E&P looks at $10-bn foreign investment by 2010

Written by Shaheen Mansuri | Mumbai, Nov 19 | Updated: Nov 20 2008, 05:30am hrs
After years of under-investment in the exploration and production (E&P) sector in India due to the rigid government regulatory frameworks, a wave of foreign investment is expected in the near term, say experts. Relaxed rules and regulations for investors have attracted the investment, they add.

A recent Ernst & Young report on the upstream sector states the possible funding sources in the sector would be sovereign wealth funds based out of China, the Middle East and Singapore, which are seeking to acquire E&P assets in India. Also, Japanese banking institutions possessing large pools of cash are focusing on the Indian E&P sector. According to an analyst working with a Mumbai-based broking firm, foreign investments of up to $10 billion in the Indian E&P sector is expected by 2010.

Though in 1999, the government of India introduced Nelp (New Exploration Licensing Policy) to provide attractive incentives and level playing field to new entrants, including foreign companies, in the E&P sector. There is a likelihood of more investments coming in to India in the near future. After the opening up of the E&P sector, many players domestic and international companies, barring PSUs (public sector undertakings) like ONGC (Oil and Natural Gas Corporation) and OIL (Oil India Ltd), entered the arena.

Talking about the issues and challenges surrounding the sector in India, Venkatesh Prasad, partner, J Sagar Associates, said Nelp helped raise the interest of foreign players in the sector. According to a set of rules in Nelp, foreign investors are exposed to one window system for procuring and renewing licences for their joint ventures in India. Prior to Nelp, Indian E&P infrastructure was state owned but with easier rules incorporated in Nelp, foreign investors interests remain protected, said Prasad.

It may be noted that after being convinced Nelp is transparent, many international agencies like energy giants British Petroleum, British Gas and French multinational TOTAL had bid for oil and gas exploration rights in India in 2006.

Elaborating more on Nelp, Dilip Khanna, partner, Ernst & Young said, Nelp has been instrumental in attracting private sector and foreign investment to the domestic upstream segment. In the seven rounds of bidding conducted so far, 207 blocks have been awarded to various players who have made a cumulative investment commitment of nearly $10 billion. Unexplored acreage in the countrys total sedimentary area has dropped from 41% in FY 99 to 15% in FY 07.

The pace of accretion to reserves has nearly tripled. The average annual reserve accretion rate during the period 2005-07 was 317.4 million tonne of oil equivalent. This increase can be credited to larger amounts of capital being invested for exploration and development activities, which, in turn, led to major oil and gas discoveries such as the Krishna Godavari basin recently, he added.

Further explaining how the government is lending a helping hand to attract investments in the sector, Khanna said Indias growing dependence on imported crude oil remains a serious concern. The government has launched various initiatives to address this and is encouraging exploration and development of domestic oil and gas sources by providing various incentives under the Nelp.

It may be noted that sources of unconventional and alternative energy such as coal bed methane, gas hydrates, coal-to-gas, coal-to-liquid and bio-fuels are also being explored.

Nelp lays down the fundamental policy approach of the Centre. The allocation of petroleum blocks are done by auctioning via a transparent bidding procedure, said Prasad adding that various initiatives were taken to encourage private sector investment in the E&P sector, with exploration acreage offered to private companies under production sharing arrangements with the Indian government.

Almost 70% of Indias natural gas reserves are found in the Bombay High basin and in Gujarat. Offshore gas reserves are also located on the Andhra Pradesh coast (K-GBasin) and Tamil Nadu coast (Cauvery Basin). Onshore reserves are located in Gujarat and the north eastern states.

Field Report

Strategic challenges

Capitalising on opportunities: adjusting short term capital spend opportunity

Ability to operate-key vendor contracts need to be re-negotiated for favourable term

Human capital-assessing cost of employees

Financial risks

Liquidity and debt-unfavourable terms for debt raise in the current market

Tax planning-financial re-structuring can lead to tax leakage for E&P players

Counterparty exposure-risks from various trading partners

Background view

Nelp helped raise foreign players interest in the sector. According to a set of rules, foreign investors are exposed to one window system for procuring and renewing licences for their joint ventures in India

In the seven rounds of bidding conducted so far, 207 blocks have been awarded to various players who have made a cumulative investment commitment of nearly $10 billion

Unexplored acreage in the countrys total sedimentary area has dropped from 41% in FY 99 to 15% in FY 07

The government is encouraging exploration and development of domestic oil and gas sources by providing various incentives under the Nelp

Sources of unconventional and alternative energy are also being explored

Prior to Nelp, Indian E&P infrastructure was state owned