 "Mayank Ashar")
In three months from now, India will witness open competitive bidding for the development of small and marginal oil and gas fields. The bidding, which is taking place four years after the last round for the auction of conventional oil and gas blocks under the New Exploration Licensing Policy (NELP), will be the first of its kind in the country's energy sector.
The Union cabinet, chaired by Prime Minister Narendra Modi, last week approved the Marginal Fields Policy, laying the ground for the auction. The event is expected to kick-off the much-needed revival of the exploration effort to ramp up India's stagnant crude oil and natural gas production. It is being seen as a precursor to the next NELP bidding round. Its success is important also because the energy-starved nation is dependent on costly imports for over 80 per cent of its energy needs.
If all goes well, at the end of the bidding round India will have allocated 89 million tonnes of precious hydrocarbon reserves worth Rs 77,000 crore, which have been lying locked in 69 marginal acreages, to global firms with the technical know-how and the economic muscle to take up challenging exploration assignments.
These 69 blocks were earlier relinquished by India's national oil companies, including the largest explorer, the Oil and Natural Gas Corporation, and Oil India as they were found to be commercially unviable. No wonder then that Petroleum Minister Dharmendra Pradhan said the upcoming policy will mark a "paradigm shift" in the contract regime for the hydrocarbon sector.
The policy is ambitious. Apart from the competitive bidding, it allows pricing and marketing freedom to companies. It calls for the shift from the existing production-sharing contract (PSC) regime to revenue-sharing and market-linked pricing, besides offering exemption to companies from hefty cess on crude production. It also marks a change towards implementing a Unified Licensing Policy. This means that the licence granted to the successful bidder would cover all hydrocarbons found in the field. As these are already discovered acreages, the winning bidder would have to start production within three years for on-land discoveries, within four years for shallow finds and within six years for deep-water fields.
A game-changer?
But is the policy really the spinner the government would have us believe? What are the chances of its success, given the current scenario where global oil prices have been battered to historic lows of sub-$50 per barrel as compared to the peak of $147 per barrel in 2012? Would this not significantly shrink the returns for companies? And, most important, would it have the potential to impact India's future hydrocarbon bidding rounds in a way that draws global investors beyond the bureaucratic hurdles, legal tangles and administrative delays that have so far marred the development of the exploration and production sectors? Experts say, yes.
"The government has made the regime very attractive with free pricing of the output and with exemption from levies," says Debasish Mishra, senior director at Deloitte. "Although the oil price is low now, someone bidding for this will see production starting in a couple of years and will have an eye on the long-term price of oil and gas. Also, since this is a revenue-sharing regime, the level of regulatory scrutiny will be less and that is attractive to investors." He adds that companies would definitely be helped as the fields are already discovered, which means there will be fewer geological surprises.
According to Salil Garg, director-Corporates at India Ratings, the extent of viability will depend on the cost dynamics and, thus, vary from one field to another. "Low crude prices do impact the viability of new developments in oil and gas," he says. "The developers would need to estimate three key variables in advance before placing a bid: D&P (development and production) costs, quantum of the hydrocarbon extractable and the market prices."
Deepak Mahurkar, leader of Oil and Gas at PwC India, adds that the current scenario of low crude price would work in favour of investors. "It is a risk-free situation for investors as they would be bidding when the government would expect bidders to consider not very high oil prices. Whereas, as and when prices go up, it will be an upside," he says.
A divided house
On the issue of whether revenue-sharing is preferable over the cost-recovery model of the existing PSC regime, expert opinion is divided.
The PSC regime led to complaints from operators that there were regulatory delays in getting approvals of Field Development Plans. The Comptroller and Auditor General of India and other government agencies had also blamed the operators of gold-plating and showing inflated investment with the aim to pocket a larger share of the profits.
At the same time, revenue-sharing contracts have generally been more amenable for businesses where upfront costs and output are fairly ascertainable. That, however, is not the case with hydrocarbon discovery.
This debate aside, experts are unanimous about the possibility that the government might be viewing the upcoming auction as a test before it launches the tenth NELP round under the revenue-sharing model.
"In all probability, the government is trying to test the waters," says Mishra. "It will be moving towards a revenue-sharing mechanism in future NELP and other licensing regimes as well." That utility, however, would be limited as marginal fields are small sized and their bidding experience might not be wholesome.
He adds that the company has no problem with the formula as such, whether it is production or revenue-sharing. "What matters is the return to the investor. There is no such thing as a free lunch for the government."
