Opening up exploration

New hydrocarbon policy to be welcomed, with caution

The decisions taken on hydrocarbon exploration and pricing by the Union Cabinet on Thursday are by and large welcome, in that they should encourage greater private sector investment in this vital activity. India is not well-served at the moment in terms of natural gas and petroleum resources; it has to import a vast majority of its requirement, leaving the country at the mercy of world prices and threatening the stability of its external account. This problem has been exacerbated of late by contractual disputes between the government and various licensees. Earlier contracts, based on production sharing after cost recovery between the government and the private sector contractor, have proved to be difficult to monitor and have led to disputes. Among other issues in these contracts, operators had an incentive to "gold plate" their costs, and thereby reduce the amount provided to the government. This has now been replaced by a revenue-sharing model, which is easier to administer. This is a welcome move.

It is possible that industry will be more pleased with other aspects of the policy. A new licensing system is now being introduced, which will mean that the concessionaire in a particular field will be able to explore for both conventional hydrocarbon resources like petroleum as well as unconventional ones like shale gas and shale oil. "Open acreage" is also promised, so that companies can bid to explore certain blocks and then the hydrocarbons regulator will subsequently examine their geological findings. This means that companies can start to look at blocks that have not already been put out for bidding by the government.

While there is much to welcome, it is important to remember that the cost recovery and production-sharing method had its advantages in minimising risk to the explorer. If investments are to fructify in the changed regime, it is necessary to ensure that other sources of risk are minimised - for example, companies should not be expected to specify profiles of their hydrocarbon discoveries in advance to their actual production, given geological uncertainties. But overall, several long-pending issues have been addressed.

Perhaps the most debatable of them is the grant of pricing freedom, subject to a cap, on deep-water and other hydrocarbon discoveries in difficult areas. This has been extended naturally to future discoveries - but also to reserves discovered under previous contracts which had not started producing at the beginning of this calendar year. Some will see this as a windfall gain to the concessionaires in question, including Reliance Industries Limited. However, the government has rightly included the caveat that the new regime will only be available if arbitration or other legal proceedings currently in progress are settled or withdrawn. It is notable that, on Thursday, Reliance's stock price did not trend upwards. The overall impact of the increase in gas price on downstream sectors will have to be watched. At present the gas price is $3.82 per million metric British thermal units (mmBtu); what the new formula might take it up to is not yet clear. But the effects of such decisions on medium-term investment and on prices, however, remain to be seen.