Reddy, Steady: New India Oil Minister

The appointment of Jaipal Reddy as India's oil and gas minister to replace Murli Deora in the recent cabinet reshuffle was unexpected and, given the current climate in India over corruption, is being regarded by some observers as brought on by suspicions that Deora was perceived as pushing the cause of particular corporate lobbies.

Yet, Reddy is an old ruling Congress party hand and is known to be close to party President Sonia Gandhi and Prime Minister Manmohan Singh. This in turn could help him push key decision-making that impacts India's energy security, although he will need to operate in an atmosphere of globally high crude oil prices and an absence of domestic fuel price reforms, which have been stalled by political exigencies.

Reddy told Asia Sentinel that he would follow the policy framework of his predecessor Deora, including pushing unconventional energy sources such as shale gas.

"I am not a new minister of a new government. I am a new minister of the same government...whatever decisions were taken by Murli Deora...were taken together by the cabinet.''

All of this of course means that Reddy is unlikely to ruffle the status quo by taking on the structural rigidities in India's hydrocarbon sector, which engenders a corrupt underbelly unless the party high command wants him to.

In a wide-ranging interview, Reddy acknowledged that relations with Iran, which India would like to make a major energy partner, are "not easy" because of the isolation by the west and especially the United States over the issue of Iran's nuclear ambitions.

"The most difficult part is finance, whether loans for investments or money transactions due to the sanctions," he continued, adding that Indian firms such as the state-run Oil and Natural Gas Co. of India, known by its initials ONGC, have been seeking advice from the government.

However, Reddy added that India remains committed to its relations with Iran and said the latest payment issues will be sorted with Tehran without disruption of any oil supplies.

The minister said India is still pushing against US wishes for the 2,670-km Iran-Pakistan-India (IPI) gas pipeline, saying construction of the Iran-Pakistan stretch is a positive development that could result in the entire US$4 billion pipeline being laid. However, he added that the project has its "complications due to security and transit issues with Pakistan and dealing with Iran."

Reddy, however, said that India hopes for a "brighter result" with the 1,680-km. Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project, to which the US is more hospitable. "The success of TAPI could be a template for IPI,'' Reddy said. The pipeline, to be financed by the Asian Development Bank, is projected to cost US$7.6 billion.[

"India needs to bolster every oil and gas source," Reddy said.

NELP-IX

One immediate task for Reddy would be to oversee the ninth bid round under the

New Exploration Licensing Policy. India is seeking to attract investment from such exploration and production majors as British Petroleum Plc, Chevron and Exxon Mobil. The bid closes on 18 March.

"Despite the successes of Reliance (KG gas) and Cairn (Rajasthan, oil) India needs to ramp up hydrocarbon base given the rapidly rising demand and dependence on imports," Reddy said. "We are looking to attract global energy players reluctant to invest in India by removing policy uncertainties, promoting transparency and an open playing field."

New Delhi is offering 34 exploration blocks in 10 sedimentary basins covering an area of about 88,807 sq. km. Under the new exploration licensing policy, 87 oil and gas discoveries have already been made in 26 exploration blocks. Thge new exploration changes, however, could well be the last in the series to be substituted by the Open Acreage Licensing Policy.

Cairn-Vedanta Deal

Reddy said that he wants all issues relating to the US$9.6 billion acquisition of Cairn India by Vedanta "sorted" without losing time.

"My officials have been meeting concerned parties including ONGC, Cairn and Vedanta," he said. "The law ministry and the prime minister's office are looking at the various aspects. All fairness will be pressed into seriously (in deciding on the case). We will go by the rule book'' on the issue of government consent to the deal going through.

The minister, however, added that the government will protect the interests of state owned explorer ONGC. "Objections by ONGC need to be tackled," Reddy said.

ONGC and Cairn India have differed strongly over royalty payments. Though ONGC has 30 percent of the prolific Rajasthan block it has to pay a royalty on entire crude oil output, which the explorer says makes the investment a losing proposition. ONGC has paid over Rs11.8 billion on behalf of Cairn India during the first nine months of the current fiscal year.

ONGC has thus asked the Indian government not to approve the Vedanta–Cairn deal until excess royalty on crude oil is sorted. Should a consensus emerge, ONGC has said that it will not exercise its pre-emption rights or make rival bid to Vedanta's.

Last month the ONGC board recommended that the "royalty it pays not only on its share, but also on the 70 percent share of Cairn India, should be deducted from the price realized on the sale of crude oil from Mangala and other oilfields (in Rajasthan).''

Reports, meanwhile, suggest that Vedanta will terminate the deal if Cairn India changes ONGC's royalty obligations in the Rajasthan block at the instance of the oil ministry. Cairn India, meanwhile, has dismissed ONGC's claims of losses from the Rajasthan block, saying that recovering royalty would result in government losing US$2 billion in revenues and reduce profits

On January 31, Reddy said that oil secretary Sundareshan will be meeting all stakeholders over first two weeks of February to decide matters. Last month, Cairn said it expects to conclude the deal before April 15.

The issue of Adulteration

Official differential fuel pricing has caused the mushrooming of countrywide mafia that makes money out of mixing much cheaper kerosene with petrol or diesel. Reddy, however, ruled out decontrolling diesel prices as it would "not be a politically astute policy and would also face political opposition." Instead the ministry would rely on technology to pre-empt adulteration.

"I agree with those who ask for kerosene and diesel deregulation as a theory," he said. "But they should think whether it is practical. What is possible is what is practical (marker and tracking systems are possible)."

Remarking on the spiraling domestic petrol prices that have been freed, Reddy said that his ministry will not interfere with decisions of the state oil marketing companies.

"Consumers should understand that there are limitations under which all of us are working." The rise in fuel prices, he said, is a global issue.

Fuel Subsidy

Regulated fuel prices mean that India's oil minister has to lobby with the finance ministry and the prime minister's office for doles to shore up the bottom lines of state oil firms.

"We hope to get Rs360 billion from the finance ministry. Our upstream companies (ONGC, OIL and GAIL) will absorb a shock of Rs240 billion and downstream will absorb additional Rs120 billion," he said.

He added that the finance ministry has sanctioned Rs80 billion due to under-recoveries for the third quarter 2010-11 (October-December) that amounts to Rs210 billion so far in the current financial year.

The three state OMCs, BPCL, HPCL and IOC are estimated to report big losses this financial year ending March. "The OMCs are not in a position to bear more than 120 billion revenue loss in 2010-11,'' said Reddy.

Clearly, Reddy has his task cut out.

Siddharth Srivastava is a New Delhi-based journalist. He can be reached at sidsri@yahoo.com