The Modi Government gave its nod to a series of proposals concerning India’s oil and gas sector on March 10th, a move that will go a long way to boost revenues of oil and gas firms in India.
The approvals include a new Hydrocarbon Exploration Licensing Policy (HELP) which provides for a uniform licensing system to cover all hydrocarbons such as oil, gas, coal bed methane etc. under a single licensing framework.
Alongside, the Cabinet approved Marketing and Pricing freedom for new gas production from Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas and gave its nod to the Policy for grant of extension to the Production Sharing Contracts for small, medium sized and discovered fields
All these approvals will give a major boost to the production plans of oil and gas companies like state-owned
ONGC, Reliance, BP, GSPC, Oil India, Cairn and others. The new price formula (as per those in the know) may see the existing gas price of US Dollars (US$) 3.82 per MMBtu going up to US$ 7 per MMBtu.
Dharmendra Pradhan clarified at a media conference that the price will be the lowest of weighted average of fuel oil and imported LNG or weighted average of fuel oil, naphtha and imported coal.
As the existing rate of US$3.82 per MMBtu was considered inappropriate by the producers of gas from deep water and ultra water fields, the move to approve a new price formula is seen as the one that will incentivise exploration and production of hydrocarbons in India.
“The new price will apply to undeveloped gas discoveries and not on currently producing fields,” Pradhan said.
In the recent Budget for 2016-17, even the finance minister Arun Jaitley had hinted at the gas pricing freedom.
“India is blessed with rich natural resources, including oil and gas. However, their discovery and exploitation has been below our potential,” he had said in his Budget speech.
With near stagnation in domestic production and consequent rapid increase in imports, “the government is considering incentivising gas production from deep-water, ultra deep-water and high-pressure, high-temperature areas, which are presently not exploited on account of higher cost and higher risks,” he had said.
“A proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels,” Jaitley had said in his Budget speech.
Goldman Sachs, in a recent report, said the current gas price regime is not incentivising domestic capex sufficiently as cost for new deep-water discoveries ranges between USD 6-7 per mmBtu.
Gas price in India, it said, is lower than USD 9 per mmBtu in China, USD 10.5 in the Philippines, USD 6.5 in Indonesia and USD 8 in Thailand and Malaysia.
Hydrocarbon Exploration Licensing Policy, HELP: Innovative Policy for future
The present policy regime for exploration and production of oil and gas, known as New Exploration Licensing Policy (NELP), been in existence for 18 years. Over the years, various problems and issues have arisen.
Presently, there are separate policies and licenses for different hydrocarbons. There are separate policy regimes for conventional oil and gas, coal-bed methane, shale oil and gas and gas hydrates. Different fiscal terms are also in force for allocation of acreages for exploration for different hydrocarbons. In practice, there is overlapping of resources between different contracts. Unconventional hydrocarbons (shale gas and shale oil) were unknown when NELP was framed. This fragmented policy framework leads to inefficiencies in exploiting natural resources. For example, while exploring for one type of hydrocarbon, if a different one is found, it will need separate licensing, adding to cost.
The Production Sharing Contracts (PSCs) under NELP are based on the principle of “profit sharing”. When a contractor discovers oil or gas, he is expected to share with the Government the profit from his venture, as per the percentage given in his bid. Until a profit is made, no share is given to Government, other than royalties and cesses. Since the contract requires the profit to be measured, it becomes necessary for the cost to be accounted for and checked by the Government. To prevent loss of Government revenue, these are requirements for Government approval at various stages to prevent the contractor from exaggerating the cost. Activities cannot be commenced till the approval is given. This process of approval of activities and cost gives the Government a lot of discretion and has become a major source of delays and disputes. Many projects have been delayed for months and years due to disagreement between the Government and the contractor regarding the necessity or lack of necessity for particular items of cost, and the correctness of the cost.
Another feature of the current system is that exploration is confined to blocks which have been put on tender by the Government. There are situations where exploration companies may themselves have information or interest regarding other areas where they may like to pursue exploration. Currently these opportunities remain untapped, until and unless Government brings them to bidding at some stage.
The pricing of gas in the current system has undergone many changes and witnessed considerable litigation. Currently, the producer price of gas is fixed administratively by the Government. This has led to loss of revenue, a large number of disputes, arbitrations and court cases.
The current policy regime, in fixing royalties, does not distinguish between shallow water fields (where costs and risks are lower) and deep/ultra-deep water fields where risks and costs are much higher.
The country currently faces a situation where oil and gas constitutes a major and increasing share of total imports. Oil production has stagnated while gas production has declined. There is a need for concerted policy measures to stimulate domestic production. Keeping in view this objective, the Government has enunciated a new policy regime for exploration licensing, the Hydrocarbon Exploration and Licensing Policy, HELP with the following key features:
- There will be a uniform licensing system which will cover all hydrocarbons, i.e. oil, gas, coal bed methane etc. under a single license and policy framework.
