For fresh exploration efforts — in both conventional and unconventional hydrocarbons — the emerging policy and regulatory environment is conducive. However, Team Modi needs to walk an extra mile to reduce regulatory hurdles for existing operators under production sharing contracts
A hike in the price of crude oil (courtesy, the US’s decision to reimpose sanctions against Iran and output decline in Venezuela) has drawn the attention to India’s dependence on oil import, which currently stands at 83 per cent, to meet its energy requirement. This, due to a lack of a conducive policy and regulatory environment that came in the way of boosting domestic exploration and production efforts so far.
Until the late 1990s, exploration and production of oil and gas used to be predominantly be with public sector undertakings (PSU) viz Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL), who were awarded fields on ‘nomination’ basis. With the launch of New Exploration Licensing Policy (NELP) in 1999, private companies, which had a small presence, including a joint venture with ONGC/OIL, were allowed exploration in a major way.
Awarded blocks under NELP, involved in stage-I an inter-ministerial empowered committee of secretaries that arrived at recommendations based on bid evaluation criteria and conducted negotiations with bidders, wherever necessary. In stage-II, these recommendations were approved by the Cabinet Committee on Economic Affairs. The operator could not pick up a block of his choice and had to contend with whatever was offered. Besides, different hydrocarbons, like oil, gas, coalbed methane, shale oil and gas hydrates were governed by different policy regimes and some areas like shale gas, for instance, were reserved only for PSUs.
The exploration and development of the blocks was guided by production sharing contracts (PSC) signed between the operator and the Ministry of Petroleum and Natural Gas (MPNG). Monitoring was done by a management committee that included Directorate General of Hydrocarbons — the technical arm of the MPNG — a representative of the operator and a nominee of the MPNG. It covered all aspects viz preparation of field development plans, drilling wells, conducting multiple tests (to determine commercial viability of the field), laying pipeline and reviewing of production. The processes involved approval at every stage and included cost incurred in minutest details. In short, DGH/MPNG were micro-managing the affairs. Under the extant profit-sharing model, companies would bid by quoting minimum work programme they would undertake; they would first recover their investment and only thereafter begin sharing profit with the Government. This meant that the operator took no risk and even prompted him to inflate cost. It gave a lot of discretion to bureaucrats and opportunities for quid pro quo and corruption.
The dispensation was a losing proposition for all stakeholders. While companies spent their energies on managing bureaucrats to get FDPs and cost estimates/projections approved, the Government was uncertain as to when it would start getting its share of profits from investment in fields and for how long. Worse, it led to an uncertain and unpredictable policy environment under which companies were unable to take investment decisions. As regards to gas pricing, in the first major case of supplies from a field awarded under NELP viz KG-D6 (operated by Reliance Industries), in 2007, the then UPA Government approved a price of $4.2 per million British thermal unit. This also applied to supplies from ONGC/OIL. From November 1, 2014, the Modi Government put in place a formula-based approach using gas prices prevailing in four global locations. Exploration and production companies, including PSUs, did not find this attractive.
With respect to crude oil, until 2015-16, despite the price of domestic crude linked to its international price, ONGC/OIL were not getting full benefits as they were forced to give discount to downstream oil PSUs to share a portion of the under-recovery on sale of refined products like diesel, kerosene, LPG etc at low price. This hampered the former’s ability to generate cash for undertaking investment. Lately, the Modi dispensation has taken some bold initiatives to improve the policy environment and reduce regulatory hurdles.
In July 2017, the Government introduced the Hydrocarbon Exploration and Licensing Policy (HELP) in place of extant NELP. Also dubbed as Open Acreage Licensing Policy (OALP), under it, bidders can get a single licence for exploration and production of conventional as well as unconventional hydrocarbons. They can pick up a block of their choice. They are allowed freedom of pricing and marketing. HELP offers revenue sharing contract. This eliminates the scope for Government intervention, reduces interface with bureaucracy and delays. The operator can remain focused wholly on optimising production without having to worry as to whether any activity and associated cost would be recognised or not. This will assure the Government of its share of profit from day one of commencing production. Above all, it provides a certain and stable policy environment. The proof of pudding is in eating.
In the first round of OALP underway for which bids for 55 exploration blocks, covering an area of 59,282 sq km (the existing area under oil and gas exploration is a little over 100,000 sq km) in 10 sedimentary basins spread across 11 States were on offer and are to be awarded by July 2018, response is overwhelming. More than 120 entities from India and abroad have shown interest. For the existing producing fields (awarded under NELP and pre-NELP rounds), the Government is contemplating to let the operators explore and produce unconventional hydrocarbons that includes CBM, shale oil/gas, gas hydrates etc. Further, their production is expected to be covered by revenue sharing model. This will bolster the prospects of getting more output in a shorter time frame. The Government has also addressed pricing concerns of exploration and production companies by allowing vide March 2016 guidelines higher price — based on alternate fuels — for deep/ultra-deep water blocks which present challenging geological and physical environments. For marginal fields, market-based pricing is allowed; ditto for CBM. This should give them much needed comfort. In respect of crude, from 2016-17, the Government refrained from asking ONGC/OIL to give discount on sale to oil PSUs, thereby helping them generate more internal resources. Now, in the wake of a surge in crude price and dire need to avoid burdening the consumers, it should resist the temptation of resurrecting discount.
In short, for fresh exploration efforts —in both conventional and unconventional hydrocarbons — the emerging policy and regulatory environment is conducive. However, Team Modi needs to walk an extra mile to reduce regulatory hurdles for existing operators under PSCs. For instance, it may consider implementing Dr Kelkar committee recommendation for granting exploration and production rights for the entire economic life of the field instead of the extant practice of granting these rights for a lesser period.
(The writer is a freelance journalist)
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