Energy security is high on the agenda of the central government. As the country’s energy mix is weighted heavily towards coal, the government has been actively promoting a shift towards more sustainable sources such as oil and gas, as well as renewables by introducing facilitating polices. This is also an outcome of India’s commitment towards the Paris Agreement, which is aimed at containing global climate change with the ratifying countries reducing their carbon footprint (Crude oil and natural gas are much cleaner sources of fuel as compared to coal.).
During the past 12-18 months, a number of reforms have been introduced in the hydrocarbons sector. The government has clearly spelled out its vision of reducing the country’s import dependence (on oil and gas) by 10 per cent by 2022, and has thus introduced policies aimed at augmenting domestic output. From introducing the much-awaited Hydrocarbon Exploration and Licensing Policy (HELP), to the recent launch of the National Data Repository (NDR), the centre is going all out to ensure that it meets its objectives.
In March 2016, HELP was approved by the Cabinet Committee on Economic Affairs. The policy is applicable to new discoveries and areas which are yet to commence production (as on January 1, 2016) and will thus include fields where exploration is under way and commercial production has not yet commenced. The key features of the new policy are:
- Revenue sharing regime: HELP proposes a shift from the production sharing contract (PSC) to the revenue sharing regime. The new regime is a kind of “pay-as-you-go” model where the operator will have to part with a percentage of gross revenues generated from the block. The government’s share of revenue will move in accordance with the total earnings reaped by the developer from the block. The government will not be concerned with the costs incurred and will receive a share of the gross revenue from the sale of output (oil, gas, etc.). The step is also aimed towards ensuring ease of doing business.
- Marketing and pricing freedom: Under HELP, the company will have the freedom to price and market gas produced in the domestic market on an “arm’s length” basis. To safeguard the government’s share of revenue, the same will be calculated based on the higher of the prevailing international crude price or actual price.
- Single licence for exploring all types of hydrocarbons: HELP requires companies to acquire just one licence to manage all hydrocarbon reserves in a block such as oil, gas, shale and coal bed methane. A single licence for the exploration and production of all forms of hydrocarbons in each block will be given to firms offering the maximum revenue to the government.
Another change under the HELP regime is lower royalty rates as compared to that in the New Exploration Licensing Policy (NELP). A graded system has also been introduced in which the royalty to be paid decreases from shallow water to deepwater and ultra-deepwater reserves. Royalty for onland areas has been kept the same as earlier so that revenues of state governments are not shaved off. Besides, cess and import duty exemptions have been retained from the NELP framework.
Policy for Marketing and Pricing Freedom for New Gas Production from Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas
At present, gas prices in India are determined by a formula of average gas prices in gas-surplus countries. Under the new policy, producers will be allowed marketing freedom (including pricing freedom) for all discoveries made in deepwater/ultra-deepwater/high temperature/high pressure areas which are yet to commence commercial production as on January 1, 2016 and for all future discoveries in such areas.
However, in order to protect user industries from sharp increases, this freedom will be accompanied by a price ceiling based on the opportunity cost of imported fuels. The ceiling price will be the lowest of the landed price of imported fuel oil, the weighted average import landed price of substitute fuels (coal, fuel oil and naphtha) and the landed price of liquefied natural gas. These prices will be reset semi-annually.
This price cap (at current prices of the fuels that form part of the equation) works out to around $6-$7 per million metric British thermal units (mmBtu) of gas, which is significantly higher than $3.8 per mmBtu, which is the current price of natural gas as fixed by the government using a dynamic pricing formula, which takes into account prices in gas-surplus countries such as the US, Canada and Russia.
Another policy approved by the cabinet deals with the grant of extension to PSCs for 28 small- and medium-sized fields where the recoverable reserves are unlikely to be produced within the remaining duration of the contract periods. During the extended period of contracts for these blocks, the government’s share of profit will be 10 per cent higher than earlier but royalty and cess will be applicable at the prevailing rates of the nomination regime.
NDR and OALP
A part of HELP, the NDR and the Open Acreage Licensing Policy (OALP) were launched recently, in June 2017. While the NDR is a database of detailed information on sedimentary basins (to be utilised in carrying out exploration and production in the future), the OALP allows companies to cherry-pick their own areas for exploration (after accessing the NDR). The repository, which has been prepared by the Directorate General of Hydrocarbons, will open up 2.8 million square km of sedimentary basins in the country, and will help accelerate exploration and production activities. The OALP came into effect on July 1, 2017, on an “expression of interest” basis.
The bidding round under the new regime is expected to take place in a month’s time. Bid evaluation will be based on the minimum-work programme and revenue sharing model. The contracts are likely to be awarded to the winning companies by April 2018 and it is expected that the contracts will be signed by May 2018.
The various policies announced certainly come as good news for players in the oil and gas sector. HELP, for instance, has corrected some key problem areas that have thus far deterred investments in the sector, from both domestic and foreign players. A shift towards a unified licence and lower royalty rates are likely to incentivise the domestic production of hydrocarbons, especially from deepwater and ultra-deepwater blocks that are currently lying untapped.
Meanwhile, the shift to revenue sharing could prove to be a disincentive as the investment recovery period for producers gets prolonged. However, the reform pertaining to reduced government intervention should lure foreign investment when global oil prices recover. The new regime will also ensure transparency as well as speedy implementation of projects. According to India Ratings, the changed policy will enable nearly 190 billion cubic metres or around 35 million metric standard cubic metres per day of gas reserves (15-year production profile) to be brought onstream. Also, unlike the existing contracts, where 100 per cent of the gas allocation is decided by the government on the basis of the gas priority allocation policy, the new regime provides greater flexibility to developers to choose the end-consumers and the price at which the gas is sold to them.
The new pricing formula for production from difficult areas also comes as a huge relief. However, exploration and production players will have to revisit their costs as there are blocks that have both deepwater and shallow water discoveries. Averaging the price will be difficult if the same infrastructure is used. Over time, it will pave the way for a level playing field between domestic and imported gas, and create a competitive gas market. However, prices of alternative fuels, to which India’s gas prices are indexed, should stay healthy for the derived gas prices to remain attractive and support new investments in the sector. According to industry experts, the new policy will increase investments in difficult fields but the price of gas from normal fields will stay subdued, discouraging investments in that segment.
A major benefit of the OALP and NDR will be an increase in business confidence. With these policies, that have brought in the much- needed transparency in the sector, the government hopes to make the landscape more attractive by allowing players to choose their own areas and carve out their own blocks with pricing and marketing freedom.
Going forward, there is more scope for easing policy further. The government has elaborate plans to continue with the reform process. Other areas identified for future policy intervention include production enhancement contracts, production of shale oil and gas (for NELP and pre-NELP blocks), another set of PSC reforms, and a fresh bidding round under the Discovered Small Fields Policy. Besides, increasing thrust is being given to the role of technology. The centre has highlighted the need for the adoption of new technologies by the oil and gas sector that will take it ahead of the traditional growth curve. Investment requirements in the internet of things have also received attention from the government. In all, from the policy end, the outlook seems fairly promising, as after a long span the centre’s intent is being backed by action. W