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Effective exploration policy: Key to energy independence

Effective exploration policy: Key to energy independence

August 19, 2015 / 11:50 AM IST

Consider this, India consumes barely one fourth of the global average energy per capita, yet it depends on imports  to meet 80 percent of its crude oil demand.[1] This demand is an amount in excess of 3 million barrels of oil per day, which at prevailing oil price of ~$110 per barrel, means a daily foreign exchange drain in excess of $330 million. With a modest foreign exchange reserve of ~$300 bn, the entire reserve can run out in less than 1000 days unless there is fresh foreign exchange inflow. Think about it again…$330 million per day!


Consider another startling fact - it would take an increase in indigenous production of oil by an amount equal to the total crude oil exported by Iran and Iraq put together, to give India energy self-dependency. That is, if we continue consuming the below average energy per capita that we currently do. In case, let’s say, we start consuming energy at the rate at which other developing countries like Brazil or Mexico – than we need to add production capacity more than the ‘total exports’ from Saudi Arabia, Iran and Iraq.


This kind of ambitious target can be achieved only through a big leap in domestic production of oil and gas, which in turn depends on a spirited exploration policy. Considering that only ~22% of India’s reserves are well explored – it doesn’t look like we care a lot about the big problem staring us right in the face.[3] This is akin to a problem faced by a man who is buying mangoes from the market, when he has a garden full of mango trees buy he has not bothered to check 8 out of 10 trees he owns to see if they have any mangoes he can use. Apparently, those trees are loaded!


Funnily enough, more than 16 years after the New Exploration Licensing Policy (NELP) was framed to steer India on the ambitious path to energy independence, we have only managed to increase amount of well explored area by a mere 7%.  ONGC and Reliance are the companies that own and operate most of the blocks. However, there are real challenges of technology and commercial viability of the fields that both these operators are struggling to deal with, leading to a slowdown in investments in some fields with known hydrocarbon discoveries.


At a time when India is mulling a new incentive regime to boost domestic oil and gas production, we retrace the footsteps of NELP, an initiative that failed to live up to its promise.


Throwback to NELP


With the Directorate General of Hydrocarbons (DGH) as a nodal agency, NELP was formulated in order to provide a level playing field to public and private sector companies in the exploration and production of hydrocarbons. NELP became operational in 1999 with acreages being offered to participating (public and private) companies by way of open global competitive bidding.


So far, we have seen nine rounds of NELP between 1999 and 2012. According to a DGH report, in these nine rounds, 360 blocks have been offered, 254 have been awarded, 180 are operational and 74 have been relinquished.[2]  Till date, 128 hydrocarbon discoveries have been made in 42 NELP blocks. Out of these, 82 are gas discoveries and 46 are oil discoveries. NELP blocks have managed to get in investments amounting to US $21.3 billion. 


Let us look at where things started going wrong.


Why NELP failed?


Touted to be a big-ticket initiative, NELP was also an ode to the government’s commitment to liberalization. It fostered a healthy competition between nationalized and private companies and was said to be a landmark event in India’s upstream oil sector story. However, the optimism around NELP in its formative years began to fade when it did not yield the desired results.


A number of implementation issues crept up along the way and threw a spanner in the works. There have been several instances where companies have been unable to carry out exploration in blocks despite having bagged them. Some companies found it commercially unviable to explore the allotted blocks, while some others faced clearance-related hurdles from defence ministry and the department of space. 


The litany of woes plaguing NELP does not stop here. In fact, a recent report quotes RS Sharma, former ONGC chairman, as saying: “There is a sort of negative sentiment, as far as investors are concerned; a lot of clearances are needed at various stages. Indian blocks have comparatively lesser prospectivity. Therefore, the regime has to be reassuring for investors, with faster clearances” 


If there are investments by operating companies, it kicks off a multiplier effect in terms of investments by equipment and service providing companies. To see the effect of investments, all one needs to do is to visit Kakinada. A once sleepy little town was all set to become India’s Aberdeen.[4] However, limited investments by ONGC, RIL and other operators means limited investments by any of its potential vendors. Infact, barring forward-looking companies like GE, not many companies were enthused about investing in building capabilities for India’s oil and gas sector at all. GE too, had to think out of the box and invest in a one of its kind multimodal facility that can provide it with the manufacturing flexibility that is needed to keep it occupied.


