 "Seeking to boost investment with upstream reforms")
Full deregulation of diesel prices by the Narendra Modi government in October 2014 and direct benefit transfer in cooking gas might have been the continuation of the policies put in place by the United Progressive Alliance government. However, the new policy package for the upstream oil and gas sector that the National Democratic Alliance government has announced are reforms it can take sole credit for if they click.
Stagnating domestic production and lack of investor interest had turned the Indian hydrocarbon story sour. So much so, that the industry was looking for not just a helping hand from the government, but also reforms that would tackle issues of pricing of natural gas, ensure sanctity of contractual commitments, assure extension of tenures and sort out matters relating to clearances. Besides, it puts pressure India's trade balance. According to International Energy Agency, crude oil production will fall 3.5 per cent annually to 0.3 million barrels a day (mbd) in 2040 from 0.7 mbd in 2013 turning India into the second largest oil importer, behind China.
With issues of retail pricing for petrol and diesel resolved, the next logical step for the government was to turn its attention to the upstream sector. In its endeavour to get back "Make in India" into the upstream sector, Union Petroleum Minister Dharmendra Pradhan announced a host of initiatives on March 10, which Mayank Ashar, managing director and chief executive officer of Cairn India, describes as "continuum of reforms".
Broadly, Pradhan made three announcements, including a comprehensive overhaul of the future contractual arrangement between the government and the companies mining oil.
For one, the Hydrocarbon Exploration and Licensing Policy (HELP) will replace the New Exploration and Licensing Policy (NELP), which was notified back in 1999. Several contracts under NELP had led to disputes. ICRA, in its report, has stated that some of NELP's features - like profit sharing, which led to close scrutiny of costs, as well as the time-consuming procedure for approval and disputes/arbitration - had affected the sentiment in the Indian upstream oil and gas sector.
"The government, by replacing NELP with HELP, has tried to address these issues while providing greater flexibility through certain key features," the ICRA report stated.
Under NELP, large discoveries have been claimed in the Krishna-Godavari (KG) Basin by three major companies - Oil and Natural Gas Corporation, Gujarat State Petroleum Corporation and Reliance Industries Ltd (RIL). However, none of these three is as yet making a mark in domestic production volumes.
Nonetheless, in about two weeks of Pradhan's announcements, government-promoted ONGC announced a Rs 34,012-crore investment, the largest in its history, for the KG basin. "The investment will be made over a period of three to four years to bring Cluster 2A and 2B into production," ONGC Chairman and Managing Director D K Sarraf said after a board meeting on March 28. "At its peak production in 2023, the field will contribute 3.5 million tonne of oil, around 15 per cent of the total oil production of 22 MT envisaged by then. Also, gas production at peak would be 5 billion cubic metre or 25 per cent of the total output," he added.
The investment plan was prompted by the different pricing mechanism and marketing freedom being notified for difficult fields. This was Pradhan's second key on March 10.
There is no fixed premium for gas produced out of the difficult fields, but the producers can now sell at a price anywhere below a cap linked to alternative fuels. At the current price, the cap has been notified at $6.61 per million British thermal units, which is more than double of the new notified price for natural gas produced from other fields (which has been set at $3.06 till September 2016). This cap makes it possible for ONGC to develop one of its three clusters in the KG basin. The investment through a field development plan has been delayed even as RIL has been producing gas from an adjoining block for seven years.
The question, however, is: will this reform package nudge the private sector to follow in ONGC's footsteps? So far, there is no public feedback from any of the major players, except Cairn India.
"ONGC will be the biggest beneficiary of this. It has already announced a capital expenditure plan for its field. Other stakeholders, including RIL, are also happy. BP has also welcomed the move," Pradhan told Business Standard in a recent interview.
The BSE-listed RIL refused to comment, saying that it is still studying the announcements. RIL's wait and watch approach is understandable, considering that the government has laid the condition that it should first withdraw current arbitrations before reaping any benefit for future production from difficult areas where it has already made a discovery.
Both Cairn and RIL have been in a rough patch with the government for some time, though both want a solution within the contracts signed by the government.
Cairn India's production sharing contract precedes the NELP regime. It is looking for an extension of its production sharing contract for its flagship block in the Barmer district of Rajasthan that expires in 2020. This is important since the company, along with ONGC (its 30 per cent partner in the block), has to plan for further investment. Cairn has also taken the government to court on the issue.
Post March 10, the company is hopeful because of the third announcement: extension of production sharing contracts. "The licence extension policy for 28 discovered fields brings in predictability and clarity for existing investors who can now take informed decisions on the future of their producing blocks," Ashar said in a statement soon after the government announcement. "The industry will get more clarity. We are now hopeful for an early resolution of PSC [production sharing contract] extension of Rajasthan block and realisation of fair price for our crude. This will also help India take a step closer to energy security."
The extension for the 28 fields has, however, come with a clause: a 10 per cent increase in the government share in petroleum from these fields with which Cairn might not be comfortable.
