In a major policy overhaul, the Narendra Modi government is radically changing the way hydrocarbon contracts are designed and awarded, and is also redefining how the government’s share of the bounty is determined and appropriated.
The reform, as proposed by the petroleum ministry in a note for the Cabinet Committee on Economic Affairs’ consideration, will have three prongs: One, a contract will now be agnostic to the physical form of the assets, meaning the developer can produce oil, natural gas, coal-bed methane or shale gas or any combinations of them under a single contract; two, the developer will be given a role in carving out the acreages for competitive bidding with the benefit of the National Data Repository information and, last, the Centre will get revenue share based on a two-dimensional production-price matrix.
According to official sources, the proposed reform is expected to address the persistent stagnation in India’s energy production by giving a fresh impetus to investments. The nine rounds of awarding of acreages under the New Exploration and Licensing Policy (Nelp) that spanned the last 15 years led to investments of close to $22 billion (which is moderate under the global hydrocarbon-industry standards) but production has barely improved. The most notable Nelp discovery, the KG-D6 field, got embroiled in a row and faced a steep decline in output after looking very promising initially.
A principal improvement that the new policy will facilitate is the shift from the cost-recovery to the revenue-sharing model. The extant production sharing contracts allow the regulator to do cost audit and this has allegedly been intrusive. It led to alleged instances of developers jacking up the costs in order to defer a higher share of profits for the Centre and created a web of litigation/arbitration.
In the proposed regime, there won’t be a need for the government and regulator to bunch blocks (as in the NELP regime) and then put them up for bidding; rather, the bidding and award of acreages will be a continuous, demand-based process.
The perceived advantages of bidding based on a revenue-share promise, also proposed by the C Rangarajan Committee during the last government’s tenure, is that it will provide more transparency and reduce regulatory interference in the functioning of the developers, the sources said. In addition, the model would safeguard the government’s interest in the event of any windfall gains arising out of higher-than- estimated output from unexpected finds.
Under the revenue-sharing mechanism, explorers would need to share income with the government from day one of production, depending on the level of the output and with linkage to the price. So the government’s remuneration is de-linked from the quantum of investment made in developing the block and extracting the hydrocarbons. Under the present regime (applicable for blocks auctioned under NELP), an explorer gets to recover all costs incurred during the exploration cycle (the spending on the minimum work programme) before sharing profits with the government.
“The rights would be given to the explorer to find any form of hydrocarbon in the specified area and there would be a uniform licensing policy. Moreover, in the new regime the exploration company would review the geological (NDR) data and seek carving out of blocks accordingly,” a senior official told FE.
Dilip Khanna, partner (oil & gas) at EY, said: “The need for such policy arises from the past instances where overlapping resources were found in certain blocks awarded, which necessitated different contractual conditions and resulted in a long-winded exploration and development process. A uniform licensing policy would integrate contractual provisions for exploration & production of all kinds of hydrocarbon resources, unlike the current PSCs that only cover conventional oil and gas formations”. He, however, added that the risk-reward equation needed to be balanced and, in some cases, production sharing contracts could work well.
According to the sources, the petroleum ministry’s proposal would be sent to CCEA after receiving inputs from stakeholders in the government, including the finance and law ministries. They added that the NDR, being set up by the Directorate General of Hydrocarbons (DGH), would store 2D and 3D data of the sedimentary basins and would be fully functional by March, 2016.
The government has so far awarded 282 exploration blocks, which include 28 before launch of NELP auctions. These went to state-run firms such as ONGC, Oil India, GSPC and also private-sector companies like RIL, Cairn India, Essar Oil, BG, ENI, Santos, BHP Billiton and HOEC, among others.
Under the nine rounds of NELP auctions held so far, the committed exploration investments were $11.73 billion but $12.51 billion have been actually expended. In addition, an expenditure of $ 8.81 billion has been incurred by the contractors for carrying out development activities mainly, drilling and setting of production facilities.