- Contracts will be based on “biddable revenue sharing”. Bidders will be required to quote revenue sharein their bids and this will be a key parameter for selecting the winning bid. They will quote a different share at two levels of revenue called “lower revenue point” and “higher revenue point”. Revenue share for intermediate points will be calculated by linear interpolation. The bidder giving the highest net present value of revenue share to the Government, as per transparent methodology, will get the maximum marks under this parameter.
- An Open Acreage Licensing Policy will be implemented whereby a bidder may apply to the Government seeking exploration of any block not already covered by exploration. The Government will examine the Expression of Interest and justification. If it is suitable for award, Govt. will call for competitive bids after obtaining necessary environmental and other clearances. This will enable a faster coverage of the available geographical area.
- A concessional royalty regime will be implemented for deep water and ultra-deep water areas. These areas shall not have any royalty for the first seven years, and thereafter shall have a concessional royalty of 5% (in deep water areas) and 2% (in ultra-deep water areas).
- In shallow water areas, the royalty rates shall be reduced from 10% to 7.5%.
- The contractor will have freedom for pricing and marketing of gas produced in the domestic market on arms length basis. To safeguard the Government revenue, the Government’s share of profit will be calculated based on the higher of prevailing international crude price or actual price.
The new policy regime marks a generational shift and modernization of the oil and gas exploration policy. It is expected to stimulate new exploration activity for oil, gas and other hydrocarbons and eventually reduce import dependence. It is also expected to create substantial new job opportunities in the petroleum sector. The introduction of the concept of revenue sharing is a major step in the direction of “minimum government maximum governance”, as it will not be necessary for the Government to verify the costs incurred by the contractor. Marketing and pricing freedom will further simplify the process. These will remove the discretion in the hands of the Government, reduce disputes, avoid opportunities for corruption, reduce administrative delays and thus stimulate growth.
Marketing and Pricing freedom for new gas production from Deepwater, Ultra Deep water and High Pressure-High Temperature Areas
Imports of hydrocarbons occupy a large share of India’s total imports. Currently, over three-quarters of the domestic requirement of crude oil and approximately a third of domestic requirement of gas are met through imports. In terms of macro-economic impact and also in terms of energy security, it is of paramount importance that domestic production of hydrocarbons be increased.
Much of the unexploited oil and gas available in India is in areas characterized by deep water/ultra-deep water or high pressure/high temperature. The Cabinet Committee on Economic Affairs approved a mechanism for pricing of domestically produced natural gason 18.10.2014. Recognizing the need for incentivizing gas production from deep water, ultra deep water and High Pressure-High Temperature (HPHT) areas on account of higher costs and higher risks involved in exploitation of gas from such areas, in principle approval was also given for a premium on the gas price for the gas to be produced from new discoveries from such areas.
Subsequent to the decision of the CCEA, global oil and gas prices have fallen substantially and are currently at the lowest level for over a decade, affecting the attractiveness of the sector to potential investors. There are a number of discoveries of gas in deep water/ultra- deep water, high pressure/high temperature areas which have not been developed. ONGC and other operators have been requesting a higher price for gas to be produced from such fields, without which they may not be economical to bring to production. Meanwhile, domestic gas production is showing a declining trend. It has witnessed a decline of 17% in two years from 40.66 BCM in 2012-13, it fell to 33.65 BCM in 2014-15. With the economy growing at over 7%, demand for petroleum products including gas is increasing. The sector thus faces a situation of rising demand, falling production and consequently rapid increase in imports.
In this background, after extensive consultations, it was felt that rather than fixing a premium, it would be more appropriate to provide marketing and pricing freedom to the gas to be produced from the new discoveries as well as existing discoveries which are yet to commence production. However, in order to protect user industries from market imperfections, this freedom would be accompanied by a price ceiling based on opportunity cost of imported fuels.
After a careful consideration of the country’s strategic, economic and environmental interests and interests of both producing and consuming industries, a new policy is being introduced which is balanced.
The salient features of the new policy are as follows:
- For all the discoveries in deep water/ultra-deep water/high temperature/ high pressure areas which are yet to commence commercial production as on 1.1.2016 and for all future discoveries in such areas, the producers will be allowed marketing freedom including pricing freedom.
- To protect user industries from any market imperfections, this freedom would be subject to a ceiling price on the basis of landed price of alternative fuels. To the extent that domestic gas can be produced and sold at a price below import parity price, it will not only benefit the overall economy by boosting employment and GDP and reducing imports, but also benefit the user industry by lowering the average price.
- The ceiling shall be based on publicly available prices of substitute fuels and the method of calculation shall be communicated transparently.
- The ceiling price shall be calculated as, lowest of the (i) Landed price of imported fuel oil (ii) Weighted average import landed price of substitute fuels (namely coal, fuel oil and naphtha) (iii) Landed price of imported LNG. The weighted average import landed price of substitute fuels in (ii) above will be defined as: 0.3 x price of coal + 0.4 x price of fuel oil + 0.3 x price of naphtha.
