Discovered small fields: Govt may extend bank guarantee relaxation

The Centre is in favour of extending bank guarantee relaxation to discovered small field (DSF) operators. With crude oil prices crashing and most DSF assets nowhere near production, DSF players had asked for a 75 per cent cut in bank guarantee commitments to free up working capital. This request was granted till February 2021.

Officials in the know say this re­laxation was given during the first wave of the Covid-19 pandemic. “With the pandemic continuing, we are likely to extend this relaxa­t­ion,” a top oil ministry official told Business Standard. To improve pro­ject execution, the petroleum mini­stry will also launch a dedicated on­line project management cell where developers may voice their concer­ns. “We will review the bottlenecks they highlight on a monthly basis,” the official added.

Five years after the first DSF auctions for hydrocarbons, project de­v­elopers continue to face multiple issues. Until now, none of these discoveries had begun production. Executives from many new ent­r­ants to India’s upstream oil and gas exploration sector blame this on delays in clearances and faulty data.

“The mission to exped­ite domestic production is being hampered beca­u­se of delays in policy decis­i­ons,” said D N Singh, secre­­tary general, Association of Di­s­co­vered Small Field Operators. “There is a need to become adept at the new realities of the oil and gas sector,” added Singh, the CEO of Ganges Geo Resources, a Mumbai-based oil and gas enterprise that won five contract areas in the second DSF bid round held in 2019.

According to oil ministry offic­ials, 42 petroleum mining leases have been granted for production from DSF blocks. The grant of the leases implies that the operator can start production. Besides, it is estimated that around eight blocks have been declared unfeasible for hydrocarbon exploration until now.

DSF and vision

Under the DSF-I (2016), the Ministry of Petroleum and Natural Gas offered 67 pre-explored small and marginal fields termed as 46 contract areas. These were then estimated to have 625 million barrels of oil in place and 2 million standard cubic metres per day of gas reserves.

For perspective, India imports 1656.58 million barrels (roughly 226 million tonnes, or mt) of crude oil every year. This comprises around 84 per cent of India’s total crude oil requirement. While the quantum of assets auctioned under DSF is much lower than the country’s consumption, any attempt to boost local supply is in line with Prime Minister Narendra Modi’s vision to lower import dependence.

In March 2015, Modi had set a target of lowering India’s crude oil import dependence by 10 per cent, from 77 per cent then. This target was to be achieved by 2022.

Come 2021, the consistent dec­l­ine in domestic production and sustained increase in fuel demand has pushed up crude oil import depen­d­ence. The import levels now are about 10 per cent more than 2015.

The goal of the DSF auction exercise was also to let public sector undertakings — Oil and Natural Gas Corporation (ONGC) and Oil India (OIL) — focus on larger fields, while the smaller ones would be given to new players who want to test the waters. In addition to freeing up capital for deployment in more lucrative assets, ONGC and OIL also managed to get rid of less prolific contract areas, according to their estimate.

DSF-I saw 17 first-time small and medium private entrants to India’s oil and gas exploration sector.

Concerns and delays

To prevent non-serious players from gobbling up the assets on offer, the DSF bid rules mandated a minimum work programme criterion as an award parameter. This largely means that companies that promised to drill more wells have a better shot at winning the blocks on offer. In addition to the drilling work was the mandate to start commercial production, failing which the contract area would stand relinquished. There was also a strict timeline for project implementation.

These have become major concerns now for some of the DSF players who have sought a relaxation in the timelines for honouring their commitments. There have also been requests to change the methodology for the government’s revenue share calculations.

“New companies that have bid for these blocks do not completely understand the complexity of upstream operations when they enter the business. They generally hire consultants whose only priority is to ensure their clients win the blocks. This leads to them making tall claims (of minimum work programme and revenue share commitment) while bidding to win the blocks,” said an executive from a company awarded a DSF block.

“It is later on when the new developer faces reality, they fret. Delays in environmental clearances and encroachments are major issues, too,” he added.

The second round of DSF bids were called in August 2018. There were 25 contract areas covering 59 discovered and pre-explored oil and gas assets with 190 mt of oil and gas reserves. This auction saw 11 new small and medium private first-time entrepreneurs being awarded 23 contract areas.