Oilcos spends on exploration down to trickle

Written by Prashant Mukherjee | Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: Jun 27 2012, 09:17am hrs
Has Indias dream of stepping up indigenous oil and gas production come a cropper If the big global oil majors not participating in the New Exploration Licensing Policy (NELP) wasnt bad enough, new data from the oil ministry show an alarming fall in exploration wells being drilled. While 157 production sharing contracts were signed under different NELP rounds between 2005 and 2011, the number of exploration wells drilled has fallen from 60 in 2005 to nil in each of the four years between 2008 and 2011. As a result, exploration spending in NELP blocks has seen a drastic drop, falling from $4 billion in 2007 to a mere $4.7 million in 2011.

The reasons for the sharp fall in exploration drilling range from not getting permissions from defence and space agencies to environmental issues and the companies choosing to abandon blocks found to be less promising. In three of Cairn India's exploration blocks, the company was forced to declare force majeure when, after more than a year in one case, the company found it could not access the block as part of it fell under the navy's exercise zone and another part under the army's firing zone. In some cases, delayed permissions from the Directorate General of Hydrocarbons (DGH) is also being seen as a hurdle.

Apart from waning interest in exploration, companies have also found that several oil and gas blocks were not worth the additional investments. After the completion of the minimum work plan, there were many blocks that were not feasible for drilling and are not considered as good blocks. Therefore, we relinquished most of these blocks, AK Hazarika, director (onshore) of ONGC told FE.

A senior government official said that global energy majors such as BG Group, which recently exited from blocks in the Krishna-Godavari basin and in Mahanadi, have access to hydrocarbon assets across the world that have a better discovery rate. Once they exploit them, they would turn to assets in India, the official said. Besides, they also have the option to take stakes in projects such as BP's recent acquisition of a 30% stake in 23 blocks held by Reliance Industries.

Exploration is a difficult business, especially if it is deepwater drilling. Companies have changed strategies and are prioritising certain blocks for the hydrocarbon hunt, said BN Talukdar, Oil India's director (exploration).

Some experts attribute the decline in exploration spending to the high cost of capital and the withdrawal of tax incentives. The Reserve Bank of India raised its key policy rate the repo rate, at which it lends to banks 13 times from March 2010 to October 2011 before lowering it by 50 basis points to 8% this April. Besides, the government ended the seven-year tax holiday on crude oil production from blocks licensed after March 31, 2011. For natural gas and coal-bed methane (CBM, the seven-year income tax exemption is applicable only for blocks licensed under NELP 7 and CBM 4 auctions.

With passing of every year and subsequent NELP rounds, as more blocks come under exploration coverage, there ought to be an increase in exploration activity. The drop in exploratory expenditure is worrisome, said a recent note sent by the Prime Minister's office (PMO) to the oil ministry.

According to the data sourced from the DGH, the technical arm of the oil ministry, operators have not drilled even a single well in blocks won during the NELP VII, VIII and IX rounds. There has been a significant fall in the collection of 3D seismic data, which is the starting point for identifying drilling sites for exploration. The acquisition of 3D seismic data has dropped from around 32,000 sq km in 2006-07 to only 1,500 sq km in 2011-12.

Operators also point out that difficulties in getting clearances from various ministries forced them to walk out from the proposition. Now a committee headed by cabinet secretary Ajit Kumar Seth is looking into the matter.

NELP was introduced in 1997-98 to provide a level playing field to both public and private sector companies in the exploration business. Exploration activity under the policy has met with limited success, with Reliance Industries' gas find in the KG Basin being the only exception.