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Re-igniting the spark

Re-igniting the spark

With government taking initiative to de-bottleneck the energy sector growth and boost country´s economy, oil and gas majors are busy addressing risk factors and multitasking to integrate their business model in order to ensure future growth, says Pradeep Pandey.

At the discomfiture of competitors and in an effort to de-bottleneck the gas sector, the petroleum ministry recently allowed Reliance Industries Ltd (RIL) to almost double the prices for gas from April after the company offered financial guarantees to the government to settle any claims against it over a shortfall in its gas output the pricing issue with RIL last month. The decision must be seen as the government´s intention even at the risk of appearing to take sides to rationalise and facilitate the extraction and production (E and P) business, and the O and G sector as a whole.

While the government is wheeling out the policy reforms, the companies vetting prospects before getting into serious venture. This is also because, in the past few years the experiences in energy sector were not too good and also the economic downturn has hard-hit the investors´ sentiment. Going ahead as Petroleum Minister M Veerappa Moily has proactively undertaken a slew of measures in 2013. It is likely that his efforts may alter the negative perception, not only in the domestic market but also in international market.

The initiatives by the government to prepare conducive environment for doing business in India´s oil and gas sector has been wholeheartedly welcomed by the industry players, manly by the national oil companies. However, private players are less enthusiastic due to bad experience in the past. For example, the country´s largest refiner Reliance Industries had to wait for a longer period to convince the policymakers for gas price revision. Given that the ministry has given the green signal for revising the gas prices from 1 April 2014, and that other reforms like deregulation of diesel prices are awaited in the next couple of months, the industry hopes new avenues will open up. This allows private players, who were waiting for deregulation of diesel prices, to now expand their retail marketing network and plan ahead. ´We already have 1,400 outlets and we are present in all parts of India,´ says LK Gupta, MD and CEO, Essar Oil.´We can start additional 200 outlets any day. We may consider retailing diesel after the prices reaches at a standard level.´ Similarly, RIL and other players are also likely to reopen their outlets.

Oil and Natural Gas Corporation (ONGC), which has already acquired Block KG-DWN-98/2 from Cairn eight years ago, will now invest nearly Rs 55,000 crore in the Krishna-Godavari basin and hopes to discover and produce 2.5-3 million tonne (mt) and 10,000 million standard cu m of gas a day there.

Covering the spectrum
It has also been observed that O and G companies are also expanding their horizon throughout the value chain from ´crude to customer´ in order to optimise their margins. Industry analysts were of the view that demand in the country is huge and it may further increase to keep pace with targeted GDP growth. In order to ensure participation in such a huge opportunity in India, national oil companies are busy ensuring oil and gas assets onshore and offshore both. Companies like, ONGC, Bharat Petroleum (BPCL), RIL, Essar Energy, Videocon Industries have already expedited their exercise to acquire potential resources in overseas market. For example, RIL is eying shale gas assets in US, Essar, ONGC and BPCL raising O and G assets in regions like Brazil and Mozambique. Most of them also busy with upgrading their refining capabilities in order to meet the international standards. BK Mishra, Senior Vice President and Business Head Energy and Utilities, Tech Mahindra, says, ´We have been observing that in line with global players, Indian lead players from O and G sector are serious about their backward and forward integration. They are revamping their entire value chain.´

Will NELP X will help? ´Because of its large population and the need for fast economic growth, India´s share in world energy demand is projected to increase from 5.5 per cent in 2009 to 8.6 per cent in 2035,´ says Rahool Pai Panandiker, Partner and Director at The Boston Consulting Group. India has become a significant consumer of energy resources. If the government hopes to maintain a GDP growth rate of about 8 to 10 per cent, it requires to at least triple its primary energy supply, he added.

Initiating a series of reform measures, the government has prepared itself to auction oil and gas blocks for exploration ahead of the legislative elections. The 10th round of bidding for oil and gas assets under the National Exploration Licensing Policy (NELP-X) is scheduled this month, which is expected to attract investments worth $4-5 billion. Private players in the country do not seem to be very much fascinated with this new round though public sector enterprises are quite hopeful. ´We are confident that the government will resolve any issues relating to policy uncertainty,´ Sudhir Vasudeva, Chairman, ONGC, told this publication in a recent interaction. It is also reported that ONGC will be actively participating in biddings. However, major private players such as Essar group and RIL are likely to keep themselves away.

Essar Oil says that it has not yet decided. ´We have not yet taken a call. If we find value, we will consider it, ´said L K Gupta, CEO and MD Essar Oil. He pointed that the company is currently more focused on completing its Ranigunj CBM fields and running our Vadinar refining plant optimally.

Although, the oil ministry has assured that the new bidding will follow the revenue-sharing model so that the project viability could be assured and also set a new price rate of $ 8.4 per mmbtu for KG-D6 block. Analysts estimate a minimum price of $10 mmbtu to ensure internal rate of return of around 30 per cent. According to a latest report released by IHS CERA, a US-based independent energy research firm, 91 trillion cubic feet (tcf) of reserves remain unexplored across12 main sedimentary basins in India. Of this, 53 tcf is in deep-water and ultra deep-water, 85 per cent of which can only be viable at over $10 per mmbtu.Analysts also find difficult to assess that how many overseas players will find it attractive enough at this point of time. Foreign explorers were absent in NELP IX while NELP VIII saw Cairn, BG and BHP Billiton putting in bids. Foreign players have been bidding for blocks in India since NELP II although they kept themselves away in NELP III.

Under NELP X, the government is expected to auction 86 hydrocarbon-bearing acreages; 58 have received clearances environment and clearances. NELP IX, which took place in 2010, saw 34 blocks being auctioned of which 14 blocks were awarded. Ever since NELP I, in 1999, a total of 360 blocks deep water, shallow and on-land have been auctioned while 249 were awarded. While DGH data shows 196 of these as being operational, 53 have been relinquished and only 13 blocks are currently producing under joint ventures or run by a private company.

This is enough for the government to have grown rather sceptical of NELP itself, as the response to oil and gas block auctions in the last few years has been tepid. Recently, petroleum minister Moily has announced that NELP would be done away with after the 10th round.

Conclusion
The gas price under the new formula, to come into effect on 1 April, will be approximately double to $ 8.2 per mmbtu of what it is at present $4.2 per mmbtu to begin with will certainly create hope among the companies.

Vandana Hari, Asia Editorial Director at Platts, an energy research firm, says that freeing the price of domestic gas is a bold move. According to him higher gas prices were likely to attract investments into the upstream oil and gas sector but foreign players might decide to wait and watch on how the implementation of the new gas formula plays out. In addition to this the on going process of decontrolling the diesel prices may also revive the investors´ sentiment in the sector. However, many of the policy reforms appear to be inspired by the government´s widely publicised tussles with RIL over the last couple of years. All the above development shows that the government is learning from its past mistakes now trying to secure all the necessary clearances needed for the development of a block, including approvals from the defence and environment ministries, before auctioning them out to companies under NELP-X.

Exploration and production work at many such blocks awarded earlier had been stalled due to want of such clearances, till the Cabinet Committee on Investments moved towards giving them the necessary approvals earlier this year. So, a better ground has been prepared and its likely that the new round of bidding may get proper response.

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