The NDA government has announced a radical overhaul of the oil and gas exploration policy. 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. It aims at improving the ease of doing business as well as reducing India’s import dependence by raising the output from domestic sources of oil and gas. In the process, it is expected to create jobs and spur economic growth. There are three key changes in the new regime. One, instead of separate policies and licensing regimes governing different hydrocarbons, such as oil, gas and coal bed methane, there will now be a single unified framework for all. This is important because some unconventional hydrocarbons, such as shale oil and shale gas, were not even known when Nelp was first designed. Thus, Help not only plugs the existing policy gaps but also removes inefficiencies in exploiting natural resources due to a fragmented policy framework and the ubiquitous red tape.
The second key change is that the production-sharing contract between government and contractors would henceforth be governed by a revenue-sharing model instead of a profit-sharing one. In the latter, the norm till now, contractors gold-plated their costs to artificially depress profits. This not only led to disputes and litigation but also caused project delays as government pored over each decision by the contractor to check for possible fraud. Such problems are less likely to occur under revenue-sharing. The third key change has been the freeing-up of pricing. One of the reasons why domestic oil and gas exploration has suffered over the years despite the fact that India has a huge import dependence — over three-fourths of the domestic crude oil demand and about a third of the domestic demand for gas are met by imports — is the inability of companies to price the output in a profitable manner. Now, instead of pricing being determined by a formula set by a committee, Help will allow producers to charge a competitive market price for new production, subject to a ceiling determined by the landed price of alternative fuels, such as fuel oil, liquefied natural gas and naphtha.
One of the first activities to suffer a decline when oil prices plummet, as they have done in the past year and a half, is exploration. Yet, this is also a time when the cost of exploration is low since everything, from drilling rigs to fuel itself, is much cheaper. Moreover, an investment now will result in production after at least eight or nine years, by which time oil prices would have surely recovered. In sum, Help is well timed.