Millennium Post

Drift in oil exploration policy

This is over and above the  electoral calendar coming in the way of any prospective investor to take a serious call till the new government is in place by June 2014 particularly when stability in policy has seldom been India’s forte and strength to attract investment.

It would not be off the mark to recall that the country launched the NELP way back in 1999 when the National Democratic Alliance (NDA) under the BJP coalition was in governance. As is widely known, India has an estimated sedimentary area o 3.14 million sq. km, comprising 26 sedimentary basins. Whereas the country could bring under exploration only 11 per cent of sedimentary basins prior to adoption of the NELP, the situation underwent a gradual but all the more glaring transformation with the government granting an area of 47.3 per cent of the nation’s sedimentary basin for exploration. So far, 117 oil and gas discoveries have been made in 39 NELP blocks. As on April 2013, the balance of recoverable reserves of oil and gas amounted to 758 million metric tonne of oil equivalent of hydrocarbon reserves and 1351 billion cubic metres (BCM) of gas. Under the Ninth bidding, a total of 34 exploration blocks were offered in which bids were received for 33 blocks. So far, production sharing contracts (PSCs) have been wrapped up with stakeholders of 19 blocks. A total of 254 production-sharing contracts have been signed under the NELP so far. The PCS makes due provision for ‘cost recovery’ where the explorer is primarily permitted to recover the costs before partaking of the profits with the government.

Moreover, the PSC provides for specific timelines for exploration activities as well as development of oil and gas discoveries made in the blocks. Still, the government put in place a plethora of measures to enable the contractors to complete the work programme and also fully exploit the hydrocarbon potential in the blocks and ensure early monetisation of discoveries. These facilitating steps include extension policy, rig moratorium policy, policy for allowing exploration in mining lease (ML) area after the expiry of the exploration period and submission of integrated field development plan (IFDP).

Despite all the concessions under the PSC, the difficulties in managing the existing model based on the pre-tax investment multiple (PTIM) methodology and the cost-recovery mechanism were intractable, driving even overseas investors with deep pocket to stay away from the bids. Hence the Rangarajan Committee which went into the whole gamut of the issue plumped for a new contractual system and fiscal regime based on a post-royalty payment revenue-sharing. This model envisages that the production or post-royalty value of the combined output of oil and gas be shared between the government and the contractor. Such a production sharing will be linked to the average daily production and prevailing average of oil and gas prices in a well-defined period. Under this dispensation, it is claimed that the government would be able to capture economic rent in the form of royalty and revenue share of hydrocarbons right from the inception or onset of production. This way the government will be able to secure a share of any windfall profit accruing on account of a price surge or a geological surprise by way of huge hydrocarbon find.

The Minister of State for Petroleum and Natural Gas Ms Panabakka Lakshmi told the Lok Sabha in a written reply on December 6 that in line with the recommendation of the Rangarajan Committee, a proposal to adopt new contractual model and fiscal terms for future award of hydrocarbon acreages is under consideration of the Ministry. This is quite understandable because nine rounds of NELP had ‘limited success in terms of commercial discoveries and their monetisation’. Of the 254 blocks auctioned, commercial production was commissioned only in three blocks with total production of 0.4 million tones of crude oil and 26.11 million standard cubic metres of gas per day. Meanwhile, another Committee set up under the former Petroleum Secretary Vijay Kelkar who was the original architect of the NELP in the Petroleum Ministry way bay in 1999 queered the pitch by insisting on the continuance of the PSC paradigm.

   It is interesting when confronted with the dilemma of which model to adapt for the 10th round of NELP, the Minister of Petroleum & Natural Gas M Veerappa Moily who is fast becoming a man Friday for the panicky UPA government cryptically noted at the Petrotech 2014 global event in Greater Noida (UP) that ‘we would come out with a detailed policy soon taking a considered view of both the views’. The inescapable point is that with the government in electoral mode and mood, the country’s 10th round for exploration bid of oil and gas blocks would get stymied. After 14 years of a tested policy,  the government of the day is not able to zero in on the best option particularly when two committees it appointed gave a diametrically different model giving the whole process a drift.

Foreign investors and national upstream oil companies would only be aghast at our ability to procrastinate and inability to exploit the high-risks but potentially profitable exploration and development of a fuel which is now bleeding the economy with inexorable rise in import bill.

It is also ironic that the Prime Minister Manmohan Singh who inaugurated the Petrotech 2014 waxed eloquent that ‘the global oil and gas industry requires new technologies and processes, innovative thinking and creative business models through partnerships among various stakeholders. Such partnerships could result in outcomes like improved recovery from mature fields, exploitation of ultra-deep water energy reserves and progress in complex frontier areas’.

Even as he seeks partnerships for taking India’s exploration of oil and gas to a new high, reports surface that the home ministry is guarded over ceding blocks to Chinese presence – including machines purchase, sub-contracts or consultancy.


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