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Cairn ruling means any export can be banned.


Date: 06-12-2018
Subject: Cairn ruling means any export can be banned
On the face of things, the government not allowing Cairn to export its share of the crude oil produced from its Barmer field in Rajasthan, and the Delhi High Court judgment upholding this, are in the country’s best interests. Since India imports around 80% of its crude oil requirements, the government’s argument was that allowing Cairn to export crude oil would mean more imports and, to that extent, would hurt the country’s interests. Indeed, were this permission to be granted, it is possible that others would also ask for similar treatment; so, for instance, a Reliance Industries could ask for permission to export its natural gas from the KG Basin as global prices are higher than those in the country. Indeed, as the judgment points out, the contract between the government and Cairn—indeed, with any oil/gas producer—has such a conditional-export clause which says exports will only be allowed once there is domestic self-sufficiency. This is something, the judgment says, Cairn also seems to have accepted in its application to the government in the past.

The problem with the argument, as Cairn points out, is that all the crude oil is not being sold to the government/PSUs, but around half is sold to private refiners like Reliance Industries and Essar Oil; since Cairn’s crude is of a superior quality that few PSU refineries can use, this allows Reliance and Essar to get the crude at a discount of $3-4 per barrel compared to what they would pay were this to be imported. So, if Reliance is selling its petrol/diesel at international prices—in the overseas market—why should Cairn not get the international price for its crude oil? The government, and the country, would also benefit from this since, as Cairn’s petition points out, every $1 increase in crude oil realisations per barrel gives the exchequer an additional $41 million through more profits for it and ONGC, and in the form of royalty and cess. In fact, one of Cairn’s proposals was that it be allowed to swap this crude—the part sold to Reliance/Essar—globally and get the normal quality crude that most Indian refineries use. This crude could then be sold to PSU refineries; India wouldn’t be importing more crude than it does, but Cairn and the government would make more money.

There is, also, a broader issue here. If government policy is that exports can be allowed only after the country reaches self-sufficiency, this argument can be applied in other areas as well, and other exports, too, could be stopped. Indeed, for several decades, the unstated government policy on agriculture exports was to ban them the moment local prices started rising—local prices rising, in a sense, were seen as a barometer for the country not being self-sufficient in food and, therefore, an indicator to stop exports.

This, however, is a slippery slope. Is self sufficiency to be determined by prices—and if so, by CPI or WPI?—or should it be done, in the case of agricultural produce, by seeing whether the calorie intake of the population is rising fast enough? Indeed, the government policy on not allowing, for instance, commercial mining of coal or iron ore is also determined by the same thought process—if commercial mining is allowed, the argument is, this will drive up ore prices and make Indian steel uncompetitive. This policy, it is obvious, can be extended to other sectors as well—why allow exports of steel from India since, were this not to be allowed, Indian steel would cost less and so India’s automobiles would be more competitive as a result.

That philosophy, of fixing quotas or imposing price ceilings, one would have thought, would have gone away in 1991 when the government delicenced most industries as the policy was proving to be counter-productive. If a Cairn, or an Indian farmer, got a higher price through exports, the new philosophy was, this would encourage them to produce more and that, eventually, would be beneficial for the economy. If iron ore were to be exported, or sold by commercial miners, in the short-run, this would lead to lower supplies for end-users and higher prices in the local market. But, were this to be allowed, both local and global miners would start producing more in India which, in the longer run, would not only keep local prices under check, it would lower the import bill dramatically. Keep in mind that, till the local oil market was dominated by PSUs like ONGC and OIL, India’s production remained quite poor; in less than a decade of commercial production, the private sector Cairn already accounts for a fourth of India’s oil output.

The Delhi High Court can’t be blamed for its judgment since it has really just interpreted the production sharing contract between Cairn and the government, though it would have been hoped the court would at least give Cairn the desired freedom to do what it wanted with its share of the oil produced. Cairn did not want to export the crude that belonged to its PSU partner, ONGC; indeed, it did not even want to export even all of its share of the oil produced, it only wanted to export the part that was not being sold to PSU oil companies but was being sold to private firms at a discount. In quite the same manner, the Supreme Court verdict on the gas dispute between the Ambani brothers was also unfortunate; after all, since the gas Mukesh Ambani was selling to his brother, Anil, was from the former’s share of gas, and not the government’s, the government had no role in whether this could be allowed or at what price the sale could take place. While the courts should have weighed in favour of the private sector being allowed to exercise its property rights in both the Cairn and Ambani case, it is really up to the government to come up with a forward-looking policy that rewards firms for higher production instead of penalising them.

Source: financialexpress.com

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