Implementation issues apart, NELP was beset by legal tangles as well, owing to production sharing contracts (PSC) between the government and companies. This further hindered oil and gas production.


Little wonder then that even after 15 yrs, nine rounds of NELP and over 120 offshore blocks being awarded - only one NELP block operated by Reliance, the famous KGD6, is producing anything. This block too is beset with multiple problems of its own. 


The need of the hour is introduction of forward-looking reforms that give a major boost to investments in the oil and gas sector. Something that gets global investors excited about Indian industry as well.


The way ahead


With a view to setting right the flaws in NELP that have led to its continued non-performance, the newly-formed government is considering making amendments to the policy. In a move aimed at reviving investor interest and boosting hydrocarbon exploration in India, petroleum minister Dharmendra Pradhan, speaking at 21st World Petroleum Congress in Moscow, hinted at reworking the incentive regime


If that happens, the PSC model (the cost-recovery framework that NELP follows) will make way for a revenue-sharing one. In the PSC model, companies can recover all costs from the sale of oil and gas before sharing profit with the government, whereas in the revenue-sharing framework, companies have to declare the amount of oil or gas they will share with the government at the onset itself.


The PSC model has been the bone of contention for some time now with former finance secretary Vijay Kelkar backing it, and C Rangarajan, former chairman of the economic advisory council to the prime minister, favouring a revenue-sharing regime. 


There are also talks of introducing a uniform licensing policy to facilitate exploration and production of different fuel sources such as oil, gas, shale and coal bed methane under a single regime. Currently, there are separate contracts for blocks under NELP and those under the Coal Bed Methane (CBM) policy. 


It is only a combination of such reforms that can counter the waning investor interest in India’s oil and gas sector and drive up domestic exploration. The good news is, India has the required reserves of both oil as well as gas. All that is required is a favourable regulatory regime, commercial incentives for risk taking and some policy support from the government.


India’s subsea potential


India’s sedimentary basins span over 3.14 million square kilometers. Out of this, 1.79 million square kilometers is onland and shallow offshore, while 1.35 million square kilometers are in deep water. With a large number of these blocks lying unexplored, it wouldn’t be wrong to say that India is still awaiting its big subsea moment.


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


 


Given the rate at which India is progressing, it is time we scale up our domestic oil and gas production by using technology that has been effectively used under similar circumstances elsewhere in the world. Whether it means enabling subsea production in shallow waters that enables increased oil recovery, or it means subsea compression that enables higher gas recovery or it means setting up a micro LNG facility – at the forefront of all technological challenges facing the industry is a solution that can be provided  by GE Oil & Gas. With its advanced technological solutions and services, the company is a key enabler of energy production. It has a presence in the upstream, midstream and downstream segments. Fully understanding the potential that India holds, GE also employs solutions from its other businesses like aviation and transportation to further aid the country’s hydrocarbon production.


Energizing India


Oil and gas are clearly the pillars of India’s energy sector. In order to help India achieve energy self-sufficiency, the government has a balancing act to perform. It needs to have a policy framework that benefits investors as well as other stakeholders.


India’s unexplored acreage holds tremendous potential. All the country needs is an effective policy, and at the intersection of these two lies GE Oil & Gas, which with its technological expertise can help India realise its dream of energy self-sufficiency.


References:


1. BP Statistical Review (2013)


2. Hydrocarbon Exploration and production activities India 2012-13: Published by DGH


3. http://www.dghindia.org/


4. www.eia.gov/country/cab.cfm?fips=IN

Know more about, GE's Subsea Solutions

first published: Jul 11, 2014 01:17 pm

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