70 blocks of gas & grand promises

Written by Kaushik Ranjan Bandyopadhyay | Updated: Aug 29 2009, 05:03am hrs
After a string of delays and cancellation of road shows early this year, attributed primarily to the delay in clarifying tax holidays for gas production, the Ministry of Petroleum and Natural Gas (MoPNG) eventually kick-started the grand round of New Exploration Licensing Policy (NELP-VIII). Its grand because 70 blocks, the highest so far, are being offered for natural gas exploration, besides the 10 blocks offered under the fourth round of coal-bed methane exploration policy. The 70 blocks have a diverse spread and include 24 in deep-sea, 28 in shallow water and 18 on land.

Besides the widest possible spread of acreage, both onshore and offshore, the terms of bidding have also been sweetened this time. This is intended to allow for more aggressive and widespread bidding by the domestic investors, but also to draw the attention of the biggest foreign investors who have largely shied away from the previous seven rounds. In a heated debate recently, the

Directorate General of Hydrocarbon blamed the RIL-RNRL dispute for being a primary deterrent to foreign investment. In rebuttal, it was said that foreign investors were holding back because of the MoPNGs failure to deliver a well-defined, transparent and consistent policy regime.

In the midst of this ongoing dispute, the FM initiated a significant move in his latest budget speech. He announced a seven year tax holiday (of income tax on profits) for production and sale of natural gas from oil and gas blocks to be awarded under the current NELP round. The government believes this move will be instrumental in luring substantial foreign investment to gas exploration and production. Other attractive incentives include provision for fiscal stability, no upfront payment required during the exploration period, provision of foreign participation up to 100%, and freedom to contractor for marketing oil and gas in the domestic market. The last one, albeit not new to NELP, comes with a corollary: MoPNG has clarified that natural gas sales will need its prior approval. Quite surprisingly, this is not explicitly mentioned in the NELP-VIII terms of offer.

Previous NELP rounds have attained the character of a duopolistic game, dominated by ONGC and RIL who have successfully grasped a lions share of the acreage offered so far and are planning to bid aggressively even in the current round. A striking feature of NELP-VIII, however, is the willingness shown by the Andhra Pradesh (AP) government to participate in the bidding. The state is on a quest for optimal utilisation of oil and natural gas from the KG basin, reportedly with the added intention of creating employment for its youth. Its desire to participate became clear when CM YS Rajashekhara Reddy asked two of the government corporationsAP Industrial Infrastructure Corp Ltd (APIIC) and AP State Power Generation Corp Ltd (AP Genco)to form a joint venture. Accordingly, a special purpose vehicle called AP Gas Infrastructure Limited has been set up for oil and gas exploration, with these two corporations expected to hold initial stakes in the ratio of 51:49 respectively. This joint venture would especially benefit AP Genco, which plans to augment its generation capacity threefold but has been facing difficulty in ensuring fuel supplies to a proposed gas-based power project at Karimnagar in the Telengana region.

The AP government is taking a cue from the Gujarat success story, where the Gujarat State Petroleum Corporation has struck natural gas. However, as the exploration business is fraught with risk, the AP government has decided to play safe by seeking strategic domestic and foreign partners adept at exploration and production. The APIIC has reportedly held some preliminary discussions with HPCL and ONGC besides some international cash-rich oil majors like British Petroleum and Conoco Philips. The underlying objective is to first form a successful strategic alliance, then gradually divest the stakes of the two key initial partners to a minority, and in favour of the strategic partners.

Given the diversity of the blocks offered, and especially with the inclusion of 28 shallow water blocks under NELP-VIII, the initial investment that the AP government would have to undertake would perhaps not be very highconsidering the multiple benefits that will accrue on a successful strike of oil and gas reserves. The participation of the AP government coupled with a series of successful road shows in Mumbai, Houston and Calgary might as well lead to substantial strategic foreign participation, reversing the trend of earlier NELP rounds. But besides these initiatives to address concentration in the upstream sector, the government also needs to address governance of the natural gas sector in general. Critical issues include transparency and adequate stakeholders participation with respect to investment in blocks, availability of information with respect to gas discovery, gas pricing and utilisation, and regulation in the downstream sector. Otherwise, the promises of the governments road shows will just come to grief, starving the sector of much-needed foreign participation.

The author is a senior fellow at the Asian Institute of Transport Development, New Delhi