The removal of ceiling on the foreign direct investment limits from virtually all activities in the petroleum sector has brought little cheer from the investor community.

According to experts, the removal of the limits does not address the real issues hampering the flow of FDI into the sector.

Foreign direct investment in the petroleum sector has witnessed a sharp fall in the past couple of years. While in the first year of the Ninth Plan (1997-98), four FDI proposals (with equity of more than Rs 500 crore) were approved in the sector, the number of approvals jumped to six in 1998.

Who all backed out

Exxon signed a project development agreement with HPCL in July 1998 for the Bhatinda refinery. Withdrew in February 1999. Saudi Aramco examined the possibilities of joining the Bhatinda project. Decided not to pursue investment. Oman Oil Company decided to pick up 26% equity in the Bina refinery project. In February 2001, it decided not invest further in the project Kuwait Petroleum Corporation withdrew from the Paradip refinery project in January 2000

However, the number started declining thereafter -- one in 1999, nil in 2000 and just one in 2001. The following year, 2002, also drew a blank.

The reasons for low FDI in the sector have little to do with the cap on investment limits. In fact, in most occasions, it has been the state of global economy and the circumstances beyond the government that have led to foreign investors shying away from India.

During 1998-99, international crude prices declined sharply putting pressure on the profit levels of the global upstream majors.

The companies cut their investment plans and adopted the strategy of consolidation. As a result, their investment programmes in foreign countries were trimmed.

Though the government had notified a phased programme for the dismantling of the administered pricing mechanism and rationalisation of taxes, duties and removal of subsidies during 1998-2002; because of volatility in international crude prices and the country's increasing dependence on imports, foreign investors had the feeling that the APM could not be dismantled in time.

In the refining sector, while retention pricing (cost plus) was abolished and import parity pricing was introduced for refineries from April 1, 1998, volatile international prices exposed Indian refineries to the risks and uncertainties of global oil market.

This was, however, not the only factor responsible for a completely blocking future flows of foreign funds in refinery projects in India, but all those who had committed investment in India refineries also withdrew, partially or fully, from the projects.

Moreover, a global economic slowdown, especially the crisis in the Southeast Asian countries, put downward pressure on demand for petroleum products resulting in surplus refining capacity globally.

As a result, the stand-alone refineries became completely unviable. In India, growth in demand for petroleum products fell from around 7 per cent in the early 1990s to 2 per cent in 2000-01, less than one per cent in 2001-02, and 2.8 per cent in 2002-03.

The one area in which the government is squarely to be blamed for low level of investment during the pre-NELP (new exploration licensing policy) days is the exploration sector.

In the absence of reliable data on exploration blocks, India has generally been perceived low on hydrocarbon prospectivity.