Reforming India’s Oil & Gas Sector

<span style="font-weight: bold;">The various measures taken by the federal government to reform the oil and gas sector have managed to create the right amount of enthusiasm in the world’s fastest growing energy market.</span>
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<p> Avery colourful legend has it that during the construction of the railway line from Dibrugarh to Margherita by Assam Railways &amp; Trading Co (AR&amp;TC) in 1867, a herd of logging elephants returned to the camp with their feet covered in crude oil. Even as this led the AR&amp;TC personnel to look for seepages, the site engineer, WL Lake, reportedly cried out in excitement to his workers, ‘Dig boy, dig!’ on coming to learn about it. </p>
<p>Well, even if the story is somewhat exaggerated, that is how India’s first commercially successful oil asset of Digboi was commissioned in 1890. During World War II, the field was producing 7,000 barrels of oil per day for the Allied War Machine.</p>
<p>At the time India attained Independence, several foreign oil exploration companies were actively engaged in oil exploration and production here. However, in the years that followed, the country moved towards a system of socialist planning, with either no or minimal role left for private sector participation. Conversely, the period also saw the emergence of public sector giants such as Oil India Ltd (OIL) and Oil and Natural Gas Commission (ONGC).</p>
<p> <span style="font-weight: bold;">India’s rapidly expanding energy appetite</span><br />
According to the Indian Minerals Yearbook, 2017, as in April 2015, the total balance recoverable reserves of crude oil were estimated at 763.48 MT (million tonne), including 373.62 MT in onshore and 389.86 MT in off-shore areas. The reserves of natural gas were estimated at 499.59 BCM in onshore and 988.89 BCM in off-shore assets.</p>
<p>India’s emergence as the world’s fastest growing economy has also resulted in the country becoming the fastest growing energy market globally. In 2015, India surpassed Russia to become the third largest energy consumer in the world after China and the US, with oil and gas accounting for around 35 per cent share in the country’s energy consumption. Moreover, India also surpassed Japan to become the third largest oil consumer in the world after the US and China during the same period. Therefore, in view of its rapidly growing hunger for energy, reliance on imports and limited domestic hydrocarbon reserves, India is trying to increase its domestic oil and gas production by considering all possible forms of energy. In fact, the Prime Minister Narendra Modi-led NDA government aims to increase the domestic production of oil and gas to reduce dependence on imports from 77 per cent to 67 per cent by 2022.</p>
<p>Opines <span style="font-weight: bold;">Deepak Mahurkar, Partner and Leader Oil &amp; Gas, PwC India,</span>’The very high hydrocarbon import dependence of India is a cause for concern. The longer the period of low oil and gas prices, the better it is as that would save India from serious consequences’. The progress of domestic hydrocarbon finds were hampered by controls placed by the government on the sector, delays in critical decision-making and difficulty in doing business. Mahurkar is however optimistic about the future. ‘Various newer initiatives of the government will go a long way in removing several hurdles. The gestation period for the outcome in E&amp;P industry is long, and it may take over a decade to enjoy significant benefits. The business sentiment has clearly started to improve’, he adds. </p>
<p>However, <span style="font-weight: bold;">Kirit Parikh, Chairman Integrated Research and Action for Development (IRADe),</span> slightly differs in his view. ‘I think the point is we have not had enough success in explorations and one has to be slightly realistic here. Despite being offered fairly generous terms, leading international players are not coming to India. One possible reason they may consider is that government and policy risks are high in India. Another reason can be that they perceive Indian basins to hold small reserves and that they are not worth exploring’. He feels that both these aspects lie at the heart of the problem. As a veteran industry expert, Parikh has a point.</p>
<p>When<span style="font-weight: bold;"> INFRASTRUCTURE TODAY </span>asked <span style="font-weight: bold;">Nitin Prasad, Chairman, Shell Companies</span> in India, if the British-Dutch multinational would be investing in oil and gas exploration in India, he unambiguously stated, ‘I think there is a lot of work that needs to first go into taking a look at oil and gas exploration blocks, and we have certainly assessed their economic viability. </p>
<p>A company like Shell is in competition with the whole world. So, before investing a few billion dollars in India, we study other options to check if that investment would provide better fruits elsewhere’.</p>
<p> <span style="font-weight: bold;">Need to improve efficiencies</span><br />
India, however, faces the additional challenge of increasing efficiencies at its existing oil and gas assets. The targeted crude oil production during the year 2016-17 is at 37.085 million metric tonnes (MMT) as against a production of 36.942 MMT in 2015-16, which is an increase of 0.39 per cent. Crude oil production during April-November 2016 was at 23.990 MMT, which was lower by 3.53 per cent against 24.868 MMT during April-November 2015. This shortfall in crude production was primarily due to lower contribution from off-shore fields due to decline in production from mature and marginal fields in Bombay High, reconstruction of process platforms of Bassein and Satellite fields and underperformance of wells in KG-D6. Onshore production was also affected on account of lower contribution from old and ageing fields, shortfall in production from major producing onshore fields, operational issues, particularly in Rajasthan, Gujarat and North East, besides political unrest in Assam.</p>
