A lost year for oil and gas
The year 2014 started with great optimism, but ended much below expectations for the domestic exploration and production (E&P) industry.
The year before the last, 2013, saw efforts to kick-start an industry that had gone into hibernation and despondency. In 2013, during a year-end ‘open house’ called by the ministry of petroleum and natural gas, the industry felt “cautiously optimistic”. It was hoped at the time that all ‘works-in-progress’ would be complete by the time NELP X was announced (in January 2014) and the momentum would sustain thereafter.
2014 unfolded with a looming general election. The first three months proved to be a complete washout. All actions were put on hold till the new political dispensation—and the consequent postings—became certain. The election commission’s guidelines provided cover for the inaction of the next two months. Then, the overwhelming mandate the new government—one that promised reforms and action—got enthused not only the upstream industry, but the entire country. Quick action, logical decisions, economic reforms and management sans micro-management were expected. The industry quickly updated the new dispensation on the issues resolved, but is still awaiting procedural affirmation of these. By the last few months of 2014, the E&P industry’s initial enthusiasm had already yielded way to caution, as can be seen from the following examples.
The price of domestic natural gas occupied headlines in the national media for more than a year. Fixing the gas price had gone through at least two years of discussions in various fora. In fact, it was a key recommendation of the committee headed by the former economic advisor to the prime minister. It had been approved by the Cabinet Committee on Economic Affairs and notified too, but had become a politically sensitive issue during the elections. Later, in a review lasting about a month, it was overturned. Incidentally, in that review, most stakeholders barely got the opportunity to present their views, giving the impression that only the formality of stakeholder-engagement was adhered to. The industry is still struggling to make sense of the final recommendations implemented so speedily! The few companies that had discovered commercial gas (on a market price-based contract with the sovereign) are now perhaps ruing their fate, as they have to produce under the administered price mechanism. The discoverers of gas-not-yet-developed face a Hobson’s choice. The country, meanwhile, imports expensive substitutes.
The gas price decision sent a sharp message to investors: The sanctity of contract was expendable.
While the recent announcement of ten policy changes is a positive step in resolving pending issues, it is disheartening to note the time taken to get there. That these matters were finalised way back in November 2013 shows that the processes are yet to pick up speed. Another ten identified and outstanding issues were expected to be discussed with the stakeholders to find solutions in the first half of 2014. The discussions haven’t even blipped on the radar yet.
We can go on with the examples: the sustained ring-fencing of exploration in mining lease area, pursuit of geologically-unsuitable contract models, etc.
In 2014, some positives also emerged, regarding exploration in the North East, improving the management of CBM contracts and the contentious alternate models for development of marginal discoveries. These were welcome, but a significant positivity shall emerge only when quick, practical solutions are implemented.
Now that 2014 is over, where should we go from here? Can India afford to send out a message of “one step forward and two sideways” to the investor community while launching Make-in-India? It is a question that shall be answered only over the next two years, but at the moment none from the upstream table are placing any optimistic bets. Meanwhile, the current relief to the CAD, from the low crude prices, is unlikely to be long-term.
Upstream could go forward in three ways: the “nationalised model”, where PSUs carry out all the upstream activity; the “discover-and-auction model” (circa 1990s), where the national oil companies focus on data generation, establishing basins and discoveries and farm out discoveries to private players with a carried interest and signing-in fees to support future exploration; or a “pure auctions model”, as it is at present (NELP, OALP or a successor scheme) where PSUs and private companies bid on a level playing field. Successful implementation of the third model is necessary if we wish to devolve major capital risk to the private sector while ensuring fast delivery and the latest skills and technology.
Assuming India wishes to follow the third option, it needs at least 3-5 times more private operators to work here, and 3-5 times more wells drilled every year. This target cannot be met unless current stakeholders are enthusiastic about Indian upstream and enthuse and attract new participants. Future stakeholders shall also require the assurance of the sanctity of contracts being preserved, as also a reward-potential consistent with risk perceptions. To achieve these, India needs to:
- Retain convergence of government and operator interests in the contract design to preclude game-playing for a win-lose situation and forestall micro-management—something that is very relevant for the administration whose slogan is “minimum government”;
- have an enabling mechanism for quick decision-making expediting efficient E&P, and protecting decision-makers from the financial implications of the decisions on the private sector;
- accept that flexibilities in contract are essential for optimal and efficient and time-bound solutions, and encourage good practices in the industry, instead of trying to bind the private sector in a rigid steel frame;
- create a level playing field with a statutory and independent regulator which is at arm’s length from the policymakers and the contract administrator;
- ease the conditions for exploration;
- assure that the sanctity of contract is preserved in spirit.
The good news is that all these daunting objectives look feasible in 2015, maybe even within the first half of the year. The convergence of interests is a contractual feat and the Kelkar Committee has already suggested a solution. More tweaking is always possible if all the stakeholders brainstorm together.
The enabling mechanism we have talked about could be effected with a simple policy decision/directive by Cabinet. The Cabinet could direct the oil and gas ministry to ensure that all E&P decisions are taken to expedite delivery or increase efficiency. Freeing contract administrators of financial responsibilities for their decisions will go a long way.
A clear delineation policymaking, contract administration and regulation functions is suggested for making the process efficient, transparent and level the playing field. The suggestions of the Rangarajan Committee, the Kelkar Committee and numerous other experts have already tackled the tricky issues. The regulator needs to be statutory and independent with financial and staffing freedom (like Sebi). An initial mechanism can be devised within months through simple administrative orders.
Making India E&P friendly requires having standardised solutions for repetitive processes and bringing all decision-makers in the different ministries, the Centre and states on the same page. It is desirable to have a national view of E&P vis-à-vis other national priorities, so that the way forward is clear with proper and pre-defined exits provided.
In the past, the sanctity of contracts has been repeatedly undermined, through the retrospective definition of mineral oil, additional taxations, gas prices administration and contract interpretation issues. Winning back the confidence of the industry needs the suggestions discussed here to be implemented and be seen to be practised for some duration. A review of earlier decisions in this context can be very reassuring.
If we go along this path, we shall win the confidence of current participants who are ultimately the most crucial references for the growth of this industry.
A multi-fold increase in upstream activity will bring the global oilfield services sector to India. This can boost the Make-in-India campaign with investments to the tune of thousands of crores of rupees even without actual discoveries. In addition, commercial discoveries can significantly reduce the CAD, freeing up resources.We should neither write off the Indian upstream’s potential, given the the current state of inadequate information, nor should we assume guaranteed success in a short time.