The new gas pricing policy is a step in the right direction

With a gas pricing policy in place, the oil & gas sector in the country is looking to script a better story in the coming year, believes Ashish Bhandari, CEO, Oil & Gas, GE South Asia.

How much impact will the ´Make in India´ initiative have on India´s oil & gas sector?
The government has highlighted Oil & Gas (O&G) as a priority sector as part of its ´Make in India´ campaign. The focus in O&G will be on Oil Field Services and Equipment (OFS). An interesting model could be Malaysia and Dubai kind of service hubs on the east coast and west coast of the country. GE will actively look to manufacture and service high-end equipment as suitable opportunities emerge. The critical driver for ´Make in India´ for O&G will be ´Produce in India´. Healthy growth in E&P is critical for ´Make in India´ to succeed.

Have the new gas pricing norms made exploration a lucrative prospect for international players? (78 per cent of the country´s sedimentary area is yet to be explored).
The new gas pricing policy is a step in the right direction. More is needed to drive an aggressive campaign on exploring and mapping a significant majority of our sedimentary basins. The two biggest actions would be a healthy premium for deepwater and ultra deepwater; and a new NELP that encourages risk taking and international participation.

Under the new gas pricing formula, the price of $5.61 per unit was to apply for normal discoveries. For all new discoveries in the ultra-deep, deep-water areas and high pressure-high-temperature areas, the government has said that a premium will be given, but when will the country see some clarity on the issue?
This question is best answered by the government. Some of the statements indicate that policy clarification will be made sometime in the next two months.

How much of an impact will falling global oil prices have on the sector?
India should be a relatively good story. Most of India´s E&P players will proceed as planned with their capital investments. In fact, it is a good time for India to attract global service players for high-end technology such as deep water drill ships, HPHT and fracking. On the other hand, the global O&G industry will be negatively impacted in 2015-certain geographies and industries may be severely impacted. However, the O&G industry is a very resilient group. The downturn will drive focus on cost and technology, ultimately strengthening the industry in the long run.

The oil industry expects gas production to rise two-thirds by 2019. What is the reason for this positive outlook?
Firstly, I would say, by two-thirds you can double the production in five years. The opportunity exists. It will not be easy. It will require all the parties involved-the national oil companies, ONGC, and then the external parties that are involved including the government, all of them to work together. But the opportunity exists. The reason for optimism is driven by two factors. First, the new pricing policy that has been announced which clears the underlined uncertainty in the market that was. Everyone now knows what the policy is and people can go forward with their lives. Whereas previously everyone was waiting for the policy to be clarified and projects were held back. Now that the policy has been largely qualified, there are lot of projects that are ripe for qualification.

Most of these projects are with ONGC. The biggest project we have is called 98-dash-3, for North and South. This is the project which the government has talked about as their biggest project, which ONGC has talked of as their biggest project. Then you also have Lakshman Vashishta, G4. We also have the GSPC with their Din Dayal, the expansion that is coming up and then, closer to home the Dama expansion that ONGC is going to do and the work by Oil India in Assam. So if you add all of them up, the potential would be 100mmsemd per day. Out of them, the only project which is not completely clear is the R-series by Reliance, which will be a big player since 25 per cent of the growth number shall come from this project. All other projects from our understanding are going forward.

So, you see this positive outlook capitalising into gains for all the oil companies and the sector…
Yes, we would be very bullish over the industry in the short and medium term and depending on what the new exploration policy looks like in the long term.

What can India do to capitalise with long term opportunities that may be thrown up due to the falling oil prices?
There´s a double-edged sword here. Falling oil prices would mean some projects which are on the cusp of liability may not meet that requirement going forward. In the Indian context, with some deep sea discoveries that we have, people will be more reluctant to monetise that. Though that is a risk in my opinion, with a clear policy and an open environment, that risk can be minimised. The opportunities that exist for India with these crises, globally there will be a little uncertainty which means areas and geographies that were globally hot will come down. Which means the service rates come down, equipment rates come down, and there would be more capacities available. Projects with relatively assured economics in India will get more attention. For example, if you see the rate of drill ships, they would cost $600,000 a few months ago, now it is around $450,000 or $400,000 a day. That´s almost a reduction of 30-40 per cent in two-three months.

For customers like ONGC who are looking at these kind of equipment to be purchased, it is a very good sign. The projects have a lot better chance of getting executed on time.

You initially mentioned something on policy clarity; what are the policy changes that you would recommend?
Okay, that´s a very good question. You can talk about policy in multiple amounts and respects. Different people would have different expectations. My expectation would not be just from an equipment supplier´s perspective. I would like to come back and say what would try drive to reduce India´s imbalance in terms of inputs and what could maximise domestic production. The policy that takes us in that direction needs to be recommended. In this regard, the first policy that is the most first long term and basic thing that we need to be put into place is the NELP or whatever is the equivalent of NELP and whatever that policy is should be clear in terms of the scope it gives the person who comes in. Today, the pricing is unclear under NELP, the intervention schemes are unclear. When you get a policy for development, it does not include portions of exploration. It is not a like a clean licensing arrangement at all. And over the last few years, a lot of people who came in have all left the country. So our ability to attract people with a very clear, very unambiguous NELP would be a huge step in the right direction. I would say the question around whether it would be revenue sharing or cost sharing. These are all specific and less important. Most people will say they can work reasonably well under either schemes as long as the implementation is reasonable. As long as the implementation is reasonable, it is fine. If the implementation of either one of these policies is not done in a trustworthy manner, then the policy itself will not be effective. So that is the first bit on the NELP. Next is in terms of the industry itself, especially as it relates to gas and oil prices. The oil pricing on the supply side is largely decontrolled. We follow global prices.