The Ministry of Petroleum and Natural Gas will notify the periodic revision of gas price ceiling under these guidelines. In the case of existing discoveries which are yet to commence commercial production as on 1.1.2016, if there is pending arbitration or litigation filed by the contractors directly pertaining to gas pricing covering such fields, this policy guideline shall apply only on the conclusion/withdrawal of such litigation/arbitration and the attendant legal proceedings.
All gas fields currently under production will continue to be governed by the pricing regime which is currently applicable to them.
The decision is expected to improve the viability of some of the discoveries already made in such areas and also would lead to monetization of future discoveries as well. The reserves which are expected to get monetized are of the order of 6.75 tcf or 190 BCM or around 35 mmscmd considering a production profile of 15 years. The associated reserves are valued at 28.35 Billion USD (1,80,000 Crore) The country’s present gas production is around 90 mmscmd. Besides, these there are around 10 discoveries which have been notified and whose potential is yet to be established.
There would be substantial employment generated during the development phase of these discoveries and a part of it would continue during the production phase of the block. As an illustration, ONGC has estimated that in the development of discoveries in the block KG-DWN-98/2, there would be deployment of 3850 direct skilled workers. Besides, these there would be around 20000 persons required during the construction phase. These personnel will take care of fabrication workshops, marine crew in barges, civil works of onshore terminal etc.
Policy for grant of extension to the Production Sharing Contracts for small, medium sized and discovered fields
28 small, medium sized fields discovered by National Oil Companies (ONGC and OIL) were awarded to Private Joint Ventures through Production Sharing Contract (PSC) between 1994-1998 for periods varying from 18 to 25 years. These Contracts are effective from different points of time. The earliest of PSCs were signed in the year 1994. Out of 28 PSCs, two fields in which the duration of the PSC had expired in 2013 had been granted extension up to 2018. The remaining PSCs would start expiring from 2018.
For many of these fields the recoverable reserves are not likely to be produced within the remaining duration of contract. Further, in certain fields where additional recovery of hydrocarbons can be obtained only through capital intensive Enhanced Oil Recovery/Improved Oil Recovery (EOR/IOR) Projects, the payback period would extend beyond the current duration of the contract.
A uniform and transparent policy for extension of the remaining reserves is required to be put in place to enable the contractors to take investment decisions for exploitation of the remaining reserves. It is expected to expedite decision making, enable timely planning by the contractors, and lead to increased oil and gas production.
The following process and guidelines for extension of contracts for small and medium sized discovered fields is being put in place:
- The contractor should submit the application for extension of Contract at least 2 years in advance of the expiry date, but not more than 6 years in advance. The Director General Hydrocarbons (DGH) will make a recommendation within 6 months of submission of application by the contractor. The Government will take a decision on the request for extension within 3 months of receipt of the proposal from DGH.
- The Government share of Profit Petroleum during the extended period of contract shall be 10% higher than the share as calculated using the normal PSC provisions in any year during the extended period. For example, if the current profit share, is 10 or 20%, it shall become 20 or 30% respectively.
- During the extended period of Contract, the royalty and cess shall be payable at prevailing rates and not at concessional rates stipulated in the contracts.
- The extension of these PSCs would be considered for 10 years both for oil and gas fields or economic life of the Field, whichever is earlier.
The policy for PSC extension will lead to production of hydrocarbons beyond the present term of PSC. The reserves which are likely to get monetized during the extended period are of the order of 15.7 MMT of oil and 20.6 MMT of Oil Equivalent of gas. The reserves associated with this field would lead to monetization of reserves worth USD 8.25 Billion (around 53000 Crore). The monetization of these reserves would require an additional investment of USD 3 to 4 Billion.
Employment Generation Potential: The extension of these contracts is expected to bring extra investments in the fields and would generate both direct (related to field operations) and indirect employment (related to service industry associated with these fields).
The extension of contracts would also envisage that the present employment levels in these fields are maintained for a longer period of time.
Presently, medium sized fields are employing around 300 personnel for field operations while for small sized fields this would be around 40 to 60 persons.
The investments in these fields may also lead to construction and laying of facilities which would employ several unskilled labourers, over and above the skilled labourers.
Transparency and Minimum Government and Maximum Governance: With a view to enable the E&P companies to take investment decisions for exploitation of the remaining reserves this extension policy has been approved so as to grant extensions in a fair and transparent manner. The policy aims at bringing out clear terms of extension so that the resources can be expeditiously exploited in the interest of energy security of the country and improving the investment climate.
Ratna Field: The Ratna Offshore Field, located south-west of Mumbai, was discovered in 1971 by ONGC. The field was tendered out and tentatively awarded to ESSAR Oil Ltd. in 1996. Ever since then due to a number of administrative and legal uncertainties, which were raised and examined at various times,the contract was never finalized. As this field has remained without exploitation for over 20 years since its initial tendering, the Government has now decided that it will be assigned to ONGC on nomination basis. This will enable this long pending and proven oil reserve to come into production, and create new employment.