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O for Oil; O for Optimism

O for Oil; O for Optimism
The plunging price of oil is the biggest energy story in the world right now. In June the price of a barrel of oil was almost $115. However, it soon began to slide and the price of a barrel is now hovering under $50. Yet India’s quest for energy security has not progressed as desired. Reports as recent as those from last quarter suggest that India continues to look for ways to get West Asian Oil and Gas producers to cut the Asian premium, which added up to more than $3 billion annually.

While the Organisation of the Petroleum Exporting Countries (OPEC) continues to put severe pressure on shale oil, the fact remains that United States is no longer dependent on oil from the Middle East, thanks to their domestic hydrocarbon revolution. The shale revolution in US had benefited from a unique set of enablers, with above-the-ground factors along with good infrastructure.

Closer to home, China too has been actively working on developing and acquiring energy sources across the globe. It has used its diplomatic sabre to garner several assets.

Under such circumstances, while India has the option of considering Africa and South America for cheaper alternatives to oil from the Gulf – it is critical for our government to not ignore domestic production. Domestic production always makes good economic sense as it will create significant value for forward and backward economic linkages. We must drop the habit of sticking with mere imports of hydrocarbon from any region across the world.
 
Beyond the immediate present
While the nation celebrates the fall in crude oil prices, since it will reportedly pump 1.4 trillion dollars into our economy, one must wonder how long that benefit will last. This time around India should not be short-sighted. Until and unless we secure energy within the country, India will continue to fall into this cycle – of windfall gains but tremendous losses. So while the dip in global prices will benefit the economy, it is not a long-term solution.

All experts believe that the fall in crude oil price will continue for some time, presumably at least for over twelve months. Equally problematic today are the delays in providing extensions to existing oil fields like that of Cairn India. Thanks to the fresh finds in their producing fields, oil companies today need more time to extract the oil/gas they have found. Under the earlier regime, India did not allow oil companies to explore for oil/gas after a certain period of time. However, since that policy damaged exploration efforts, the previous government allowed continuous exploration. The first company to really strike gold from such a decision was Cairn India, which reported big gas finds in its Rajasthan fields. The field was big enough for Cairns to ask for an extension in its exploration license.

It has been almost a year since Cairn India applied for the extension. The permission, however, is yet to be granted. India imports over 70 per cent of its oil needs and 70-80 per cent of revenue generated from all oil and gas production goes back to the government in the form of cess, royalty payment, profit petroleum and the like. Ideally, a field should be given to an exploration company till its natural life is over. In Cairn’s case, the government has reportedly considered allowing an extension, subject to the provision that Cairn allows state-owned ONGC to hike its share in the joint venture.

However, like elsewhere around the world, the contractor should determine the economic life of the field. Such an act would be in the nation’s interest. If there are any disagreements, the economic life of the field should be determined by an independent expert. Such inaction has sent a negative message to all the potential investors. Clearly, India needs an investor-friendly strategy so that these resources do not merely remain untapped.

At this juncture, let us look at Brazil. The South American nation, which has taken significant strides in E&P and attracted big investors, can be considered as an example. The Brazilian National Petroleum Agency (ANP) takes a maximum of 3 months from the submission of request for extension to a final decision on the same. If no decision is announced within 3 months, then the request for extension is deemed approved. This clearly reduces uncertainty for the contractor or operator and requires the ANP to take quick decisions. It also provides the contractor/operator with continuity of production operations in the field, thereby benefiting all stakeholders.
 
Developments during plunging oil prices

It is imperative to note that back home, though the past nine rounds of New Exploration Licensing Policy (NELP) attracted investments worth over $20 billion and led to 99 gas discoveries (as on 13 Dec 2013) in on-land and offshore areas, only 11 have moved to production phase. Considering the global downturn in industry and the fall in crude oil prices due to the lack of demand, the Indian Government has an opportunity to establish efficient mechanisms for faster approvals on key energy blocks. 

Such moves will enable operators of big energy fields to leverage the opportunity and tie up with various services and vendors at better price proposition, ensuring optimal utilisation. This in turn will not just increase the percentage of profit for the government as well as all stakeholders by increasing their margin, but going by the current government’s development agenda, extra earnings can be well utilised to build infrastructure and public utilities across the country. Clearly, this is a win-win situation for the people of this country, government and industry in particular. This will boost Modi’s vision of Make in India in the E&P space.
Nantoo Banerjee

Nantoo Banerjee

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