Major policy shifts in oil and gas exploration

Government has unveiled a radical overhaul oil and gas exploration policies, to boost Indian economy. 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 was 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 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 share in 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, Government 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 per cent (in deep water areas) and 2 per cent (in ultra-deep water areas).

Imports of hydrocarbons occupy a large share of India’s total imports. 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 characterised by deep water/ultra-deep water or high pressure/high temperature. Some of the key features of the new policy are : For all the discoveries in deep water/ultra-deep water/high temperature/ high pressure areas which are yet to commence commercial production as on January 01, 2016 and for all future discoveries in such areas, the producers will be allowed marketing freedom including pricing freedom. It will 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, moreover, 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 will be based on publicly available prices of substitute fuels and the method of calculation shall be communicated transparently.

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. The government share of Profit Petroleum during the extended period of contract shall be 10 per cent 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 per cent, it shall become 20 or 30 per cent 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 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 finalised. 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.

The new policy regime marks a generational shift and modernisation 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. These will remove the discretion in the hands of the government, reduce disputes, avoid opportunities for corruption, reduce administrative delays and thus stimulate growth.

New policies will generate employment, enhance transparency & reduce administrative discretion–minimum government, maximum governance.

Dharmendra Pradhan , Minister of State (Independent Charge) Petroleum & Natural Gas

By Sanjay k Bissoyi