1. Getting the most out of existing oil fields

Getting the most out of existing oil fields

If India continues with the current policy, the production requirements for 2022 will be much larger and the climb more steep

By: | Published: October 15, 2015 12:20 AM
It is desirable to adopt an ad valorem cess rate which is a more progressive and efficient mechanism given that both the government and producers would be able to capture value from oil price movement. In addition, it will spur investments even in low oil price environment.

It is desirable to adopt an ad valorem cess rate which is a more progressive and efficient mechanism given that both the government and producers would be able to capture value from oil price movement. In addition, it will spur investments even in low oil price environment.

In a previous column (FE, October 3, goo.gl/HJ7aRn), it was clear that for meeting the prime minister’s target for Amrut Parv, India will have to set the objective and focus on extracting the last barrel from existing fields/discoveries, bringing the maximum possible number of blocks under exploration in the shortest time,  and making the terms attractive for the private sector to ensure higher investments.

The existing discoveries can be classified as development not started; regular production; maturing; and terminal.
‘Development yet to start’ implies a technical delay, or lack of commercial attractiveness or slow regulatory/approval process speed or complexity. Each has a different way forward.

Discoveries proceed by establishing adequacy of reservoir size and commerciality through the approval of field development plan (FDP) and then actual implementation on ground happens. Any delay in the chain is because of lack of clarity on requirements, inadequacy of information provided by operators, repeated asks, rigidity of approval authorities, etc. The Directorate General of Hydrocarbons (DGH) needs to provide more granular detail on what it is seeking, classified by the type of field, as well as accept that plan is a ‘best estimate’ and not a firm commitment.

Production estimates are a derived number, for which the DGH itself has the raw data and can easily establish that the techniques used for estimates are robust as per industry practice. Massive penalties for deviations from the projected numbers become counterproductive. However, deadlines for approval can expedite the process. As is done globally, making FDP a quick consultation between the operator and the regulator helps have a grip on technical systems. The operator has so much skin in the game that approval is often of secondary importance. India can gain much time by adopting a similar system.

Sustaining or increasing production from existing fields raises many issues. Even though India is energy-deficient, it discourages additional exploration in producing (ML) areas by requiring additional approvals for drilling wells and ring-fencing these—as a result, the fiscal terms for the producer lack in appeal. Drilling a new well costs money, and reduces current income for both the government and the operator. In India, through a new policy, the government has created a ring-fence to pass on the risk of an unsuccessful well to the operator. As a result, such exploration becomes quite limited, and the challenging-to-extract oil remains underground. Policy then clearly discourages additional exploration and prospecting. This needs to be addressed to stabilise and augment production.

To remain healthy, oil and gas fields require additional capital expenses during their life. For example, improved oil recovery (IOR) and enhanced oil recovery (EOR) are much bandied terms in the industry. Their efficacy is seen all over the world where the recovery factor from the reservoir has been increased significantly. India needs a similar increase. It is achievable in the seven years available before the year of Amrut Parv. Many jurisdictions even have tailor-made incentives to maximise economic recovery from the fields. However, some of our fiscal policies do not leave adequate capital on the table, and need to be reviewed. Consider, for example, cess and gas prices. Most energy-deficit countries are moving away from production-based taxes given that they are regressive. India adopted a progressive policy by removing cess from NELP blocks. Even a progressively declining cess rate for old fields (nominated and pre-NELP contracts) was recommended to create a level-playing field over time. However, financial appetite trumped the energy security and cess rates have been progressively increased. In today’s price scenario, cess weighs in above 20%—a staggering load by any account. We have increasing dependence on fields already in production, nearly all of whom are paying large cess. Little is left on the table, particularly in the low price era. It is wishful thinking that huge additional commitment can commercially flow into new exploration of old or new acreages. It is desirable to adopt an ad valorem cess rate which is a more progressive and efficient mechanism given that both the government and producers would be able to capture value from oil price movement. In addition, it will spur investments even in low oil price environment.

The PSC provided for an arm’s length determination of gas price. Thereby, it not only gained some parity to free market oil price but also set down the commercial risks in terms that the exploration companies understand and are equipped to handle. In a long saga, the actual price provided to the industry is now a formula-driven derivative, which has no correlation to its replacement fuels in India. Once again, the immediate or perceived financial gains have trumped, in the process giving a poor reputation to the sanctity of contracts and bringing many fields on the verge of commercial misadventures. Continuation of the policy again assures little room to sustain or expand production. This problem is further accentuated in low market price era, where there is no reserve to take care of lean times and continue production.

While the extension policy is not yet finalised, all indicators point that the government wishes to increase its revenue share, a model sometimes followed by energy-exporting domains such as Libya. Indian fields at the time of extension are mature and often marginal. Such terms are likely to cause exits, leaving extractable hydrocarbon molecules underground. To ensure all extraction, the government needs to declare a policy to extend the life of contracts to the economic life of field, and maintain field incentivising terms depending on a predetermined decline and challenge formula. The earliest possible positive move in this direction will encourage many fields moving towards contract expiry to invest substantial amounts in upgrades and increased production. This again will add to our 2022 numbers. It is time to reap the benefit.

A curious phenomenon has been witnessed in upstream. Despite knowing that certain decisions or the lack thereof will lead to production shut down, such a path has been followed. Perhaps it was assumed that the production was too small to make any difference. For India, no production is “small production”. In the US, oil stripper wells (very marginal volumes) accounted for over 16% of total oil and 11% of natural gas produced (latest available data). We must respect the foot soldiers of Indian oil industry and not shut them down. It is likely to collectively add a significant tonnage. A similar delay through an alternate route happens when an adverse arbitration decision is frivolously appealed against. It is true that the adverse impact is postponed to happen on someone else’s watch. The country, meanwhile, loses the time to develop and expand production so held up. An unbiased review of outstanding disputes, appeals and withdraw from weak positions may interestingly lead to increased production.

Maturing fields don’t have to die. These can live in good health for a long time, if our “old-age well care” is to world standards. The UK government announced new incentives for maturing fields (Woods Report) a couple of years ago. Our policies in such cases are counter-intuitive, more like an energy excess country. In addition to the US example of stripper wells, there are now companies which specialise in producing from terminal fields. These work out rehabilitation schemes and with the government providing appropriate fiscal relief to make it possible.

The potential to devise policy initiatives to operationalise shut and shutting fields, announce forward-looking extension policy, incentivise challenging production, rationalise cess and taxes to put more money in exploration companies to intensify work and well intensity, to achieve reversal of production trends, and contribute to the production in 2022 is an under-explored avenue. It need not be so. The only clarity so far is that if the current policies continue unhindered and the fields are exploited less than they can be, then the “new” production requirements for 2022 will be much larger and the climb more steep.

The author is secretary general of AOGO. Views are personal
ashu.sagar@gmail.com

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