Govt may find few takers for marginal oil and gas fields

Govt may find few takers for marginal oil and gas fields

Experts said the low crude oil and domestic natural gas prices may lead to the plans to auction the marginal fields see muted interest

Mumbai: The oil ministry will find it difficult to make good on its January announcement that it will auction the 69 marginal fields left undeveloped by state-owned explorers, going by the current price of crude and the natural gas environment.

Experts said the low crude oil and domestic natural gas prices may lead to the plans to auction the marginal fields meeting the same fate as the last nine rounds of the New Exploration Licensing Policy (NELP)—for the auction of oil and gas blocks—which saw muted interest from overseas and domestic oil and gas buyers.

“I doubt the marginal fields will encourage any private firm to come and develop them,” said Sudhir Vasudeva, ex-chairman and managing director, Oil and Natural Gas Corporation Ltd (ONGC). Vasudeva was instrumental in developing ONGC’s marginal fields during his tenure as the director-offshore of the company.

ONGC had, at one point, more than 165 marginal fields. The bigger ones among them were clustered together and developed. What is left are the isolated fields, mainly in the eastern and western offshore areas, which require huge investments for development, he said.

Marginal fields are oil and gas-bearing fields which were allotted to ONGC and Oil India Ltd (OIL). Owing to their small size, their geographical location and non-remunerative oil and gas prices in India, these fields were left undeveloped after their discovery.

“The marginal field auction may see interest from smaller players. But they would have an expectation of at least 20% return on equity, which can only be achieved through a very favourable fiscal regime, and ability to get market prices for the output,” said Debasish Mishra, senior director-consulting, Deloitte Touche Tohmatsu India Pvt. Ltd. However, a low price of crude oil may be a dampener, he said.

Natural gas in India is currently priced at $4.8 per million metric British thermal units (mmBtu), which is expected to be revised from 1 October. However, going by the trend of various benchmark natural gas prices to which the Indian domestic gas formula is linked, the outlook for natural gas in India is far from robust.

British oil and gas giant BP Plc and Reliance Industries Ltd (RIL) have always claimed that in the absence of a market-linked price, it will be difficult to produce from newer fields in the Krishna-Godavari (KG) basin.

RIL, BP and Canada’s Niko Resources Ltd are partners in the KG D6 block. In October 2014, BP Plc took an impairment of $770 million arising “…as a result of uncertainty in the future long-term gas price outlook, following the introduction of a new formula for Indian gas prices”, it said in a statement.

Globally, marginal fields usually create an ecosytem of investment facilitation from smaller players. The same thing may happen in India too, Mishra said.

Another former ONGC executive said while bigger companies will not bid for marginal fields, the smaller companies do not have the technical and monetary wherewithal to develop oil and gas assets on their own.

“Bringing in technology to drill, develop and maintain a well, setting up transportation infrastructure, investing huge funds in these activities and getting the oil and gas to the market and selling them require a strong network and collaboration between several stakeholders. As of now, India does not have a second rung of companies who have mastered this exercise,” said the executive, who did not want to be named.

The marginal field auction policy has to be incentive-heavy, he added.

Vasudeva said there are examples in countries such as Malaysia, Nigeria and the UK where marginal fields are developed by offering incentives such as slab-wise royalty. Among the other incentives are a provision for faster depreciation and lower taxes.

According to a paper by ONGC, available on the website of Society of Petroleum Engineers (SPE)—the world’s largest organization of oil and gas executives—ONGC had more than 165 such small and marginal fields, totalling more than 297 million tonnes (mt) in reserves. Of these, only 53 have been monetized.

Oil minister Dharmendra Pradhan had said in January that of 69 marginal fields proposed to be auctioned, 63 had been abandoned by ONGC and six by OIL. These fields will be auctioned under a new revenue-sharing model as against the earlier production-sharing contract, he said. Under the revenue-sharing model, companies that bid for the assets will have to bid based on the volume of revenue they expect from oil and gas sales.

The company offering the maximum revenue share to the government will be the eventual winner of the block. It is a marked shift from the production-sharing regime wherein companies are allowed to recover their complete cost before paying royalty to the government.

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