Reliance Industries is generally blamed for its low output of oil and gas production, but some other players in the industry are also to share the blame. Launched with much fanfare, the NELP (New Exploration and Licensing Policy) has not lived up to its promise. NELP was expected to increase the country’s oil and gas production through public-private partnership.
After a slow start, the government decided to incentivise the sector through product-sharing contracts (PSC) signed under NELP 1999 which would provide for public and private companies to recover all their capital and operating expenditure from revenues. Subsequent profits generated were to be shared between the company and the government as per a specific formula. Despite de-risking the normally high-risk exploration sector there were few foreign companies interested in NELP. One of the reasons could have been the fact that Indian finds were smaller as compared to those available in the international markets.
However, even those players who signed the contracts under NELP have done little to talk about. A report in the Financial Express says that out of the 157 PSC signed under NELP between 2005 and 2011, the number of wells drilled has fallen from 60 in 2005 to nil in each of the four years between 2008 and 2011. Operators have not drilled a single well in blocks won during the NELP VII, VIII and IX rounds. Worse still is that further rounds are likely to see even lower enthusiasm as 3D seismic data acquisition has dropped from around 32,000 sq km in 2006-07 to only 1,500 sq km in 2011-12. Companies collect 3D seismic data in order to assess and bid for wells offered in NELP.
Thus it’s no surprise to see that even the few firms that came in are planning to exit from India. Mint reported that foreign firms such as Australia's Santos Ltd and Italy's Eni SpA plan to exit their oil and gas exploration and production business in India.
Various reasons, both domestic and international, can be attributed to the dismal state of the exploration sector. Primary among them is oil prices, which have been lower since their peak in 2007, thus affecting the sentiment of drilling companies. The government has also played its part in dampening the mood by removing the seven-year tax holiday given to the sector, while various agencies associated with the sector have delayed clearances to start exploration.
As many as 31 exploration blocks on both the east and west coast have been blocked as the areas offered fell under Naval exercise area, missile firing range, Navy projects, satellite launching area, international maritime boundary limit and national parks or forests. This resulted in many companies triggering the force majeure clause as the Directorate General of Hydrocarbon (DGH) had not taken prior permission from these agencies before putting it up on the block. Some of the wells offered have a high cost of production; with the current oil prices these have become unviable.
The most high-profile of all cases of NELP has been the Reliance Industries’ acquisition of KG-D6, which is now mired in controversies with the DGH. The government has appointed a committee headed by C Rangarajan to review the terms of PSCs. The panel will review existing production sharing contracts (PSC) like the one signed with RIL for KG-D6 fields, in respect of the current profit-sharing mechanism with the Pre-Tax Investment Multiple (PTIM) as the base parameter and recommend necessary modification for future PSCs. The committee would seek to rewrite some of the terms in the PSCs signed for exploration and production of oil and gas, and will not affect agreements that have already been signed.
The way things stand the panel might like to tilt the PSC balance in favour of the government, which will act as a further deterrent for further investment in the sector.
Both 3D acquisition data and the number of exploratory wells dug show that India’s oil and production is unlikely to increase any time soon. Unlike the US, which has moved away from its dependence on imported oil to shale gas, India does not have any such luxuries. India will have to continue to rely on imported fuel to meet its requirement.
One way of ensuring energy supply is to aggressively acquire assets abroad which can ensure substantial supply of India’s imports. It is here that the announcement of ONGC Videsh’s IPO gains significance. With oil prices being subdued and some oil rich African and South American countries finding it difficult to balance their budgets, it is a good time to aggressively acquire assets. ONGC Videsh with its presence across the globe can be entrusted with the task insuring the country’s energy requirement, something which its parent company has been unable to do.