Cairn is free to sell its crude at whatever is the market price. For gas, the question is a lot tougher. The government has still not clarified what the deep sea premium would be, how it would be calculated. The fact is that pricing can still be looked at on a periodic basis. Those are all still adding elements of uncertainty. So as much as the policy can move towards ultimately some sort of market pricing on the supply side, it would be helpful. We all understand it will not be straightforward in the Indian context because a lot of downstream industries that in many senses are also subsidised by the government are also controlled by this. But any policy that allows maximisation of India´s gas resources would be welcome.

My third recommendation would be specific to the downstream industry to let the pooling effect be absolutely clear so that fertilisers and power, the two primary industries could also start their growth in earnest, knowing how their formulas would work.
I would look at it in that manner.

What according to you should be the basis for this gas pricing in future, now that the Government has recently announced the fresh price for domestically produced gas? If someone asked me in very simple terms, I would say that the policy should be such that it would allow gas that can be produced at $10 per mmtbm, it should pay $10. The goal is that you should be able to pay the right amount for every block of gas. India should look to produce every bit of gas that it has. That should be a policy that tries to mirror the effective cost to the price that it pays is the policy you should try to get to, at least in theory. Now the complicated part is who decides the cost of a particular asset in a particular implementation and there can be a lot of debate and thought and the market way of doing it would be that for a particular hypothetical deep-sea asset, the pricing should be based on known project standard geophysics of that particular environment, one could come back and say what it costs. And the government is trying to do as well by saying that a premium would be provided for deep sea and ultra-deep waters. After you provide that premium, leaving that environment in terms of the cost recovery mechanism, to be reasonably open and clear how the cost will be calculated, what will be the matrix and getting a system that will be able to recalibrate itself. That is because over time, if you see too little a premium for a particular set of blocks and ability of increasing that premium and vice versa with a particular block of deep sea, if you think you are giving too much of a premium, you should have an ability to reduce that premium for future blocks of a similar kind. But it should be a smart system that does not change pricing for a given block, but uses the intelligence from each and every block to start categorising similar blocks in the Indian context and allocating specific numbers to such blocks.

What according to you are the three most important things India can do to secure its energy security?
For me personally the three biggest things are driven by policy. A good policy will let everything else happen. Among the three things India needs to maximise, first is production. India is not like the Middle East with lot of natural resources in terms of hydrocarbons. Most of India´s oil and gas is difficult oil and difficult gas. They need some of the highest end technologies that are available in the world. We look at the example of a deep sea drill ship. For example, if you took the cost of a land rig it is Rs 12 lakh a day. A deep sea drill ship is Rs 2-3 crore a day. Similarly, if you take a look at a lot of work that is going on with Cairn or ONGC, all their needs are around enhanced oil recovery, artificial lift, needing high end technology and solutions. So India´s need for high end technology is extremely high. Getting that high end technology to come to India is very important. The second thing that is important is risk capital. For risk capital to come in, there has to be an assurance of compensatory rewards because some of these projects are extremely high risk. For a deep sea well, you could be down Rs 100-200 crore in just a single drilling campaign. So, how many companies would have 100 million dollars to put into 5-10 well-drilling campaigns, out of which one or two could be successful or could be none of them would be successful. So an environment that encourages this risk capital to come in is extremely important and risk capital will come in only if there is assurance reward, which is again the policy bit that we have talked about. There is a good chance that the risk capital will come in out of India and private players, the good thing about the risk capital is that once it comes in, the particular party or company that comes in makes money because these is equipment and money that you sink into the ground. The only time you take that money outside is when you are actually producing oil and producing things. In that sense, the incentives for risk factor are very well aligned with that of our country as a whole.

The third bit is that of scale. Oil and gas as an industry, to drive costs down in the longer run, you need scale. In the US, the shale industry is a very good example where with scale it has become like an automotive supply chain-the US drills horizontal wells, the way it goes through, hydro-fracking, etc., the speed at which it happens, but you need scale for all of this to happen. Scale also allows local companies to invest heavily in manufacturing. Today India does not invest a lot in oil and gas. If scale is there, all companies, including us will invest heavily in manufacturing capabilities in oil and gas to bring their costs down. If scale is there, there is volume too.

But there is no single India-based service company in oil and gas that has made it big. Again, it boils down to the fact that our own domestic industry does not allow for the scale for some of these companies to take off. As scale comes in, this will happen. So for me, the three big things are these-technology, capital and scale under an umbrella of a good policy to drive India´s production up.

What do you think is the effect on downstream industries of the increasing prices of oil and gas?
The simple answer is, if there is price increase of domestic oil and gas, it results in higher gas production. Then it is actually hugely positive for the downstream industries. Take a look at the fertiliser industry. In the last five years, India´s fertiliser industry has gone from zero to a place where India imports 40 per cent of its fertilisers. Not a single plant is viable for fertilisers because the only alternative for fertilisers is to base it on foreign LNG and foreign LNG by the time it hits a fertiliser plant, which may be located in UP or some other interior part of the country, it is $16-17 per mmbtu. In such an environment, we are not producing our own gas of which maybe big chunks may be commercially viable at less than half the prices we are talking about for LNG. So, if we can drive domestic production, then the higher price is a price that all of industries would be happy to pay because it allows them to expand the capacity, expand the pooling effect, and actually reduces the effective price for gas and the same thing holds for power as well. The same thing also holds for transportation. The proof of the pudding is when you look at India´s LNG imports. While our domestic gas production has been stagnating and going down, our LNG imports continue to open up. Meanwhile, we have not put up a single fertiliser plant and we have not put up a single gas power plant. Something´s got to be done. India cannot be so dependant for all its primary needs on the rest of the world.

– Garima Pant