Will the new oil-and-gas auction regime work?
The government is doing the right thing by choosing revenue-share over the existing controversial cost recovery model of development
The government on Monday announced its proposal for a new regime governing the development of the nation’s precious oil and gas blocks and claimed the changes are at the forefront of its efforts to reform the petroleum exploration and production (E&P) sector and are aligned with the larger intent of “ease of doing business”.
Minus the jargons, the basic idea stems from the concerns over the country’s stagnant crude oil production which has inflated the energy-hungry nation’s fuel bill to a massive $112 billion annually. That, coupled with the huge decline in natural gas production, is a formidable problem for India’s energy security ambitions.
The latest announcement of the new draft “fiscal and contractual regime for the oil and gas sector” follows similar policy guidelines unveiled last month for 69 marginal, or difficult to develop, oil and gas finds that is aimed to unlock Rs 77,000 crore worth of hydrocarbon reserves.
While these efforts are ambitious as they mark a switch towards pricing and marketing freedom for companies and a more investor-friendly revenue-sharing model of development, will the new policy really become the game changer the government is making us believe it is? What are the chances of its success given the current scenario where global oil prices have been battered to historic lows of sub $41 per barrel — as compared to the peak of $147 per barrel in 2012 – that will significantly shrink the returns for companies.
The government is doing the right thing by choosing revenue-share over the existing controversial cost recovery model of development. Simply put, the new model allows companies to indicate he revenue they will have to share with the government at different stages of production. This is unlike the current system where companies win blocks by committing the highest investment and recover them before sharing profits with the government. The existing system is criticized for allowing companies to gold-plate investments leading to legal tangles.
A second factor in favor of revenue-sharing is the significantly reduced levels of regulatory scrutiny investors are wary of. Delayed clearances have impacted India’s “ease of doing business” image for long.
The government has made the regime attractive also through free pricing of the gas output. Remember that despite the last year’s natural gas pricing guidelines, which linked domestic prices to global rates, companies are lobbying to have the pricing formula reworked, arguing it does not adequately represent the market rates.
Global crude prices have fallen by more than a half in the past over a year to $41 per barrel without a matching decrease in domestic gas prices, they argue. Companies would gain from the new pricing regime as they would bid for blocks in low price scenario and reap the benefits when prices rise in a few years.
Finally, the government has allowed “open acreage” under the new regime where companies would be allowed to choose the block they want to be bid for and apply for it unlike the current system where the government identifies the blocks and then invites bids. Another major reform is related to the ease for companies in terms of licensing. Under the new system, companies would be able to develop all types of hydrocarbons – conventional, shale or Coal Bed Methane (CBM) – using a single license unlike the present system of separate licenses for each.