Oil exploration: Legacy policies for upstream need to be revisited

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Published: July 22, 2019 1:37:13 AM

Not only is the inimical policy continuing, but it is understood that it is being interpreted even more rigidly by making the fence tighter, thus increasing risk and reducing exploration.

Yet despite many representations to revisit the policy and bring it in line with professed objectives, the policy continues, and current operators continue to suffer.

It is conventional wisdom that if existing customers are happy, they repeat their custom, increase their business and provide a beacon to allure new customers. When the government seeks new bidders for residual unexplored acreage in India, the most vigorous participants are likely to be the existing PI (participating interest) holders who are enthusiastic and the new companies reassured and emboldened by them.

The government has introduced welcome changes in the policies for new investments in exploration and production of domestic oil and gas. These make the contract regime more compatible for the challenging factors below the ground. The current operators, however, work primarily on NELP, pre-NELP and nominated acreage. Sadly, the legacy issues impacting these regimes still exist. Most producers are mired in these legacy issues. This impacts their future investment plans.

So, how did adverse situations arise, and why do the issues persist for years?

Take one example—the continued exploration in a producing field.

Once a discovery is found to be commercial, two distinct activities begin. One, to bring the discovery to production at the earliest. Two, to extend the reservoir limit and find additional reservoirs around the first. It is known that areas around existing fields have higher prospectivity. Additional discoveries help maintain a healthy reserve-to-production ratio, sustain production for a longer period, improve facilities’ utilisation and lower costs. These upsides exist globally, and are part of normal business operations. Such exploration ensures that all subsoil oil and gas is discovered and extracted, which, theoretically, should be of prime importance to a hydrocarbon-deficit country like India.

Exploration is a petroleum operation, and all petroleum operations are permitted in the PSC (production sharing contract) without let or hindrance. But, in India, the government decided to object to additional exploration, subsequent to the exploration period designated for the first discovery. Repeated representations by the industry resulted in a policy guideline in February 2013, where such exploration was permitted but was ring-fenced till the FDP (field development programme) approval post the commercial discovery. As a result, the entire exploration risk, which was earlier shared between the operator and the government, was transferred to the operator alone. It also increased the threshold for developing a field in case of exploration success.

What is the result of such a policy? The operator risk has increased manifold, and it shall now only attempt those additional explorations where costs and risks are relatively low. Consequently, many potential oil and gas resources that might otherwise be discovered and subsequently produced remain unexplored. Operators’ income from the field also takes a dip. An unintended consequence is the drop in funds available for new bids. Actual experience shows that the amount of such additional exploration in ML (mining licence) areas has been minimal since this policy was brought. Could we have discovered and produced more oil and gas? Perhaps yes.

Policy is not a contract. It can be changed, particularly if the change furthers the objectives of contract, and is in the interest of both the parties. In this case, if the policy is changed and ring-fencing removed, then all exploration costs shall be shared between the operator and the government, as was originally in the PSC, versus the entire cost being borne by the operator under ring-fencing. An unsuccessful exploration shall be a revenue-negative event for both the operator and the government (it must be noted the operator is bearing the entire cost, and loss to the government is only notional through reduced anticipated revenue). Given the scarcity of capital, the operator undertakes such exploration only after due diligence, but it accepts these losses if they occur. On the government side, the policymaker has to accept some revenue-adverse events may occur, but are justified because India needs to explore more. The probability favours the government getting much higher oil and revenue. This hiccup has so far proved insurmountable, particularly in view of past CAG reports.
The NELP (New Exploration & Licensing Policy, 1999), under which these contracts were signed, states expedited exploration and maximisation of production as the objectives. The previous government declared “production and not revenue” as the primary consideration for decision-making, which, if effective, would immediately reverse this policy. Yet despite many representations to revisit the policy and bring it in line with professed objectives, the policy continues, and current operators continue to suffer.

After doing a root-cause analysis of the above and many other policies that are similarly comatose, the industry requested the government to notify a policy statement asserting the primacy of expedited exploration and maximisation of production rather than revenue as the objective. The logic formed the basis of some policies issued in February 2019. But, the policy statement, as requested, was not notified.

Hence, there is no protection for the decision-maker if any amendment to the existing policy results in a theoretical adverse revenue to the government or a big gain to the operator—even if the same happens because of a big discovery and additional oil production. It is likely that in the absence of such a policy statement, the above and many other policies that require a revisit, to bring all processes in line with current and updated thinking, will not happen.

Not only is the inimical policy continuing, but it is understood that it is being interpreted even more rigidly by making the fence tighter, thus increasing risk and reducing exploration.

PM Narendra Modi has thrown a challenge to the industry to reduce imports by 10% by 2022. To achieve this, policies also must converge to extract the last subsoil molecule of hydrocarbons. To facilitate this, all legacy policies giving primacy to revenue need to be revisited, and demotion of revenue as only a secondary or tertiary objective needs to be notified. Once the processes of current E&P operators are consistent, not only will production increase, but will also release the spirits to boost participation from current and new companies.

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