India's Unfavorable Climate in Oil & Gas
About 93% of India's energy comes from fossil fuels and Oil and Gas accounts for about 43% of the total energy produced from the same. Of this 43%, a large part comprises of imports of oil and gas which has created an uncomfortable situation for a large developing economy like ours. Over the last decade, increasing the domestic production and encouraging exploration has been a focus area. Nonetheless, the oil and gas reserves of the country remain largely unexplored, primarily due to huge capital requirements.
Exploration and production of Oil and Gas is a risky proposition where the inputs are generally deterministic, relatively independent of the quality and quantity of reserves. On the other hand, outputs are probabilistic, subject to probability of finding reserves of suitable quality. Therefore, only an attractive investment regime can attract domestic as well as foreign investor's risk capital to India. Domestic players lag behind, and poor prospect from profitability point of view has made foreign players apprehensive. An investor-friendly climate can only be created if regulatory bodies ensure reasonable returns and relatively risk-free environment to operate.
With the New Exploration Licensing Policy (NELP), a major thrust was given to bring in the much needed capital and state-of-the-art technology to the exploration sector.
It was aimed to create an investor-friendly climate and was marked by attractive fiscal and contractual features. The policy also addressed the underground risks involved in exploration of sedimentary basin. However, risks over the ground, mainly due to policy inaction and unfavorable investment climate have made investors wary.
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According to Deepak Mahurkar, Director and Leader, Oil and Gas industry, PricewaterhouseCoopers India, "Over a period of time, what we now observe is that not only the underground risks remain as it is, except for few excellent discoveries, but the above aground environment has also not improved much."
Political uncertainty, frequent changes in policy and stricter policy controls have already made the foreign investors apprehensive about India. If not addressed immediately, these would also start affecting the domestic players in next few years.
Talking about the government's public-private partnership (PPP) model, Shyam Saran, Chairman of the Research and Information Systems for Developing Countries and Former Foreign Secretary pointed out, "We have not been able to create a regulatory or an incentive regime."
Being a highly regulated sector until recently, the government has also not done enough to facilitate PPP in this segment and has not been able to attract private oil and gas exploration companies in tapping new blocks.
The crux of India's energy security challenge lies in pricing. Price regulations have limited the attractiveness of the sector. Distortion in pricing have waned the investor sentiment. Moreover, lower prices have resulted in little or no demand-discipline on consumer side, which contributes to a huge wastage of power. Higher gas prices are a necessity for the sector. Unless higher prices are given to the producers, private sector investors will not invest.
Further, subsidies provided to sensitive petroleum sector contradicts the freedom granted to companies under Administered Pricing Mechanism. There appears to be a wide gap between the objectives, policy and implementation, especially for Oil and Gas in India.
"If you have administered price mechanism, which does not take into account the need for ensuring that there should be adequate returns, then obviously expectation that foreign capital will come in or foreign private capital will invest is I think a pipe dream," Saran added.
Government attempts to micro-regulate the sector, specifically production and exploration, are unlikely to be successful due to lack of institutional capacities to support such intents. The process involves 60+ licenses to be acquired - a cumbersome and costly process in terms of time and money. This is a major drawback in India's investment climate and a major hindrance in attracting foreign investment.
Given the grim outlook, policymakers need to make timely decisions in order to avoid impending policy paralysis. Failure to do so would result in a serious crisis in the power sector in near future. Government should maximise energy production and focus on energy security rather than maximizing revenues.
"You cannot afford to have policy paralysis for a day longer. Next time a crisis hits us, the payoff will be so enormous that we will not be able to come out of it as simply and as quickly as we came out in 1991," FICCI Secretary General Rajiv Kumar comments.
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Ofwat allows retailers to raise prices from April
Retailers can recover a portion of excess bad debt by temporarily increasing prices from April 2022, according to an Ofwat statement.
The regulator confirmed its view that levels of bad debt costs across the business retail market are exceeding 2% of non-household revenue, thereby allowing "a temporary increase" in the maximum prices. Adjustments to price caps will apply for a minimum of two years to reduce the step changes in price that customers might experience.
Measures introduced since March 2020 to contain the spread of Covid-19 could lead to retailers facing higher levels of customer bad debt. Retailers’ abilities to respond to this are expected to be constrained by Ofwat strengthening protections for non-household customers during Covid-19 and the presence of price caps.
In April last year, Ofwat committed to provide additional regulatory protection if bad debt costs across the market exceeded 2% of non-household revenue.
Georgina Mills, Business Retail Market Director at Ofwat said: “These decisions aim to protect the interests of non-household customers in the short and longer term, including from the risk of systemic Retailer failure as the business retail market continues to feel the impacts of COVID-19. By implementing market-wide adjustments to price caps, we aim to minimise any additional costs for customers in the shorter term by promoting efficiency and supporting competition.”
There are also three areas where Ofwat has not reached definitive conclusions and is seeking further evidence and views from stakeholders:
- Pooling excess bad debt costs – Ofwat proposes that the recovery of excess bad debt costs is pooled across all non-household customers, via a uniform uplift to price caps.
- Keeping open the option of not pursuing a true up – For example if outturn bad debt costs are not materially higher than the 2% threshold.
- Undertaking the true up – If a 'true up' is required, Ofwat has set out how it expects this to work in practice.
Further consultation on the proposed adjustments to REC price caps can be expected by December.
"While it’s great that regulators are helping the industry deal with bad debt in the wake of the pandemic, raising prices only treats the symptoms. Instead, water companies should head upstream, using customer data to identify and rectify the causes of bad debt, stop it at source and help prevent it from occurring in the first place," she said.
"While recouping costs is a must, water companies shouldn’t just rely on the regulator. Data can help companies segment customers, identify and assist customers that are struggling financially, avoiding penalising the entire customer in tackling the cause of the issue."
United Utilities picks up pipeline award
A race-against-time plumbing job to connect four huge water pipes into the large Haweswater Aqueduct in Cumbria saw United Utilities awarded Utility Project of the Year by Pipeline Industries Guild.
The Hallbank project, near Kendal, was completed within a tight eight-day deadline, in a storm and during the second COVID lockdown last November – and with three hours to spare. Principal construction manager John Dawson said the project helped boost the resilience of water supplies across the North West.
“I think what made us stand out was the scale, the use of future technology and the fact that we were really just one team, working collaboratively for a common goal," he said.
Camus Energy secures $16m funding
Camus Energy, which provides advanced grid management technology, has secured $16 million in a Series A round, led by Park West Asset Management and joined by Congruent Ventures, Wave Capital and other investors, including an investor-owned utility. Camus will leverage the operating capital to expand its grid management software platform to meet growing demand from utilities across North America.
As local utilities look to save money and increase their use of clean energy by tapping into low-cost and low-carbon local resources, Camus' grid management platform provides connectivity between the utility's operations team, its grid-connected equipment and customer devices.