Mitras Analysis of News : 5-7-2017

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1.Open acres (The Hindu)

2.NPA resolution: a rough road ahead (Live Mint)

3.Nothing learnt from history (The Hindu)

 

1.Open acres (The Hindu)

 Synoptic line: It throws light on the newly launched Open Acreage Licensing Policy which aims to enhance the efficiency of oil and gas industry. (GS paper III)

Overview

  • In a major attempt to boost India’s oil and gas production, the government has launched the National Data Repository (NDR) and Open Acreage Licensing Policy (OALP) under the progressive, market driven Hydrocarbon Exploration and Licensing Policy (HELP), introduced new oil and gas block licensing policy is expected to open up 2.8 million square kilometres of sedimentary basins to exploration and production activities.
  • The new Licensing policy places greater discretion in the hands of explorers and operators, it attempts to address a major drawback in the New Exploration Licensing Policy, which forced energy explorers to bid for blocks chosen by the government.
  • This replaces the controversial profit model in petroleum with a revenue share model.

What is Open Acreage Licensing Policy (OALP)?

  • Open Acreage Licensing Policy (OALP) gives an option to a company looking for exploring hydrocarbons to select the exploration blocks on its own, without waiting for the formal bid round from the Government.
  • The OALP, a part of the government’s Hydrocarbon Exploration and Licensing Policy (HELP) will allow investors looking for exploring hydrocarbons to select blocks after studying the data available through the national data repository without waiting for a formal bid round from the government. The company then submits an application to the government, which puts that block up for bid.
  • What distinguishes OALP from New Exploration and Licensing Policy (NELP) of 1997 is that under OALP, oil and gas acreages will be available round the year instead of cyclic bidding rounds as in NELP. Potential investors need not have to wait for the bidding rounds to claim acreages.
  • The objective of OLAP is to increase India’s indigenous oil and gas production by maximising the potential of already discovered hydrocarbon resources in the country.
  • Besides allowing potential investors to make informed decisions, this will open up a new sector in India. There are a number of companies around the world that make it their business to simply explore hydrocarbon basins and sell the information they gather. The new initiative seeks to incentivise such prospectors.
  • Under HELP, an upstream player is allowed to explore both conventional and unconventional oil and gas resources including Coal Bed Methane, Shale gas and oil and gas hydrates under a single license. The new policy also stipulates a differential structure of royalty rates based on the depth of the field. The new policy and the upcoming auctions are part of the ministry’s effort to achieve the target of cutting down India’s import dependence for energy by 10 per cent by 2022.

What is Hydrocarbon Exploration and Licensing Policy (HELP)?

  • Hydrocarbon Exploration and Licensing Policy (HELP) is a policy adopted by Government of India indicates the new contractual and fiscal model for award of hydrocarbon acreages towards exploration and production (E&P). HELP is applicable for all future contracts to be awarded.
  • HELP replaces the New Exploration Licensing Policy (NELP) regime for exploration and production of oil and gas, which has been in existence for 18 years.

Four main aspects of HELP are:

  1. Uniform License:
  • It provides for a uniform licensing system to cover all hydrocarbons such as oil, gas, coal bed methane etc. under a single licensing framework, instead of the system of issuing separate licenses for each kind of hydrocarbons.
  1. Open Acreages:
  • It gives the option to a hydrocarbon company to select the exploration blocks throughout the year without waiting for the formal bid round from the Government.
  1. Revenue Sharing Model:
  • Fiscal system of production sharing contract (PSC) is replaced by an easy to administer “revenue sharing model”. The earlier contracts were based on the concept of profit sharing where profits are shared between Government and the contractor after recovery of cost.
  • Under the profit sharing methodology, it became necessary for the Government to scrutinize cost details of private participants and this led to many delays and disputes. Under the HELP regime, the Government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc.
  • Bidders will be required to quote revenue share in their bids and this will be a key parameter for selecting the winning bid. They will quote a different share at two levels of revenue called “lower revenue point” and “higher revenue point”.
  • Revenue share for intermediate points will be calculated by linear interpolation. The bidder giving the highest net present value of revenue share to the Government, as per transparent methodology, will get the maximum marks under this parameter.
  1. Marketing and Pricing Freedom
  • Pricing freedom has been granted, subject to a ceiling price limit, for new gas production from Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas.
  • The policy provides marketing and pricing freedom to the gas production from existing discoveries which are yet to commence commercial production as well as for future discoveries.
  • Considering the imperfections in gas markets in India, and to protect the interests of the consuming sector, a ceiling based on the landed cost of the alternate fuels has been imposed. The ceiling price shall be the lowest.

