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India on track to boost output

May 8, 2017

Concerted efforts of the government along with new policy initiatives, are well directed to enhance domestic hydrocarbon production and cut down import dependency by 10% in India. Sanjay Kumar and Subrat Sahu explain.

India is a petroleum resources deficit country and it heavily relies on import of crude oil, natural gas, and liquefied petroleum gas to meet domestic demand. At the end of 2015, India had only 0.3% and 0.8% of global proven crude oil and natural gas reserves, respectively. 

On the contrary, India is the third largest crude oil consumer with 4.5% of global share behind China (12%), and the US (19.7%). In terms of refining quantity, India is placed in the fourth position with 4561 thousand bbl/d which is about 5.7% of global share.  

India contributes approximately 1.5% of the total global natural gas consumption of 3135 MT of oil equivalent. The country’s primary energy consumption basket statistics suggests that fossil fuels dominate consumption with coal contributing the lion’s share (58%) followed by oil (27.9%) and natural gas (6.5%).  

Other cleaner fuels like hydro (4%), renewables (2.2%), and nuclear (1.2%) put together contribute about 7.4%. India’s growing economy demands higher consumption of crude oil and natural gas, resulting in rising import of fossil fuels.

Since 2009-10, import of crude oil has been on the rise due to surge in demand and stagnant domestic crude oil production (Fig.1). Crude oil import more than doubled to reach 213.93 MT in 2016-17 from 111.5 MT in 2006-07. Moreover, falling domestic natural gas production also pushed higher import of liquefied natural gas (LNG).

Crude oil and natural gas production and import in India

Reforms in E&P

To foster competition and provide level playing field to prospective companies interested in exploration and production (E&P) activities in India, a New Exploration Licensing Policy (NELP) was announced in 1997 and successfully executed in 1999. Transition from nomination based allocation of petroleum blocks to globally competitive bidding system was fairly successful in the initial years.

During NELP I–IX, a total of 360 blocks were offered for bidding and 282 blocks received 750 bids. Consequently production sharing contracts were signed for 254 blocks. However, due to multiple administrative and operational challenges; attractiveness of NELP fizzled out.

The highlight of NELP was the cost recovery model, which became the bone of contention between the government of India and contractors. As a result, next generation E&P reforms with a special focus on ease of doing business became imminent. A need for an independent regulator in the upstream sector was voiced.

With broader objectives of enhancing E&P activities, the Hydrocarbon Exploration Licensing Policy (HELP) was introduced in March 2016. The new policy regime intends to: (a) boost domestic oil and gas production; (b) attract substantial investments and generate employment in the sector and allied industries; and (c) bring in much needed transparency and stability in the E&P sector.

Uniform licensing policy provides the liberty of exploring and producing all hydrocarbons under one license. Open acreage policy enables E&P companies to choose the blocks from the designated area. To encourage investment in deepwater and ultra-deepwater projects, which are considered to be risky but rewarding, royalty rates for both oil and gas were rationalized (Fig. 2).

Rationalized royalty rates under HELP

New initiatives

Through HELP, to maximize productivity and minimize litigations, revenue sharing mechanism replaced cost recovery model. Almost a year passed by since the introduction of HELP and it is yet to deliver quick results as it needs helping hands to deliver desirable outcomes.

It is pertinent to highlight that transformational reform measures take time to sink in and show impact. The state-run Oil & Natural Gas Corp. (ONGC) is bullish on its investment plan to scale up gas production. Mint reported that ONGC is planning to invest about US$11 billion over next 2-3 years.

To revitalize the E&P sector, the government took many initiatives which include inviting bids, awarding, and signing contract for discovered small fields, and granting extension to the production sharing contracts under Pre-NELP regime.

Bidding for discovered fields

Multidimensional efforts including roadshows at national and international levels were made to attract investors to invest in 67 discovered oil and gas fields in 46 contract areas. Small discovered fields have their own limitations due to size, but the provision of exploration throughout the contract period may augment recoverable hydrocarbons.

Further, as the discovered fields come under HELP regime, the contractor with a single license may exploit all possible hydrocarbons including coal-bed methane, shale gas, oil, tight gas, and gas hydrates.

In March 2017, the government signed contract for 31 contract areas with estimated peak production of around 15,000 bo/d oil and 2 MMcm/d of gas over the economic life. Estimated total revenue would be about Rs. 46,400 billion ($736 million) out of which Rs. 14.3 billion ($223 million) will to the government’s kitty. Revival of discovered fields is expected to generate over 37500 employment opportunities.

First round of bidding for discovered fields attracted 37 new entrants of which 15 were awarded either singly or in consortium. This means, the E&P sector expanded investment horizon as the new entrants decoded the risky business.

Looking at the bidding results of first round discovered fields, the Ministry of Petroleum of Petroleum & Natural Gas is already in the process of launching the second round of bidding. Additional production from the discovered fields is expected to boost domestic production and reduce import dependency.

PSC extension under Pre-NELP

Recently, the government of India granted extension to Production Sharing Contracts (PSC) signed in the pre-NELP regime. The government has outlined comprehensive policy framework for granting of extension in a transparent and objective manner. Salient features of the policy included.

  • The contractor should apply 2-6 years before expiry date of the existing contract
  • Extension applicable to both oil and gas fields would be considered for 10 years or economic life of the fields, whichever is earlier
  • Contractor should provide bank guarantee equal to 10% of the total estimated expenditure of the approved work program for the contract area
  • During the extended period the contractor should pay royalty and cess at prevailing rate of the nomination regime
  • Government share of profit petroleum would be 10% higher than the normal PSC provisions

Way forward

Transformation of the domestic E&P sector is underway. New policies and administrative directives are bound to stimulate growth of the sector. State owned upstream major ONGC has been striving hard to explore more fields and increase productivity of existing fields. In the financial year 2016-17, ONGC discovered 23 fields and commercial production from these fields would boost domestic oil and gas supply in the near future.

Simultaneously, private companies are putting efforts to increase production from existing fields. Efforts are being made to increase recovery from the maturing fields. Encouraging results from the first bidding round of small discovered fields could be replicated in the future.

Introduction of open acreage licensing under HELP is bound to bring continuity to E&P activities in the country. Further, marketing and pricing freedom for the crude oil and natural gas produced under HELP provides comfort to the contractors. However, export of domestic crude remains beyond the reach of contractors till India achieves self-sufficiency, which is a far from reality.

Concerted efforts of the government along with new policy initiatives are well directed to enhance domestic hydrocarbon production and cut down import dependency by 10% through 2022. Higher domestic production would certainly boost supply of crude oil to the existing refineries and upcoming mega refineries. This may assist India to emerge as a refining hub in Asia.

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