Realist, not conformist analysis of the latest financial, business and political news

Of Course India Should Have Sold ONGC’s Oil And Gas Fields To Foreigners

There are those who insist that a national government must own the company which extracts natural resources from the territory of that country. This is not so – for the government already owns the natural resources themselves. There is thus no problem with a foreigner doing the digging or drilling. For the government can always, but always, make sure that near all the profits flow to the government. They do, after all, control the tax system.

Thus this decision not to privatise ONGC’s production fields looks like being the wrong one:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] State-owned ONGC’s nine biggest oil and gas fields including Mumbai High and Vasai East came tantalizing close to being sold to private and foreign companies but the plan was nixed after strong opposition from within the government, sources said. A high-level committee headed by Niti Aayog Vice Chairman Rajiv Kumar late last year considered “transferring” western offshore oil and gas fields of Mumbai High, Heera, D-1, Vasai East and Panna as well as Greater Jorajan and Geleki field in Assam, Baghewala in Rajasthan and Kalol oilfield in Gujarat to private/foreign companies. [/perfectpullquote]

They should have done it.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]While ONGC opposed giving away on a platter to private/foreign sector what it discovered after years of toil and spending billions of dollars over last four decades, some in government were not convinced by the incremental potential toyed to get the proposal through, they said adding it wasn’t clear how the incremental output numbers were arrived at in absence of any real basin or field study by the panel.[/perfectpullquote]

So, all agree that the foreign operators were more likely to extract more of the oil and gas in the fields. Which sounds reasonable for that’s where the technology really lies. Any fool can get the first 5% out, it’s a truly difficult technical task to extract 40% of all that’s in there.

We could, of course, claim that all those future profits would be given away. But that’s to be ludicrous because we’d not give away the fields, we’d sell them. We’d get today the current value of that future stream of profits. In fact, given that the private operators would, as above, extract more from the reservoirs we’d get more than the current net value of those fields if we left them to ONGC. So, more cash and cash now – why not sell?

The final economic point is that India controls the tax rate on those fields. The correct one being extremely high royalty rates. Entirely all of the value of the oil and gas just being there should be lifted in tax. It’s only the value added by the extraction methods which should make a profit for the field operator.

So, properly privatised India could have had all the capital now, control future profits and also locked in a decent royalty rate. Why wouldn’t they do this? Ah, yes, resource nationalism – like so many other types of nationalism, something that just makes us poorer.

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