<p>Natural gas production (targeted) during the year 2016-17 is at 34.119 BCM which is 5.8 per cent higher than the production of 32.249 BCM in 2015û16. The actual production of natural gas during April-November 2016 was at 21.149 BCM, which was lower by 3.70 per cent against 21.960 BCM during April-November 2015. The shortfall in natural gas production can mainly be attributed to revamping of process platforms that affected production from Bassein and Satellite fields, underperformance of KG-D6, stoppage of production from M&amp;S Tapti since March 2016, operational problems in Panna and Mukta, natural decline in Ravva, apart from lower off take by potential consumers, particularly in Assam, Rajasthan and Tamil Nadu.</p>
<p>In a bid to significantly reform the upstream sector, the government launched the Hydrocarbon Exploration and Licensing Policy (HELP) in March 10, 2016 making it applicable to all forthcoming bidding rounds. The policy seeks to simplify revenue sharing model, marketing and pricing freedom, and open acreage policy and permit exploration during the contract period. It is governed by a single license for exploration and production of all forms of hydrocarbons.</p>
<p>Two months later in May 2016, bids under the Discovered Small Field (DSF) policy were launched, which were aimed at monetising 67 discoveries in a time-bound manner, thus boosting domestic production of oil and natural gas. All these fields are located in existing oil and gas producing basins. The bidding round concluded in November 2016, with 134 bids received for 34 contract areas from 42 firms, including five overseas players.</p>
<p>Then in June this year, the government launched Open Acreage Licensing Policy (OLAP) and National Data Repository (NDR) as a part of its endeavour to auction fresh exploration blocks by December. </p>
<p> <span style="font-weight: bold;">India welcomes government’s moves</span><br />
Industry watchers have largely welcomed these initiatives. Says Mahurkar, ‘The HELP, DSF and OLAP initiatives, accompanied by numerous concessions offered by the government in the operating clauses of the production sharing contract (PSC), have boosted investor confidence. For example, the government took the decision of decontrolling the pricing of natural gas. This is an area that has witnessed stiffly-fought litigations.'</p>
<p>Addressing an oil and gas pricing workshop organised by IRADe in New Delhi recently, <span style="font-weight: bold;">Dharmendra Pradhan, Minister of Oil and Natural Gas </span>said, ‘Till a few years ago, the subsidy burden on oil and gas had held the national economy in its vice-like grip. The main reasons that helped us reduce the burden were that international crude prices declined and we went ahead with the recommendations of the Kirit Parikh Committee without bothering about the political repercussions’. The Parikh Committee had recommended phasing out subsidy on LPG and kerosene. And, the government has initiated steps in that direction.</p>
<p>Parikh chooses to be somewhat more circumspect in his assessment. ôWhether that response gets translated into actual action or not is to be watched. I do hope that they actually show results because I think perhaps this government has created a little bit more confidence in investors about its intentions and policy stance, and perhaps that is why it has received very good response’.</p>
<p>Industry watchers such as Mahurkar and Parikh are, however, unanimous in their view that India might be able to successfully bid out fields under OALP as proposed by the December cut-off. </p>
<p>It is also being pointed out that exchequer, contractors, service providers, and present and future employees will immensely benefit from these moves. But the principle beneficiary will be the end-consumer on account of an increased availability of natural gas from both domestic and overseas sources.</p>
<p>As far as the country’s public-sector oil giants are concerned, they will continue their domination of the industry, especially in the E&amp;P segment.</p>
<p>In the September 3rd reshuffle of his cabinet, Prime Minister Modi elevated Pradhan to the rank of union minister. This is being seen as a strong endorsement of his work. </p>
<p>When INFRASTRUCTURE TODAY recently asked Pradhan if he was satisfied with how the industry has responded to various measures rolled out by the government, he asserted after a moment’s pause, ‘The response has been hugely overwhelming’, and walked away with a confident gait.</p>
<p>India’s petroleum product imports rose from 29.5 MT in 2015-16 to 36 MT in 2016-17 showing a 22 per cent increase. According to a report by the Petroleum Planning and Analysis Cell (PPAC), the technical arm of the Ministry of Oil and Natural Gas, the country’s petroleum product import bill rose by 5 per cent to $10.6 billion in the previous fiscal.</p>
<p>The PPAC further forecasts a likely increase of 23 per cent in the crude oil import bill in the current fiscal. It is expected to show a 23 per cent increase from $70 in 2016û17 to $86 billion in 2017-18, considering Indian basket crude oil price of $55 a barrel and rupee-dollar exchange rate of 65 for the balance part of the fiscal.</p>
<p> <span style="font-weight: bold;">- Manish Pant</span></p>