Explained: Why India is doing away with auction of small oil and gas fields

Launching the third round of discovered small field (DSF) auctions, opening up 32 oil and gas blocks with 75 discoveries for global oil and gas majors on June 10, Petroleum Minister Dharmendra Pradhan said such fields will not be auctioned again.

"There will be no DSF next time. Next time, it will be a 'major' round (auction of large fields)," he said. In these upcoming major rounds, the government will auction unmonetized large oil and gas fields of state-run Oil and Natural Gas Corporation (ONGC) and Oil India (OIL).

Moneycontrol looks into the importance of these auctions and what went wrong.

Vision around DSF

It was in 2016, the government decided to attract more private investors into India's hydrocarbon exploration sector by putting the old, small and discovered oil and gas blocks of ONGC and OIL on the block. The event was considered as the entry point for India's future oil and gas barons. The ultimate aim of these rounds was to fast-track the target of reducing the country's import dependency by 10 per cent. Authorities believed that these rounds would attract small players and start-ups also.

How did DSF fare?

The first round saw aggressive bidding by companies from diverse sectors such as steel, power, software, iron ore, textile and education. Raising eyebrows, even Dilip Shanghvi’s Sun Petrochemicals was also interested. In the first round, 22 companies won bids for the 31 contracts on offer, out of which 15 were new entrants to the sector. Government signed contracts with the successful bidders in February 2017. The gross revenue from the first round itself was expected to be around Rs Rs 46,400 crore, while the government's share out of this in the form of royalty and revenue was expected to be around Rs 14,000 crore.

During the first rounds, there was clear instruction from the government that ONGC and OIL should not be part of the DSF rounds. However, during the second round in February 2019, both these state-run majors were among the eight companies that won 23 contract areas. Interestingly, these companies even bid for blocks relinquished by them, taking the sheen away from the much-talked-about DSF rounds. The second round was expected to start production by 2022, which is also likely to get delayed due to the pandemic.

"DSF as a concept was good for small investors to enter into the exploration business. A lot of new entrants came to the scene and now they can graduate to higher bidding rounds like OALP. The government should not have stopped the DSF rounds," said D S Rajput, managing director of UAE-based South Asia Consultancy, the only foreign company that won a block under DSF.

What went wrong?

While the first round was a success in terms of participation, what raises concern is the inability of these new entrants to start production in these blocks even after five years. Other than the unpredictability in oil and gas business, these companies failed to get environment and forest clearances or got them at a slow pace.

Lack of coordination between several state governments and the Centre too acted as a roadblock. Though the small players were promised the sharing of infrastructure of companies like ONGC, OIL and Cairn, that too did not take a formal shape. Finally, the pandemic and the resulting drop in international oil prices also affected the capital flow towards such projects. Many of the investors feel better handholding by the government is needed to help such new entrants in future rounds, even if it is a big round.