Ageing wells, govt pricing, tax policies hamper crude oil production

Production has been falling consistently over years

The eight-industry core sector output index grew by 8.2 per cent in June year-on-year (YoY). The output index rose just 0.7 per cent in October 2022. It declined 3.8 per cent in February 2021. While the output index rose sharply, grew moderately and declined in three different time sets, there is one constant thing in all of them. That is crude oil.

The crude oil output index declined at all these points in time. In fact, crude oil production index fell each month for the past five-and-a-half years barring May 2022, when it rose on a very low base of the last year due to Covid-19-induced lockdowns. The crude oil output index rose 4.6 per cent in May 2022, when the overall core output index rose 19.3 per cent. It was primarily due to a low base of 6.3 per cent decline in the former in 2021.

Before that, only in November 2017 did the crude output index rise 0.2 per cent. Before that, it grew 0.1 per cent in September 2017, 0.6 per cent in June 2017 and 0.7 per cent in May 2017. As such, barring May 2022, a rise in crude oil production rarely happened in the past six years and that too moderately.

Crude oil has an 8.98 per cent weight in the core sector index. The core sector index, in turn, has a 40.27 per cent weight in the index of industrial production (IIP). This means that crude oil output has a 3.62 per cent weight in the IIP. This also means that 3.32 per cent of IIP rose very rarely in the past six years, and that too, only moderately, except for May 2022.

In absolute terms, total crude oil production has declined for eight years till 2021-22. However, it rose moderately to 21.6 million tonnes in 2022-23 against 21.5 million tonnes in 2021-22. It, too, was due to higher production by private companies and joint ventures at 3.2 million tonnes in 2022-23 against 3 million tonnes in 2021-22. Otherwise, dominating public sector undertakings produced a bit less at 18.4 million tonnes in 2022-23 against 18.5 million tonnes in the previous year.

If we add condensate, total production declined for 13 years till 2022-23. The production fell to 29.2 million tonnes in 2022-23 from 29.7 million tonnes in 2021-22. It had stood at 38.1 million tonnes in 2011-12 since when it has been declining.

Prashant Vasisht, senior vice-president and co-head of corporate ratings at Icra, said crude oil production has been falling mainly because of the lack of any new significant finds and the natural decline in existing fields.

"There is limited upside expected from ONGC and Oil India Limited fields at present. Vedanta has announced its intent to increase in production to about 500,000 barrels of oil equivalent (both oil and gas) in four-five years time from about 142,000 barrels of oil equivalent produced in FY'23 but the extension of the production sharing contract was delayed till Oct 2022 after the initial 25 years contract period expired in May 2020," he said.

While both ONGC, OIL and Vedanta and many other companies have acquired several fields in various Open Acreage Licensing Policy (OALP) and Discovered Small Fields Policy (DSF) rounds, there is a long gestation period involved in the exploration and development of any prospective new fields, Vasisht said.

First, reserves have to be established (which may or may not happen), after which fields would be developed to bring these reserves to production, he said adding new production would happen depending upon prospective only.

In India, the last major find was done by Cairn in Rajasthan, after which there have not been any huge finds.

Additionally, pipeline connectivity is also an issue for many gas fields, especially in Rajasthan and the North East. Plus, there are law and order challenges in the North East with bandhs and blockades leading to lower-than-expected production and hampering new field development, pipeline laying, stoppage of production from existing facilities etc, Vasisht pointed out.

Anil K Sood, professor and co-founder of the Institute of Advanced Studies in Complex Choices, said exploration and development activities are among the riskiest activities in the hydrocarbon value chain.

"As we know, we do not have many large business houses in India that have the required equity capital for investing in the sector. Reliance Industries Limited, which has the required capital and the ability to raise additional capital if required, is currently working to build its consumer-facing businesses. In a way, it is trying to de-risk its business," he said.

Some of the other large firms have preferred the Engineering, Procurement and Construction (EPC) route, over equity investment, for participating even in less risky infrastructure projects, Sood pointed out.

On the other hand, ONGC, the firm that has been tasked with reducing India's dependence on imported oil, has seen its reinvestment ratio (capital expenditure to depreciation) come down from the post-GFC peak of 1.73 in FY11 to 1.57 in FY20, he said, adding in four out of 15 years, the reinvestment ratio was less than 1.

He pointed out that ONGC's contribution (direct and indirect taxes and dividends) to the public exchequer at Rs 5.84 trillion is 1.85x of its capital expenditure of Rs 3.16 trillion during this period.

Manoj Dalmia, CEO of Proficient Equities, said domestic crude oil production has consistently declined. This has been attributed to the ageing wells, he said, adding that oil exploration and production activities have not picked up in India.

The persistent uncertainties due to Russia-US tensions amid the Ukraine war, the possibility of a recession and falling exports have made it all the more important to boost domestic production in India, Dalmia said.

Sood said the government policy of timing consumer price changes to election periods is a deterrent to international and domestic private investment, mainly if the company is listed on the stock exchange or borrows from the market.

"In addition, a series of high-profile tax, pricing and production disputes contribute to increasing uncertainty associated with investment," he pointed out.

Dalmia said the Cairn Energy "fiasco" has acted as a deterrent for foreign investors.

He said the oil exploration category is a highly capital-intensive sector. He added that inflationary pressures and policy issues, such as long delays in the operationalisation of production even after an oil block is allotted, have affected the sector.

New Exploration Licensing Policy (NELP) was approved in 1999, and in nine rounds of NELP, 254 blocks were awarded. The Hydrocarbon Exploration Licensing Policy (HELP) replacing the NELP Policy was notified by the government in March 2016. Eight rounds of Open Acreage Licensing Policy (under the HELP regime) have been concluded till now in which about 144 blocks have been awarded. The ninth round of OALP is currently in progress.