1. How much gas will an oiled E&P policy yield?

How much gas will an oiled E&P policy yield?

The Modi govt’s draft oil & gas policy does away with the provisions that are said to have marred NELP

By: | Updated: December 9, 2015 1:47 AM

In keeping with its promise of sectoral reform, the Narendra Modi-led government has unveiled a draft policy that aims at making oil and gas exploration in India fair, transparent and attractive for investors. If implemented, it would allow pricing and marketing freedom for natural gas produced in areas awarded under the new regime. The policy also proposes a revenue-sharing arrangement, doing away with the cost-recovery model followed under the New Exploration Licensing Policy (NELP).

Petroleum minister Dharmendra Pradhan tells FE that his government is pushing for a policy that would drive the industry. “My ministry is working towards cutting down the dependence on imports by at least 10%, from 77% to 67%, by 2022. This target was set by the Prime Minister and there is no reason to be sceptical of the result at this stage, ” he says.

In September, the Cabinet Committee on Economic Affairs (CCEA) shifted to the revenue sharing model while auctioning marginal oil and gas fields. A total of 69 oil and gas fields with combined proven reserves of 88 million tonnes of oil equivalent, valued at around R77,000 crore at current prices, would go under the hammer in one go or in batches starting February next year. The auction of marginal oil and gas fields under the new regime is being seen as a pilot case for the policy to be put in place for mainstream blocks.

The reason why the Modi government has opted for a change in direction is obvious. Sixteen years since India unveiled the auction of oil and gas blocks under NELP, the relief the policy was supposed to offer on the ballooning oil import bill looked nowhere close to materialising. The country imported 189.43 million tonnes of crude oil in FY15, 10% higher than the previous year and nearly 80% of the country’s demand. As for production from acreages auctioned under NELP, they hover at a meagre 6,938 barrels per day (bpd) of crude oil and 14.14 million metric standard cubic metre per day (mmscmd) of natural gas.

The new policy proposes award of acreages for hydrocarbon exploration and production (E&P) under a uniform licensing policy covering all types of hydrocarbons—from oil and gas to shale. At present, contracts for production of oil & gas and those for coal bed methane (CBM) are handed out under different regimes. While contracts under NELP for oil and gas are based on a production sharing contract (PSC) where government’s share depends on biddable sharing of profit petroleum after allowing for cost recovery, contracts under the CBM policy provide for biddable revenue sharing based on production linked payment (PLP).

“The cost recovery methodology meant lower risks for developers as it allowed them to recover the costs incurred before sharing profits with the government. However, this methodology led to disputes and delays in terms of costs acceptances due to the technical nature of cost details,” says India Ratings & Research director Salil Garg.

Though the revenue-sharing model would simplify the basis of calculation of government’s share, it would place a greater risk on developers who would need to estimate E&P costs, quantum of hydrocarbon extractable and market prices before placing a bid. Revenue sharing contracts have been generally more amenable for businesses where upfront costs and output are fairly ascertainable. However, in case of hydrocarbon discovery neither costs  nor output are ascertainable completely.

“Thus, there might be situations where developers incur higher-than-expected E&P costs and thereafter the need to share revenue with the government leads to a longer payback or break-even period, thus depressing project returns.

Thus, investor interest could be cautious,” adds Garg.

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