oil freely. This is an improvement over the existing production sharing contracts (PSCs). It will be an incentive for such companies to produce more and sell to customers of choice.
This also has implications for net oil importing nations like India which relies on imports to fund over 85% of crude oil needs on a daily basis. This freedom only applies to the local sales and not to export sales, so the government is not impacted in any way. Since producers of oil will have the freedom to decide, expect more such long term arrangements. Apart from the PSU oil companies, it will also benefit the private E&P players. One option is that the pricing power will improve in the new dispensation.
One small point here. There is already marketing and pricing freedom for OALP and DSF fields. However, this decision also opens up free pricing for crude oil under the NELP (New Exploration Licensing Policy) and pre-NELP regime. India currently produces 29.7 MT and imports 212 MT of crude. That is a ratio of almost 88:12 in favour of crude oil imports and ageing wells worsened this ratio in recent months. This move could incentivise investments in the upstream oil and gas sector