Greater HELP for E&P firms
India has benefited from the unprecedented fall in global crude oil prices. For this, a small group of
entrepreneurs, geologists and engineers can be thanked. They concluded that shale rocks could contain
commercial amounts of hydrocarbons. They spent money, experimented and eventually found novel
ways to fracture and break up shale rocks and extract hydrocarbons. The then high prices provided the
economic incentive to do whatever it took to find and produce more hydrocarbons. Now the
development of shale resources has increased the global supply, resulting in consumer benefit through
lower prices.
Despite this impact of shale, there had been no real policy for accessing shale resources in India. Now,
while shale oil and gas has not been directly referred to in the Hydrocarbon Exploration Licensing Policy
(HELP), but a single licence for hydrocarbons from all types of sources in the same geography implies
that shale resources can now be assessed. The development of a countrywide natural gas pipeline and
addressing issues like water availability and environmental norms for fracking will facilitate exploration
and development of unconventional resources.
Blocks will now be awarded through the Open Acreage Licensing Policy (OALP). Earlier, the government
identified the blocks on offer. Exploration & production (E&P) companies waited for bid rounds and
evaluated blocks in a reactive way. The last bid round was held in 2011. This limited growth options for
companies in India by accessing new exploration acreage.
Exploration experts in E&P companies can now identify prospective basins and areas proactively. As an
example, in the US, the potential of shale resources was identified by exploration companies and not by
the government. The time-frame for the government to take a decision on bidding after submission of a
proposal and the periodicity of bid rounds are yet to be spelt out. Hopefully, bid rounds would be
frequent.
The successful implementation of the OALP requires a robust National Data Repository (NDR). Maximal
data should be populated on the NDR. Data can be attractively priced, so that more and more E&P
players and individuals analyse data for new exploration ideas.
The future contracts will be revenue-share contracts, instead of production-sharing contracts. Both
these regimes are prevalent globally.
From an economic standpoint, a production-sharing contract is a superior model. However, the last few
years have seen a huge amount of scrutiny on the costs of the E&P operators and control over
investment decisions. Oversight exercised by the government has been seen to be excessive by E&P
companies. For example, the government did not allow drilling of exploration wells in producing blocks
for years, as dry wells would reduce government revenues. On the other hand, E&P operators felt that
with better understanding of the reservoir and the geology, it is prudent to drill exploratory wells. The
impact of the government decision was to reduce exploration activity. Experimentation by drilling
relatively unproductive wells helped companies in the US develop economic ways of fracking shale
rocks. Such experimentation may not have been allowed in India.
The revenue-share arrangements should reduce the regulatory burden on the government and provide
greater freedom to E&P companies in making investment decisions. However, the devil is in the detail.
The fine print of revenue-sharing contracts and their implementation will test the effectiveness of this
change. The existing blocks would continue to be production-sharing contracts. The resolution of past
issues in production-sharing contract blocks can improve the ease of doing business for incumbent
players.
HELP provides marketing and pricing freedom. This is a good incentive for explorers for finding
hydrocarbons in India. In the past, the government had prescribed a formula for pricing domestically
produced natural gas. The policy change has now specified a price cap (based on landed costs of
alternate fuels) for new gas developments in existing deepwater and ultra-deepwater blocks. The intent
is to provide an economic incentive for development of these fields.
The cost of extracting natural gas varies by block, well and time. All exploration investments do not lead
to discoveries. Therefore, regulating prices based on cost and a rate of return on investment can be
time-consuming and inefficient. Setting a regulated price for all domestic production can result in some
higher cost discoveries becoming unviable and not getting developed.
In the long run, the government should consider a transition towards creating a single gas market in
India with price discovery through a transparent market-based mechanism.
The government has also announced the much-awaited extension policy for production-sharing
contracts for small, medium-sized and discovered fields awarded in the 1990s. The extensions can be
sought for a period of up to 10 years for both oil and gas production. However, extensions would be at
enhanced fiscal terms.
Some of these fields are on a decline, with falling production and increasing costs. There is a tradeoff
between the economic life of fields and generating higher government revenues. In addition, enhanced
fiscal terms imply that costs will increase and fields will start becoming unviable sooner rather than
later. The success of this policy will depend on whether these blocks are relinquished or existing
contractors seek extensions and invest money for enhanced oil recovery.
HELP is the most significant policy change for the upstream sector since 1998, and signals the
government’s desire to promote the sector and ease doing business in India. Its success will be driven by
the attractiveness of Indian basins and how well these policies are implemented. Resolving legacy issues
will also encourage existing and new entrants in the sector to participate in helping achieve the
government’s vision of enhanced domestic hydrocarbon production in India.
https://www.financialexpress.com/article/fe-columnist/greater-help-for-ep-firms/228462/