Objectives of HELP

  • The major Guiding Principles behind HELP are to:
    • Enhance domestic oil and gas production
    • Bring substantial investment
    • Generate sizable employment
    • Enhance transparency and
    • Reduce administrative discretion

Concerns

  • There are some concerns about the implementation of the overall Hydrocarbon Exploration and Licensing Policy (HELP). If the bidders have already invested in the exploration and development of that area, policy awards an extra five points to bidders for acreage, but it is doubtful that whether this is enough of an incentive, since the investment needed to simply explore is significant.
  • By contrast, no such preference is given to mineral explorers while auctioning mining rights instead; a revenue-share from mining operations is their recompense for exploration efforts. This could be considered for the hydrocarbon sector as well.
  • Another concern is whether India can attract enough investment to meet the government’s objective of reducing oil imports by 10% by 2022, especially given the past experience investors have had with large projects such as KG-D6. There are after all proven reserves in other parts of the world, such as the Gulf of Mexico, that could still keep investor appetite for Indian acreage weak.

Way ahead

  • India is marching steadily towards emerging as a leading global economy, aided by several transformational reforms and innovative campaigns by the Government, with the OALP government remains committed for making sustained and significant efforts to liberalize the sector by simplifying processes, increasing market access and bringing developments in the technology domain with the aim to enhance the efficiency of oil and gas industry.
  • This policy also provides for marketing freedom for crude oil and natural gas produced from these blocks. This is in tune with Government’s policy of “Minimum Government, Maximum Governance”.

Question: How HELP policy for hydrocarbon exploration is an improvement over NLEP?

 

2.NPA resolution: a rough road ahead (Live Mint)

 Synoptic line: It throws light on the tough path towards NPA resolution. (GS paper III)

Overview

  • The non-performing asset (NPA) situation has been one of the most contentious issues in the country over the last few years.
  • The most important takeaway from the latest “Financial Stability Report”, released by the Reserve Bank of India (RBI) last week, is that conditions in the Indian financial system are expected to deteriorate further before they improve.

Some facts about NPA

  • Gross non-performing assets (NPAs) rose from 9.2% in September 2016 to 9.6% in March 2017. Stress tests conducted by the Indian central bank indicate that this number could rise to 10.2% under the baseline scenario.
  • The indicator of banking stability worsened over the second half of fiscal year 2017 with measures of asset quality and profitability providing the most cause for concern even while there has been a modest improvement in capital adequacy, thanks to the private sector and foreign banks.

Economic situation

  • The situation in public sector banks is especially worrisome. Capital adequacy is under strain. Return on assets is negative. So is return on equity.
  • More than a quarter of the loans given by public sector banks to industry (thus excluding loans to agriculture, services and retail consumers) are under stress. All this is a reminder of the fact that government banks are at the epicentre of the larger banking mess.
  • The financial authorities have now decided to focus on a few large problem accounts that are weighing down the Indian banking system.
  • Fifty-six per cent of the loans given out by Indian banks have gone to large borrowers but they account for a massive 86% of gross NPAs. In that sense, the new strategy of focusing on large defaulters makes good strategic sense.
  • Bad loans are concentrated in a few firms in a few sectors such as telecommunications, power, infrastructure and steel.
  • All this is a good backdrop at a time when the NPA resolution process has reached a critical stage. The RBI has already identified 12 big accounts for quick resolution, under the powers given to it by the recent presidential ordinance (though this publication continues to believe that the government, as the owner of three-fourths of the banking sector, should not have pushed the regulator into the resolution of individual bad loans, but done the job itself).
  • These 12 accounts are the source of a full quarter of the total NPAs of the banking system. Lenders have been instructed by their regulator to use the provisions of the new Insolvency and Bankruptcy Code to file insolvency proceedings against companies.
  • Lenders have approached the National Company Law Tribunal in at least two of the 12 accounts identified by the RBI.
  • The new bankruptcy law allows defaulters 270 days to come up with a credible plan to repay loans and lenders can initiate liquidation if companies fail to do so. In other words, the design of the bankruptcy law ensures that companies cannot merely kick the can down the road.

