HELP is applicable to new discoveries and areas which are yet to commence production as on 1 January 2016, thus, it would include fields where the exploration is under-way but have not commenced commercial production due to lack of viable prices or other reasons. Ind-Ra notes this policy could aid in improving returns on the stuck projects thus reviving them, including Gujarat State Petroleum Corporation Ltd's KG Block Asset (KG-OSN-2001/03) Oil and Natural Gas Corporation Limited's (KG-DWN-98/2), provided the net realisable prices work out to be remunerative. Ind-Ra estimates that gas produced from these fields could fetch prices of around USD5/mmbtu-USD5.5/mmbtu in 1HFY17.
The developer will enjoy the freedom to price and market the gas produced in the domestic market with the cap on the prices as outlined in the formula. Unlike the existing contracts, where 100% of the gas allocation is decided by the government basis the gas priority allocation policy, the new regime provides more flexibility to the developers to choose the end consumers and the price at which the gas is sold to them. The government may allow marketing flexibility on 50% of the volumes produced from a field, while for the balance 50% the government could retain the right to decide the customers as per the gas priority allocation policy.
For the blocks which will be auctioned going forward, other than the pricing freedom and applicability of ceiling linked pricing, favorable features include revenue sharing with the government and applicability of the uniform licensing system which would cover all hydro-carbons.
The government has also changed the methodology for revenue sharing in the production sharing contract (PSC) under HELP. The methodology for the calculation of the government's share from the hydrocarbons produced from the fields has been shifted to the percentage share of gross revenues. This is in stark contrast to the earlier PSC, which comprised two main elements, cost recovery and sharing of profits based on pre-tax investment multiple. Thus, exploration and development (ED) costs (till the level bid for) were pass-through and first recoverable for developers. Furthermore, the investment multiple determined the government's share. Under PSC, the profit share of the government increased gradually till ED costs were recovered. Ind-Ra had highlighted in its report Market Wire: Oil & Gas Auction Policy Shifts Risks to Developers that there were differences over gold plating of costs given that the government's share of profit was calculated post the recovery of costs incurred by developers on ED. For the blocks auctioned under the earlier policy, only the pricing methodology would change while the methodology of sharing the revenue with the government would still continue to be based on profit petroleum and pre-tax investment multiple.
Under the earlier regime, the license to a particular developer was restricted to a single hydrocarbon, whether oil or gas and a separate license was required if any other hydrocarbon was discovered. However, the current policy will apply to all hydrocarbons discovered and exploited in the field, which will ease the process for developers.
In line with the intent highlighted in Budget 2017 to incentivise deep see water, ultra-deep water and high pressure-high temperature exploration and production, the government has outlined a formula linked ceiling price for such gas based on alternative fuels. The ceiling price in USD/mmbtu on a gross calorific value basis will be the lowest of the (a) fuel oil import landed price (b) weighted average import landed price of substitute fuels (0.3 x price of coal + 0.4 x price of fuel oil + 0.3 x price of naphtha) and (c) LNG import landed price. The landed price-based ceiling will be calculated once in six months and applied prospectively for the next six months. The price data used for calculation of ceiling price will be the trailing four quarter data with a one quarter lag. Therefore, the ceiling price applicable for H1FY17 will be basis the alternative fuel prices period January -December 2015. Ind-Ra opines that the cap in this equation could largely be governed by the weighted average import landed price of substitute fuels as indicated in the formula.
Ind-Ra notes, the recent step of a formula linked ceiling price for deep see water gas is in continuation with the government's objective of increasing domestic production in the country, which has fallen to 90mmscmd in FY15 from the highs of 143mmscmd in FY11. The government has incentivised deep sea drilling by way of concessional royalty, with no royalty for the first seven years and thereafter a 5% royalty for deep water areas and 2% in ultra-deep water. Ind-Ra notes that given the higher costs of production and risks associated with deep sea drilling, developers found it commercially unviable to extract gas. Nearly 190 BCM or around 35mmscmd gas reserves (15 year production profile) can benefit from the change in the policy.
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