Has India turned over a new leaf as far as exploration of hydrocarbons is concerned?
Has India turned over a new leaf as far as exploration of hydrocarbons is concerned? That’s the question being asked regarding the Union government’s Hydrocarbon Exploration and Licensing Policy (HELP), which replaced the decades-old New Exploration Licensing Policy (NELP) earlier this year. Aimed at incentivising production, HELP offers pricing and marketing freedom for hydrocarbons produced under the new contractual and fiscal regime. It also brings in a uniform licensing model — allowing drilling of all forms of hydrocarbons, from oil and gas to shale, to be done under a single contract — and replaces production-sharing with a revenue-sharing mechanism.
Coming up with a new regime was clearly the need of the hour. India imported 202.9 million tonnes of crude oil in FY16, 7.11% higher than the 189.43 million tonnes in FY15. In August, the demand for petroleum products witnessed a jump of 11%, the highest in the last five years.
The International Energy Agency has said that demand for energy in India would be close to that in the United States in another two and a half decades. The Paris-based organisation has forecasted India’s oil import dependence increasing to above 90% by 2040 from around 78-80% now.
To make matters worse, domestic production of crude oil has witnessed a reverse trend. Crude output in FY16 dropped to 36.95 million tonnes, as against 37.46 million tonnes in FY15. This has happened despite India unveiling a programme to auction oil and gas blocks 17 years ago, with the goal of boosting investments in the hydrocarbon sector and achieving energy security.
Through the new policy, the Narendra Modi government has attempted to make good its promise of reforming India’s oil and gas sector. Talking to FE,
Petroleum Minister Dharmendra Pradhan expresses confidence of the decisions taken by his government pushing the production of hydrocarbons northwards in India. In the past two months, Pradhan has addressed investors at roadshows across the United States, United Kingdom, Singapore and West Asia, apprising them of the government’s efforts to improve the ‘ease of doing business.’
As a prelude to HELP, India is auctioning 67 discovered oil and gas blocks. Nearly 28 decisions for the oil and gas sector have been taken by the Narendra Modi government since it came to power in May 2014. These have created a climate conducive for investments in India, feel industry watchers. “Apart from the fundamental shift from a production sharing regime to a revenue sharing mechanism, the new policy facilitates open acreage licensing and unified licensing. All these provide a lot more autonomy and flexibility to the operator. The enthusiasm of the investors for these changes will be tested in the next bidding round for discovered small fields,” says Debasish Mishra, partner (consulting) at Deloitte Touche Tohmatsu India LLP.
Terming the move to allow market pricing of energy ‘meaningful progress’, Kotak Institutional Equities has said, “We believe economic reforms will be important for the Indian market to sustain itself, in case global factors were to turn adverse. The government has achieved significant progress in reforms in certain areas.”
The government has also announced important changes to incentivise producers operating under the preceding regime. First, there will be marketing and pricing freedom for gas drilled from difficult geologies, including deep-water, ultra-deep and high pressure and high temperature areas. Second, for certain categories of blocks extension of up to 10 years would be allowed subject to increases in the profit share of the government by 10%.
India Ratings & Research has said opting for a formula-linked ceiling price for deep-sea-water gas as the government has done is in keeping with its goal of increasing domestic production in the country, which has fallen to 90 mmscmd in FY15 from the highs of 143 mmscmd in FY11.
The government has also incentivised deep-sea drilling by way of concessional royalty, with no royalty being charged for the first seven years and thereafter a 5% royalty for deep-water areas and 2% in ultra deep water. India Ratings notes that given the higher costs of production and risks associated with deep-sea drilling, developers found it commercially unviable to extract gas from such sites. Nearly 190 bcm or around 35 mmscmd of gas reserves (15-year production profile) can be better tapped from the change in policy.