After opening almost entire sedimentary basins in India for oil and gas exploration in 2017, India came out with far-reaching policy reforms notification in February this year. This may turn out to be a game changer in the oil and gas sector in India if implemented in its true spirit. It makes drastic changes in the Hydrocarbon Exploration Licensing Policy (HELP) and the Open Acreage Licensing Policy (OALP) in order to attract more domestic and foreign investment in exploration of oil and gas.
Let us have a close look at some of its salient features.
First, all the 26 sedimentary basins have been classified into three categories based on the current status of exploration and production in the respective basins. Seven basins having commercial production have been put in category-I. Five basins where hydrocarbon discoveries are there but yet to be converted to recoverable reserves and commercial production are in Category-II and 14 basins having no discovery but have prospective resources are in category-III.
Second, as the different categories of basins carry a different level of risk and reward, the licence for exploration and production will be awarded on differential fiscal and contractual terms. In categories II and III, the contractors will not have to share with the Government any revenue or production from the blocks. This is a significant departure from the existing terms of an award under the HELP. Only royalty and statutory levies will be payable. However, the revenue sharing with the Government will commence only in case of a windfall gain on a graded scale ranging from 10% to 50% on incremental revenue over US$ 2.5 billion in a financial year.
Third, in order to encourage investment in new blocks in producing basins also, a maximum cap of 50 per cent have been imposed for revenue sharing with the government. More emphasis has been given on investment. The biddable parameters for category-I blocks would carry 70% weight to the minimum work programme (MWP) and 30% weight to
Revenue share as against the current ratio of 50:50. This will eliminate the tendency to put unviable bids to win the award of blocks. Such biases were seen in Discovered Small Fields (DSF) Bidding Round I and II. Some Bidders got the blocks awarded without committing any investment but by bidding to share even 99% of revenue with the Government, an unrealistic obligation.
Fourth, to expedite exploration and production, the exploration period has been reduced to 3 years for on-land/shallow water blocks and 4 years for deep-water blocks. To incentivize early production, concessions in royalty will be given if production is commenced within 4 years in on-land and shallow water blocks, and 5 years for deep or ultra-deep water. The fiscal incentives may result in early monetisation of discoveries.
Fifth, the Contractor will have full marketing and pricing freedom to sell on arm’s length basis. There will be no allocation of the output by the Government. Discovery of prices will be on the basis of transparent and competitive bidding. However, the new Policy does not address the oil companies’ demand for permission to export oil. The exports have not been opened up.
Sixth, ONGC and Oil India have been allowed to retain the fields where oil/gas discovery has been made. NOCs may also induct private sector partners including by farming out, joint venture and bidding out. In earlier DSF Rounds I and II, the oilfields discovered by National Oil Companies (NOCs) were put on biddings. The successful bidders were not have to make any payment to the ONGC or OIL against the exploration expenses incurred by them in past. Moreover, the assets created at the site such as production facilities and development/ production wells by the NOCs were handed over to the Contractors without any payment. There was also no signature, discovery or production bonus and no carried interest by National Oil Companies or State participation. The new policy addresses the NOCs’ concerns on the rewards for the value additions done through discoveries after extensive exploration.
Though these changes make the investment in Indian oil and gas Sector more attractive, some challenges remain both for the entrepreneurs and the government.
First, 37 blocks with acreages measuring 60,000 square km are on offer in the ongoing OALP Bidding Rounds II and III. Policy Reforms in Exploration and Licensing Policy announced in Feb have not been made applicable for these blocks, though bidding is still open and yet to be closed. Why wait for future rounds? It would be prudent to go for speeding implementation of the new policy by modifying the terms of Notice Inviting Offer (NIO) and Model Revenue Sharing Contract (MRSC) incorporating changes made in the new policy. This will require extending the closing date by a month or so. Otherwise, there may be a poor response to the Rounds-II and III, as the prospective bidders would prefer to wait for Round- IV with liberal terms.
Second, as stipulated in the contract, the exploration MWP has to be completed within three years of award of onshore and shallow water blocks and four years for deep water in offshore. Speedy environment and other statutory clearance would be needed.
Third, to be eligible for early production incentives, production is required to commence within four years for on land and shallow water blocks, and five years for deep-water and ultra deep water blocks. Bringing oil and gas on the surface within reduced period require concerted efforts of the promoters and the government.
Fourth, the policy changes introduced earlier through the HELP, OALP and DSF could not boost foreign investment in Indian oil and gas exploration. Out of 55 blocks awarded in OALP-I and 53 blocks in DSF Rounds I and II, not a single block went to the foreign companies; virtually there was almost no participation by them in the bidding. Even some of the existing domestic companies in oil and gas such as Reliance or Tata skipped it. This calls for an in-depth analysis of the obstacles faced by the players in the fields.
To conclude, the latest policy change is a big step to attract both domestic and foreign players to the oil and gas sector in order to raise domestic production of oil and gas. This may at least arrest the ever increasing trend of India’s dependence on imported oil and gas.