Column: Gas exploration in pause mode

Updated: Apr 8 2014, 04:32am hrs
The pause button on the activity of the Indian upstream has again been pressed. In November 2013, the petroleum minister invited the members of the upstream community for an interaction. It was a review of the multiple issues that had piled up during the previous three years of inactivity and the actions taken in the preceding 10 months to resolve the same.

There was no doubt in the minds of participants that the government was in the action mode. Some of the solutions were obviously not ideal from the industry point of view, but at least these were steps in the positive direction, and there was hope that subsequent steps could find better resolutions. The ministry assured that the decisions reached would be notified or officially circulated and made effective by December 2013.

The question on officials minds was the industry perspective for the forthcoming round of NELP-X expected to be announced in January. The industry voiced a cautious optimism, provided all the decisions were notified, implemented and could be seen to be working in actual practice for some time, before NELP-X bidding took place.

That was then. And since then the tale has turned on its head.

While the policy for domestic gas pricing approved eight months back was notified, other decisions are said to be perambulating within the confines of various bhawans. The ministry, however, promptly announced the next round of NELP-X during the international conference Petrotech 2014 in January. Much to the concern of the audience, not a word was heard on the fate of the policies regarding other issues that had been the job-stoppers in various blocks. The ministry perhaps assumed that the intent to implement was adequate to keep the illusion of action alive. To top it all, the new round of NELP was announced to follow a unified licensing policy, the various components of which were yet to be finalised. So, while a tick-mark was achieved against the annual targets, the obstacles on the ground remained. And the possibility of action on the ground still remains remote.

The final nail in the proverbial coffin got hammered when the ministry referred a non-decision on the release of calculated gas prices to the Election Commission (EC) for its consent. It raised eyebrows as the decision had been taken nine months back, and notified two months back. The routine calculation was scheduled to be done based on the March actual prices, which are published only by mid-March. The impact of the decision was thus already known and factored in January itself. It was also known that the precise price number shall be released during the expected election period. There was also no likely impact on the voting population. The EC, however, seems to have taken the bait and deferred the release of this number.

This buried the story of the only progress made since the famous November meeting. In itself, however, it has compounded the uncertainties.

One can debate whether the government should have referred the matter to the EC, whether the EC should have accepted to review the matter, whether consideration of some related issues being sub judice is a valid driver for EC and so on. But the reality is that the industry is at a pause.

While technically the price data can be released the day after the election, in actual practice nothing may happen on this or other issues till the new administration is in place. The situation thus has the potential of becoming a hostage to the colour and complexion of the new political establishment, who may like to study, review and leave its own imprint, all of which takes time. Thus the pause could become a long intermission.

Meanwhile, it is unlikely that any of the discoveries already made can be approved for production. The government-declared price (now $4.2) has to be used for calculating economic viability for approvals. It shall show that these discoveries are not commercial. For exploration companies, it shall mean writing off their investment, or waiting for a long time and see the time erode the value and return from investment. For the consuming industry, it shall mean a fast increasing percentage of expensive RLNG (re-gasified liquefied natural gas) or even more expensive liquid fuels that shall cost at least double the proposed and held-back domestic price. The Ukraine (Crimea) incidents also warn of the potential of higher energy pricesparticularly gas prices. How does it translate for the country Back to a higher CAD and falling rupee even with a stable government! For the consuming industries, it shall be much higher input prices.

How do these events translate for a foreign investor in upstream

Assume a company participated in NELP-VII (2008), made a winning bid and its contract became effective early 2009. During the last four years, it would have seen approvals for other farm-out contracts delayed by years and subsequently approved with additional unacceptable penal conditions, thus raising fears of whether it shall be able to exit when its commercial objective so demands.

It would have seen refusal of the government representatives to take decisions in the management committee on various issues, and subsequently refusal for months (or years) to confirm the minutes of the meetings.

It might have even seen the process of environment or defence approval eat away half its block. In this case, it would find that getting out of the now uninteresting block requires it to pay penalties, without a real default on its part. It would have also seen the free market price translated to mean an administered or regulated price that is hostage to political considerations. The sanctity of contract and fiscal stability mentioned in the contract have been held more in violation. If it is a real brave soul and continues to explore, while it doesnt know when and on what basis shall he sell his gas, will he bid again If Indian prospects were like Nigerias, Angolas or Mozambiques, he still might, but given our geology, it seems highly unlikely.

Ashu Sagar

The author is the secretary general, Association of Oil and Gas Operators (AOGO)