COST CUTTING

Mumbai, June 15: Oil and Natural Gas Corporation (ONGC) has asked the government to scrap the 10 per cent price preference norm in oil services contracts.

Under this norm, the state-owned oil exploration giant is obliged to farm out orders to domestic companies that offer various services in the exploration and production (E&P) business even though their bids are 10 per cent higher than competing offers from overseas entities.

There is, however, a rider to the applicability of the price preference norm: the Indian contractor has to ensure that more than 50 per cent of the work isn’t sub-contracted to a foreign player.

The price preference measure was introduced to encourage the domestic oil field service industry.

ONGC, however, believes it has outlived its utility and unnecessarily pads its exploration costs. As a result, private oil explorers such as Cairn Energy and Reliance Industries are able to cap their costs at levels that ONGC cannot match.

The state-owned oil company is planning to invest over Rs 70,000 crore in E&P during the Eleventh Plan period.

At a time when other expenses for E&P companies have risen manifold, ONGC feels that it should not bear an additional financial burden in an environment when it has to compete with domestic and international oil companies to secure blocks for exploration.

“ONGC has requested for the withdrawal of price preference to domestic bidders considering that under the new exploration licensing policy, it has to compete with other oil companies. It would not be fair in asking ONGC to bear this additional financial burden in today's liberalised and competitive environment,” the company recently said in a communique to three industry bodies — Confederation of Indian Industry, Federation of Indian Chambers of Commerce and Industry and Assocham.

Industry associations have been seeking continuance of the price preference regime. They have been pointing out that though new Indian players have set up capabilities to serve the E&P sector and compete with their overseas counterparts, foreign contractors are at an advantage by 12 to 25 per cent (in terms of costs) because of higher taxation and other factors.

They have also argued that domestic companies have to go a long way before they can catch up with foreign firms in terms of scale and a price preference clause in oil hunt service contracts levels.