Way ahead

  • Any banking clean-up will eventually require capital—lots of capital. Credit rating agency Moody’s said in a recent note that the 11 public sector banks rated by it will need external equity capital of unto Rs95,000 crore, far higher than what the government has budgeted as capital infusion for all the banks it owns.
  • Some analysts have now begun to argue that the Indian investment cycle is set to turn. It is well known that the economic recovery cannot build momentum unless private sector investment revives.

Question: What should be the govt. strategy to deal with impending NPA’s? How do the crowd-out private investment?

 

3.Nothing learnt from history (The Hindu)

 Synoptic line: It throws light on the displacement and ecosystem related implications of the Sardar Sarovar Project. (GS paper III)

Overview

  • Disregarding years of sustained non-violent protest and an iconic mass movement that drew national and global attention, the Narmada Control Authority decided in June 2017 to raise the height of the Sardar Sarovar dam to its full height, by ordering the closure of 30 gates. It was announced in time with the arrival of the monsoon.

Challenges to the project

  • Siltation is one of the biggest challenges faced by dams worldwide, and constitutes one of the biggest challenges to the long-term success of this dam.
  • The steep slopes of the Narmada valley are prone to erosion: they have been protected so far because of the dense forests that line the sides of the valley.
  • Once these trees are lost, soil from the denuded slopes will flow unchecked into the river, turning the water muddy. The Central Water Commission’s 2015 compendium on siltation of India’s reservoirs reports alarming figures. For instance, in 85% of India’s dams, the actual rates of siltation are higher than those anticipated during their design.
  • The problems are likely to be especially severe for giant dams such as the Sardar Sarovar, which cannot be easily desilted.
  • Apart from directly reducing water storage capacity, siltation also decreases water capacity due to increased evaporation loss. As a result, the capacity to generate hydropower is affected.

Issues of dislocation

  • Since Independence, between 25 and 60 million people have been displaced from their homes and uprooted for India’s development projects. Most end up living in abysmal poverty and deprivation.
  • Once the dam is at its full height, it will submerge one town and at least 176 villages, displace close to 20,000 families, flood productive agricultural land, and destroy hundreds of acres of biodiverse forest.
  • Compensation to the displaced, when given, has often come in the form of land unsuitable for farming or living, located either on riverbeds at the risk of flooding, or in rocky areas which cannot be ploughed. Resettlement sites lack basic facilities: no wells, drinking water pipelines, or grazing land for cattle, let alone schools or road facilities.
  • The poor track record of the past is clear. Despite this, tens of thousands of additional households are now being asked to rely on resettlement without an adequately provisioned place to move.
  • This leaves the once self-reliant people of the valley with no option but to work as daily wage labour and crowd into urban slums often to be resettled again for other developmental or smart city projects.

Narmada: a fragile ecosystem

  • The Narmada valley is one of the most fertile ecosystems in India, brimming with biodiversity, and with abundant fish, birds and trees. The dams along the Narmada have changed this, blocking normal water flow, leading to downstream habitat change and impacting biodiversity.
  • The Narmada estuary, where the river meets the sea, has become increasingly saline because of the decrease in fresh water flow after the dams came up. Fish catch of some species has now declined by as much as 75%, signalling the almost complete collapse of the once famous fishing industry.
  • Thousands of commercial and subsistence fishermen affected by this change are not classified as dam-affected though. Neither are the people who and industries which depended on the once-abundant supply of fresh water in the delta.

Way ahead

  • Large dams have forced the displacement of millions of India’s small farmers and landless peasants from across the country, forcing them into urban slums and shanties, breaking apart families and sending them into a downward spiral of degradation and penury.
  • There has to be a clear, transparent public accounting of livelihoods lost and jobs created, of profits accrued at the expense of great misery and injustice.

Question: What are the implications of increasing the height of Sardar sarovar project? What are the ecological implications of it?

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