Reliance Industries Ltd is facing red tape, having brought in BP to be its gas exploration partner. But the Mumbai-based conglomerate is not alone when it comes to facing excessive bureaucratic regulation. A number of companies in the oil and gas sector have tripped at the government’s doorstep, be it Norwegian oil major Statoil and Brazil’s Petrobras in their proposal to tie up with Oil and Natural Gas Corporation or BHP Billiton, which continues to wrangle with the defence ministry over the blocks it won in an auction.
Even a big industrial house like Vedanta, with its experience of dealing with officialdom, had to pace the corridors of power for 16 months to complete its buy-out of Cairn India.
Cannot afford delays
Experts widely agree that India, being a hydrocarbon-deficit nation, cannot afford to make investors wait long for approvals. Only, official circles have yet to absorb the truth. “We make various efforts to showcase the country as an investment destination in oil and gas but the urgency and seriousness in facilitating investment proposals and deals is lacking,” says former ONGC chairman R S Sharma, now head of a hydrocarbon committee of industry lobby Ficci. “A message has to go to global investors that we do not only invite investments, but also facilitate”.
It is clear that such signals are not going out. Statoil and Petrobras quit ONGC’s K-G basin gas block last year after government delays in approving their participation in deepwater acreage. BHP Billiton, which bagged seven blocks with GVK in the seventh round of New Exploration Licensing Policy (NELP) and three independently in the eighth round has not been able to begin work. For, the defence ministry has objected to it, stating that several of the areas awarded fall inside the naval exercise area. Contracts for the seventh round were signed in December 2008, while the eighth round contracts were inked in June 2010.
There are other instances where foreign companies did not make much headway in Indian oil and gas. Australian explorer Santos Ltd’s subsidiary was awarded a 100 per cent working interest and operatorship of two blocks, covering about 16,500 sq km in the Bengal Basin. This was in the sixth round of NELP. Santos signed a production sharing contract (PSC) for the blocks in March 2007 and began its first phase of exploration from May 2007. But a maritime dispute with Bangladesh checked access to most of its blocks. Finally, in February 2009, the seismic operations were suspended.
Arbitrary interpretation
A lack of clarity over the exploration blocks being offered and arbitrary interpretation of the PSCs are two grey areas the government needs to tackle. In the recently concluded Cairn-Vedanta deal, the interpretation of PSCs to impose cost recoverability of royalty on the consortium came to the fore after Vedanta decided to buy a majority stake. ONGC had been banking on an assurance from a Group of Ministers (a government committee) that royalty would be reimbursed by the government.
Sameer Bhatia, senior director, Deloitte Touche Tohmatsu India, said the model PSCs in India are well developed and considered a model by some developing countries. However, recently, there have been instances where the interpretation of certain clauses has raised doubts. “The government should keep the nation’s interest paramount in all regulatory matters,” says Bhatia. “They must ensure no policy adversely impacts foreign investment sentiment into India. It should invest more in initial surveys, and provide potential bidders with reasonable information on prospective blocks before inviting bids in the NELP rounds.”
Ficci’s Sharma wants the government to help global investors, something not happening now.
He cites an incident where he, as ONGC chairman, wrote to the petroleum ministry when there was a delay in clearance to Statoil and Petrbras. Sharma wrote that red-tapism was making international oil majors apprehensive over sharing exploration risks in acreages where they pick up stake. While the farm-out agreements with Petrobras and Statoil were signed in August/September 2007, the state-owned oil and gas major could not initially sign a joint operating agreement with both foreign companies. For, it took nine months to obtain approval on assignments of participating interest, and then another one year in signing amendment to the production sharing contract from various parties, including the government.
