Azernews.Az

By Bloomberg

A 22 percent slump in oil prices this year and the end of state polls are emboldening India's Prime Minister Narendra Modi to press ahead with politically risky decisions to lure investors and revive the economy.

His government freed diesel prices of state control for the first time in over a decade and raised tariffs on natural gas over the weekend in the biggest steps to curb subsidies and spur output. The changes build on Modi's pledge to revitalize Asia's third-largest economy as his party made gains in two provincial elections that may help bolster his power.

Modi, who has made energy security his priority, is lifting restrictions that contributed to a decline in natural gas output every month since the mid-2010, while deterring Exxon Mobil Corp. and Chevron Corp. from bidding for oil and gas blocks. The restraints on diesel have also idled fuel pumps operated by Essar Oil Ltd. and Reliance Industries Ltd.

"These two big decisions are going to help bring in a lot of investments and increase energy supply," said T.K. Ananth Kumar, former finance director at state-run explorer Oil India Ltd. "Higher supply will improve government finances and take us closer toward energy security."

Shares Jump

Shares of state-owned refiners and explorers jumped in Mumbai, while Reliance slipped on concern the benefits of the higher prices may not be available immediately.

Oil & Natural Gas Corp., India's biggest explorer, rose 5.7 percent as of 10:26 a.m., the most since June 6; Indian Oil Corp. climbed 4.4 percent; Hindustan Petroleum Corp. gained 6.2 percent and Bharat Petroleum Corp. increased 5.3 percent. Oil India Ltd. rose 3.1 percent.

Government-controlled refiners have been selling diesel, kerosene and liquefied petroleum gas below the cost of production to help rein in inflation. They were partially compensated with cash from the federal budget, while explorers including ONGC gave them discounts on crude.

Keeping diesel affordable to the nation's poor has cost the government and oil producers about 4 trillion rupees ($65 billion) in the past 10 years, according to oil ministry data.

Brent crude in London, a benchmark for half the world's oil including India's, is trading near the lowest since November 2010. The decline helped Indian state refiners including Indian Oil Corp. wipe out their losses on retail diesel sales for the first time since 2009.

Oil Window

The drop also provided the government a window to free the fuel of controls, resulting in an immediate 5.7 percent cut in rate in New Delhi. Reserve Bank of India Governor Raghuram Rajan last month urged Modi to scrap the restrictions after inflation slowed to a three-year low.

Prices of fuels including diesel, used in vehicles, back-up generators, water pumps in farms, are politically sensitive in a nation where the World Bank estimates about 80 percent of the people live on less than $2 a day. Voters tend to resist any increase in prices.

Back in 2002, Atal Bihari Vajpayee's BJP administration freed prices of both petrol and diesel only to reverse the decision two years later when crude prices started rising. The party lost the 2004 election and spent 10 years in opposition before its victory in May.

"Deregulation will increase competition," said S. Varadarajan, chairman of BPCL. "Those sitting on the sidelines will now enter the market, there will be new players."

Idle Pumps

The decision will encourage private retailers to restart idle fuel pumps, and consumers will be the main beneficiaries of rising competition, Lalit Kumar Gupta, chief executive officer of Mumbai-based Essar Oil said, without elaborating.

Reliance and Essar started cutting back on their retail sales and shuttering fuel stations along highways in the middle of the last decade. The two non-state companies, which also run oil refineries, couldn't compete with their state-run counterparts which were compensated for below-cost sales.

Explorers can sell natural gas at $5.61 per million British thermal units starting Nov. 1, up from $4.2, and will be reviewed half-yearly, Finance Minister Arun Jaitley told reporters on Oct. 18.

"We are very enthused by this," D.K. Sarraf, chairman of ONGC, told Bloomberg Television India. "We would have more surplus to invest in exploration of other fields. Each dollar increase in rates will raise ONGC's annual profit by 23.5 billion rupees, he said.

The price is still below market expectation of about $6.5 per mBtu, according to Dhaval Joshi, a Mumbai-based analyst with Emkay Global Financial Services Ltd.

Exxon, Chevron

''However, the actual implementation of gas pricing is sentimentally positive for upstream companies,'' Joshi said, adding the higher price would increase ONGC's and Oil India Ltd.'s profit estimates by as much as 6 percent.

State control on fuel pricing has been a reason the government has failed to attract Exxon, Chevron and Royal Dutch Shell Plc to its exploration block auctions which started in 1999.

BP Plc, Europe's second biggest oil company, and Cairn India Ltd., till recently a unit of Edinburgh-based Cairn Energy Plc, are the two overseas companies with the biggest presence in India's exploration sector.

ONGC's shares have increased 45 percent this year compared with a 25 percent gain in the benchmark S&P BSE Sensex index. Indian Oil has surged 78 percent, BPCL 102 percent and HPCL 120 percent.

Dwindling Output

The benefit of the higher gas prices will not be immediately available to billionaire Mukesh Ambani's Reliance and its partners BP and Canada's Niko Resources Ltd., which together produce gas from the KG-D6 block off India's east coast. The companies are locked in a dispute with the administration over output levels and won't get the higher proceeds until the spat is resolved, the government said.

Reliance declined 0.7 percent today to 931.80 rupees, paring this year's advance to 4.1 percent.

India's gas output has declined to about 91 million cubic meters a day in the five months through August 2014 from more than 140 million cubic meters daily in the year ended March 2011, according to oil ministry data.

Modi's predecessor Manmohan Singh eased controls on petrol prices in 2010 and last year began boosting diesel prices by 0.5 rupees a liter each month as he battled a budget deficit that threatened to cut the sovereign rating to junk. Fuel subsidies risk spurring imports as India gets about 80 percent of its crude from abroad.

While petroleum subsidies are coming down, they only account for a quarter of India's 2.6-trillion-rupee subsidy bill. Outlays on food are budgeted to rise 25 percent to 1.15 trillion rupees in the year through March.

''Deregulating diesel prices is an economically wise move as not only did the government pay a subsidy on it, but also there was wasteful usage due to artificially low prices," said Rupa Rege Nitsure, chief economist at state-owned Bank of Baroda in Mumbai. "It's also a politically neutral move as all future governments stand to benefit."