The current steep hike in the international price of crude oil [courtesy, re-imposition of US sanction against Iran and increasing global demand] has once again drawn attention to India’s unconscionably high level of dependence at 83% on import for meeting its energy requirement. This also brings in to focus the commitment of Modi to increase the share of domestic production by 10% in 5 years.
Domestic supply – ‘precariously’ low
There would have been some consolation if India did not have the resources to support the demand. But, despite the country having abundant resource and seven decades after independence, the domestic production of oil continues to languish at about 15-20% of the requirement. This is entirely due to lack of a conducive policy and regulatory environment needed for giving a boost to exploration and production efforts.
Until the mid-90s, exploration and production of oil and gas used to be the exclusive preserve of public sector undertakings [PSUs] viz Oil and Natural Gas Corporation [ONGC] and Oil India Limited [OIL] who were awarded fields on nomination basis. In some cases, private companies [including foreign] were allowed to operate the field under joint venture [JV] arrangement with ONGC/OIL. The price of oil and gas was administered all through.
In the late 90s, private sector was involved with the launch of New Exploration Licensing Policy [NELP]. However, the award of blocks was governed by a cumbersome and lengthy process. This involved in stage-I, an empowered committee of secretaries [ECS] arriving at recommendations taking in to account the bid evaluation criteria [BEC], holding inter-ministerial consultations and conducting negotiations with the bidders wherever necessary. In stage-II, these recommendations were approved by the Cabinet Committee on Economic Affairs [CCEA] chaired by the prime minister.
Regulatory hurdles
The operator could not pick up a block of his choice and had to contend with whatever was offered. Besides, different hydrocarbons 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 the so called production sharing contracts [PSCs] signed between the contractor and the ministry of petroleum and natural gas [MPNG]. The monitoring of PSCs is done by a management committee that includes Directorate General of Hydrocarbons [DGH] – the technical arm of MPNG – and a representative of the contractor.
The monitoring covers all aspects from preparation of field development plans [FDPs], drilling of wells, conducting tests [to determine commercial viability of the field], laying pipeline and other infrastructure to start of production. It involves approval at every stage of the field development activity and associated cost in minutest details. In short, the processes tantamount to micro-management by the DGH/MPNG.
Under extant profit-sharing model, companies would bid by quoting minimum work program they would undertake; they would first recover their investment and only thereafter, begin sharing profit with government. While, making them completely immune from risk associated with investment, this also gave rise to the possibility of inflating or “gold plating” cost in order to reduce the pay out to government. This also led to excessive government intervention, opportunities for quid pro quo and corruption.
The dispensation was a losing proposition for all stakeholders. While, companies would spend their energies on managing bureaucrats to get FDPs and cost estimates/projections approved, government was uncertain as to when it would start getting its share of profits from investment in fields and for how long. Even worse, it led to an uncertain and un-predictable policy environment under which companies were unable to take investment decisions.
Differential pricing of gas
As regards pricing, the government follows a differential approach depending on the source. Whereas, for all existing [albeit producing] fields, it uses a weighted average of gas prices prevailing in four global locations viz. Henry Hub [USA], NBP [UK], Alberta Gas Reference [AGR] [Canada] and Russia, for deep water/difficult fields, the price is based on alternate fuels. For latter, the price is normally double that for the former. For marginal fields, market based pricing is allowed; ditto for coal bed methane [CBM].
With respect to crude oil, until 2014-15, despite the price of domestic crude linked to its international price, ONGC/OIL were not getting the full benefit as they were forced to give discount to downstream oil PSUs to share a portion of the under-recovery on sale of refined products viz. diesel, kerosene, LPG etc at low price. The discount was reduced sharply in 2015-16 and withdrawn from 2016-17.
HELP could be a game changer
Lately, 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 hydrocarbon resources. They are allowed freedom of and marketing and pricing. The competitive bidding will be continuous and blocks will be awarded twice a year.
HELP offers revenue sharing contract [instead of extant profit-sharing model]. This eliminates scope for government intervention, reduces interface with bureaucracy, eliminates delays and catapults the operator in a commanding position. The company can remain focused wholly on optimizing production without having to worry as to whether any activity and associated cost would be recognized or not. This will assure 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, the response is overwhelming. More than 120 entities, from India and abroad, have shown interest.
To ensure that the blocks are awarded speedily, on April 11, 2018, the Union Cabinet had given its approval for delegating the powers to the minister for MPNG and finance minister to award the blocks/contract areas to successful bidders [instead of existing extant dispensation of seeking CCEA approval].
Modi – government on track
While, this is for the future [read: blocks to be awarded under OALP], for existing producing fields and those covered by NELP under extant profit sharing model, suitable steps are needed to minimize the regulatory hurdles.
Besides, it would be desirable to put in place ‘uniform pricing’ for all of domestic gas irrespective of the supply source. As for deep/ultra-deep water [albeit difficult] fields, it is important to note that such fields are expected to have much larger reserves of oil and gas; hence with the same price, these can yield higher revenue. In respect of crude, the policy makers should refrain from forcing ONGC/OIL to resurrect discount on its sale to oil PSUs.
The present government is on track but needs to do more within a shorter time frame as given India’s precarious position [self-sufficiency of mere 10-15%], the time is not on our side.