In the complex upstream world of petroleum, all these announcements are a positive development. However, with conditions like the withdrawal of arbitration and pricing control for gas production still in government hands, are these reforms tempting enough to draw sizeable fresh investment in these challenging times? That one cannot say with certainty yet.
Stagnating domestic production and lack of investor interest had turned the Indian hydrocarbon story sour. So much so, that the industry was looking for not just a helping hand from the government, but also reforms that would tackle issues of pricing of natural gas, ensure sanctity of contractual commitments, assure extension of tenures and sort out matters relating to clearances. Besides, it puts pressure India's trade balance. According to International Energy Agency, crude oil production will fall 3.5 per cent annually to 0.3 million barrels a day (mbd) in 2040 from 0.7 mbd in 2013 turning India into the second largest oil importer, behind China.
With issues of retail pricing for petrol and diesel resolved, the next logical step for the government was to turn its attention to the upstream sector. In its endeavour to get back "Make in India" into the upstream sector, Union Petroleum Minister Dharmendra Pradhan announced a host of initiatives on March 10, which Mayank Ashar, managing director and chief executive officer of Cairn India, describes as "continuum of reforms".
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For one, the Hydrocarbon Exploration and Licensing Policy (HELP) will replace the New Exploration and Licensing Policy (NELP), which was notified back in 1999. Several contracts under NELP had led to disputes. ICRA, in its report, has stated that some of NELP's features - like profit sharing, which led to close scrutiny of costs, as well as the time-consuming procedure for approval and disputes/arbitration - had affected the sentiment in the Indian upstream oil and gas sector.
"The government, by replacing NELP with HELP, has tried to address these issues while providing greater flexibility through certain key features," the ICRA report stated.
Under NELP, large discoveries have been claimed in the Krishna-Godavari (KG) Basin by three major companies - Oil and Natural Gas Corporation, Gujarat State Petroleum Corporation and Reliance Industries Ltd (RIL). However, none of these three is as yet making a mark in domestic production volumes.
| ROAD AHEAD |
HELP TO REPLACE NELP
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Nonetheless, in about two weeks of Pradhan's announcements, government-promoted ONGC announced a Rs 34,012-crore investment, the largest in its history, for the KG basin. "The investment will be made over a period of three to four years to bring Cluster 2A and 2B into production," ONGC Chairman and Managing Director D K Sarraf said after a board meeting on March 28. "At its peak production in 2023, the field will contribute 3.5 million tonne of oil, around 15 per cent of the total oil production of 22 MT envisaged by then. Also, gas production at peak would be 5 billion cubic metre or 25 per cent of the total output," he added.
The investment plan was prompted by the different pricing mechanism and marketing freedom being notified for difficult fields. This was Pradhan's second key on March 10.
There is no fixed premium for gas produced out of the difficult fields, but the producers can now sell at a price anywhere below a cap linked to alternative fuels. At the current price, the cap has been notified at $6.61 per million British thermal units, which is more than double of the new notified price for natural gas produced from other fields (which has been set at $3.06 till September 2016). This cap makes it possible for ONGC to develop one of its three clusters in the KG basin. The investment through a field development plan has been delayed even as RIL has been producing gas from an adjoining block for seven years.
The question, however, is: will this reform package nudge the private sector to follow in ONGC's footsteps? So far, there is no public feedback from any of the major players, except Cairn India.
"ONGC will be the biggest beneficiary of this. It has already announced a capital expenditure plan for its field. Other stakeholders, including RIL, are also happy. BP has also welcomed the move," Pradhan told Business Standard in a recent interview.
The BSE-listed RIL refused to comment, saying that it is still studying the announcements. RIL's wait and watch approach is understandable, considering that the government has laid the condition that it should first withdraw current arbitrations before reaping any benefit for future production from difficult areas where it has already made a discovery.
Both Cairn and RIL have been in a rough patch with the government for some time, though both want a solution within the contracts signed by the government.
Cairn India's production sharing contract precedes the NELP regime. It is looking for an extension of its production sharing contract for its flagship block in the Barmer district of Rajasthan that expires in 2020. This is important since the company, along with ONGC (its 30 per cent partner in the block), has to plan for further investment. Cairn has also taken the government to court on the issue.
Post March 10, the company is hopeful because of the third announcement: extension of production sharing contracts. "The licence extension policy for 28 discovered fields brings in predictability and clarity for existing investors who can now take informed decisions on the future of their producing blocks," Ashar said in a statement soon after the government announcement. "The industry will get more clarity. We are now hopeful for an early resolution of PSC [production sharing contract] extension of Rajasthan block and realisation of fair price for our crude. This will also help India take a step closer to energy security."
The extension for the 28 fields has, however, come with a clause: a 10 per cent increase in the government share in petroleum from these fields with which Cairn might not be comfortable.
In the complex upstream world of petroleum, all these announcements are a positive development. However, with conditions like the withdrawal of arbitration and pricing control for gas production still in government hands, are these reforms tempting enough to draw sizeable fresh investment in these challenging times? That one cannot say with certainty yet.