Saturday, Sep 24, 2022

Profit-share to revenue-share, multiple windows to single: HELP for explorers

The Cabinet last week approved a new regime for oil and gas exploration, seeking to revive investor interest in the country’s energy sector.

The hydrocarbon exploration licensing policy (Help) addresses many of the ills afflicting Nelp or the new exploration licensing policy, the framework for the last 18 years. The hydrocarbon exploration licensing policy (Help) addresses many of the ills afflicting Nelp or the new exploration licensing policy, the framework for the last 18 years.

What was the need for a change in the existing New Exploration Licensing Policy (NELP)?

India’s offer of oil and gas exploration blocks under NELP since 1999 had limited success in terms of commercial discoveries and their monetisation. Of the 254 blocks auctioned in the nine NELP rounds, commercial production started in three blocks with total output of 0.4 million tonnes of crude oil and 26.11 million standard cubic metres of gas per day.

Moreover, successful explorers were forced to offer gas at stipulated rates to fertiliser and power companies. The government stuck to its regulated low prices and, with three gas pricing formulas introduced in exactly seven years, investors stayed away from the sector.

The NELP mechanism of profit-sharing where explorers first recovered their costs and then shared profits with the government was severely criticised by the CAG during an audit of KG-D6 block operated by Reliance Industries. The CAG alleged gold-plating by RIL to lower the government’s profit share.

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With low gas pricing, the so-called cost-recovery incentive turned out to be a misnomer with 167 out of the 254 NELP licence holders relinquishing the blocks after sinking nearly $ 8 billion in surveys and exploration drilling, or paying for unfinished jobs under the committed minimum work programme. Investments came to a halt.

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So, why the delay in changing the policy scenario?

Following the CAG’s objections, and dwindling interest in oil and gas exploration, the UPA government in January 2014 moved a Cabinet proposal to move to a single-licence, revenue-sharing mechanism where the government would not micro-manage the costs incurred, and would instead concentrate on receiving a share of the gross revenue.

To attract investors, it suggested a premium in pricing for a certain percentage of the gas output. However, the proposed premium was not to be extended to existing finds as there were legal suits alleging that discoverers were deliberately not putting into production their finds to get better pricing.

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The revenue-sharing model was strongly opposed by existing players and the framers of NELP. The new NDA government too initially considered premium pricing, but the Finance Ministry was not agreeable. The issue was taken up in the Cabinet which decided to provide a free pricing regime to new discoveries, including those discovered in NELP blocks, but not put into production.

The issue was put on the back burner until last January, when Prime Minister Narendra Modi met global oil and gas bigwigs from BP, International Energy Agency and Royal Dutch Shell Plc on ways to kickstart oil and gas discovery. They suggested a relook at the pricing and regulatory framework.

How is HELP different from the NELP?

The UPA’s Uniform Licensing Policy (ULP) was rechristened Hydrocarbon Exploration Licensing Policy (HELP), offering a single-licence, revenue-sharing mechanism to replace the multiple-licence, profit-sharing NELP.

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A single licence for exploration and production of all forms of hydrocarbons in blocks to firms offering the maximum revenue to the government would be given. Blocks would be allocated under the ‘open acreage policy’, wherein companies can submit bids for areas of their choice.

What are the other aspects of the new policy?

It provides for a common licence for all hydrocarbons, including shale gas and coal bed methane, and does away with computing complex investment multiples and scrutinising cost recoveries. Revenue-sharing will not be subject to cost recovery, monitoring will be simple, and the government share will accrue immediately on production, unlike in cost-recovery where the contractor first claimed its costs before splitting leftover profits, if any.

It provides for marketing and pricing freedom for crude oil and natural gas produced from these blocks, and introduces the concept of open acreage policy where companies can choose blocks from the designated area round the year without waiting for roadshows and auctions like in NELP.

Lower royalty as compared to NELP has been provided to encourage exploration and production. A graded system has been introduced in which royalty decreases from shallow water to deep water and ultra-deep water. Onland royalty has been kept intact so that revenues of states are not impaired.

Cess and import duty exemptions have been retained from the NELP era.

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Will the new policy lead to enhanced revenues for the government?

Considering that India is not floating on oil and gas, all that HELP does is provide more pricing freedom to companies. The shift to revenue-sharing could prove to be a disincentive as the investment recovery period for producers gets prolonged. However, the reform of reduced government intervention should lure foreign investment when global oil prices recover.

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What will help immediately is a separate CCEA decision to grant marketing, including pricing freedom, for new gas (not those currently under production) produced from deep offshore. This should act as a catalyst to India’s gas output and government revenue.

Since this would be applicable to existing discoveries that are yet to commence commercial production, it would immediately benefit RIL, Oil and Natural Gas Corp. Ltd, and Gujarat State Petroleum Corp. which have deep sea discoveries in licensed blocks yet to be brought into production.

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The reserves which are expected to get monetised are of the order of 6.75 trillion cubic feet, or around 35 mmscmd, considering a production profile of 15 years. The associated reserves are valued at $ 28.35 billion. India currently produces around 90 mmscmd of gas, meeting hardly 40% of its needs.

And is there any way in which the marketing and pricing freedom offered to promoters can translate into gains for consumers?

Promoters will now be encouraged to develop their deep sea finds as their ceiling price would be lowest of the (i) fuel oil import landed price (ii) weighted average import landed price of substitute fuels (coal, fuel oil and naphtha) and (iii) LNG import landed price.

This formula would result in an 85% jump in rates to $ 7.08 per million British thermal units from the government-regulated $ 3.15 per mBtu that comes into effect from April 1. Over time, it would pave the way for a level playing field between domestic and imported gas, and create a competitive gas market.

If and when crude oil prices harden, petroleum product prices would go up, and so would the price of LNG, which is based on Japanese Crude Cocktail. Consumer prices would certainly rise, putting pressure on fertiliser rates and electricity tariffs.

First published on: 16-03-2016 at 12:24:21 am
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