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

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 India 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 countryÂ’s sedimentary area is yet to be explored).
The new gas pricing policy is a step in the right direction. More is needed though to encourage international majors to be interested in IndiaÂ’s vast unexplored offshore 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 issued sometime in the next two months.

How much of an impact will falling global oil prices have on the sector?
Oil at $50/bbl will have an adverse aspect on the industry all over the world and India is no exception. That said, India should be a relatively good story. Most of India’s government owned 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?
India can indeed double its gas production in five years. The opportunity exists bit . it will not be easy. It will require all the parties involved—the national oil companies, ONGC in particular , private players, service providers and 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 existing underlined uncertainty that was in the market to a large extent . A suitable deep sea premium that enables production from the KG basin discoveries will really give the industry a much needed shot in the arm. Everyone now knows what the pricing is and people can go forward with their lives. Whereas previously everyone was waiting for the policy to be clarified and projects were on stand by . Now that the policy has been largely qualified, there are lot of projects that are ripe for-execution Most of these are with ONGC and most of these are actually deep sea. The biggest project that we have is what is called 98dash2, both North and South. This is the project that the government has talked about as their biggest project, which ONGC has talked  as their biggest project that they are going to undertake. And then you also have S1 Vashishta, G4. GSPC, OIL, Cairn, ONGC also have other projects throughout the rest of the country  Out of these three, the only project which is not completely clear is actually the reliance project, the R-series and the satellite , which will be a big player because almost 25 per cent of the growth number has to come from this project. So this is I would say is the only project which is  unclear whether it will go forward or not; all other projects from our understanding are going forward.

So, you see this positive outlook actually capitalizing into gains for all the oil companies and the sector…
Yes,. We would be very bullish on the potential for IndiaÂ’s E&P industry in the short and medium term and then depending upon new NELP policy looks like in the long term as well. .

What can India do to capitalist with long term opportunities that may be thrown up due to the falling oil prices?
ItÂ’s a double-edged sword here. Falling oil prices would mean that some projects which are on the cusp of viability going forward may not meet that requirement. In IndiaÂ’s context what that means  ,is  some of the deep sea discoveries that we have, people will be more reluctant to go ahead and try to monetize that. In my opinion, that is a risk but , with a clear policy and an open environment, that risk can be over taken and can be minimized. The opportunity  that exist for India is that these crisis, globally a bit of uncertainty gets created which means areas and geographies that were extremely hot previously are suddenly not so hot. Which means the service rates come down, equipment prices  come down, there are more capacities available. At a project with relatively assured economics in India will get lot more attention and lot more global focus than it would in the past. So that is a big upside. As an  example, I would say if you take  the rate of deep sea drill ship, until a few months ago, the drill ship would cost $600,000per day a few months ago, today some of the prices for these drill ships have come down to $450,000 or $400,000 a day. So, a reduction of almost 30-40%  in five  months. So for customers like ONGC who are looking at these kinds of equipment to be purchased, it is a very good sign. The projects have a lot better chance of getting executed on time and on budget

You initially mentioned something on policy clarity; what are the policy changes that you would recommend?
As far as policies are concerned, you can talk about policy in multiple amounts and respects and different people that you talk to will have different expectations from policy. My answer would be not just as an equipment supplierÂ’s perspective. I would like to come back and say what would drive to reduce IndiaÂ’s imbalance in terms of imports . So whatever can  maximize domestic production, the policy that takes us in that direction ; those are the policies I will talk about. So, in this regard, the first policy which t is long term and basic thing that we need to be put into place is the NELP or whatever that is equivalent of NELP and whatever that policy is should be clear in terms of the scope it gives the person that  comes in; And the scope in the sense that 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 have 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 is revenue sharing or cost sharing; these are all specific and less important. Most people will say they can work reasonably well under either scheme 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. For gas, the government has still not clarified what the deep sea premium etc 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, that 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 subsidized by the government are also controlled by this pricing. But any policy that allows maximization of IndiaÂ’s gas resources would be welcome. And I would say that the price that we have today is still not there that all of IndiaÂ’s gas resources are commercially viable even at the prices that are currently being talked about.
My third recommendation would be specific to the downstream industries to let the pooling effect be absolutely clear so that fertilizers, 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?
Again, the overarching principle should be to maximize IndiaÂ’s domestic production of gas. As such, the ideal pricing would be one that pays $4/MMBtu for gas that can be cost effectively at $4/MMBtu, and pays $8/MMBtu for gas that needs $8/MMBtu to cost effectively produce. 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 and known geophysics of that particular environment, one could come back and say what it costs. And the government is also 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 constantly able to recalibrate itself. Which is over time, if you see you are giving too little a cost, too little a premium for a particular set of blocks and ability to  increase  that premium and vice versa  if  a particular block of deep sea, you think you are giving too much of a premium, then you should have an ability for future blocks of a similar kind to reduce that premium But a smart system that does not change pricing for a given block, but uses the intelligence from each and every block to start categorizing similar blocks in the Indian context and allocating specific numbers to those 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 maximize, is domestic production.  First is technology. India is not like the Middle East with lot of natural resources in terms of hydrocarbons. To maximize domestic production, the need is for deployment of high end technology, encouragement of risk capital investment (including FDI), and cost effectiveness through large scale deployment.  Most of IndiaÂ’s remaining reservoirs can be termed as “difficult” oil and “difficult” gas. To exploit, we will need some of the highest end technologies that are available in the world. To develop the East Coast, for example, will need new technologies around subsea completion, subsea compression, high-pressure high-temperature drilling, etc 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 fracking technology and solutions. So IndiaÂ’s need for high end technology is extremely high. So 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 also has to be some amount of assurance of compensatory rewards as well because some of these projects are extremely high risk. For a deep sea well, single drilling campaign could cost Rs 100-200 crore So, how many companies would have 100 million dollars to put into 5-10 well-drilling campaigns, out of which one or two would 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 of reward, which again we talked about the policy bit. There is a good chance that a lot of this risk capital will come in is from outside  India and certainly from private players, the good thing about the risk capital is that once it comes in, it only leaves when that  particular party or company that comes in makes money because these are  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 this risk capital  are very well aligned with the incentives 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—way 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. With scale cost comes down. Scale also allows local companies to invest heavily in manufacturing. Today India does not undertake much in high end manufacturing for oil and gas. But, if scale is there, all lot of companies in India will start investing in, including GE  and lot of others like BHEL and lot of government players will invest heavily in manufacturing capabilities in India to drive our cost lower because the scale is there, the volume exists.  So those are the three primary drivers in my opinion.
Even if you take a look at the service industry, globally there are lot of service engineers from India that work for a variety of different companies. 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 domestic 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, gas particularly; it results in higher gas production. Then it is actually hugely positive to  the downstream industries as well. Take a look at the fertilizer industry. In the last five years, IndiaÂ’s fertilizer industry has gone from zero imports  to a place where India imports 40 per cent of its fertilizers. Not a single plant is viable on  fertilizers because the only alternative for fertilizers is to base it on foreign LNG and foreign LNG by the time it hits a fertilizer 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 that we are talking about for LNG. So, if we can drive domestic production up, then the higher price is a price that all of these industries would be more than happy to pay because it allows them to increase capacity,  expand the pooling effect, and actually reduces the effective price  of 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 IndiaÂ’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 fertilizer plant and we have not put up a single gas power plant. SomethingÂ’s got to be done. India cannot be so dependent for all its primary needs on the rest of the world.

Garima Pant