Modi Government is giving considerable policy support for the exploration of hydrocarbons so that investors can earn assured return on their investments
Delivering the 75th Independence Day address, Prime Minister Narendra Modi set the country a target to achieve self-reliance in energy production by boosting the gas-based economy (besides giving a push to electric mobility and hydrogen production). Modi wants the share of natural gas (NG) in the total energy mix to go up from the current around 6 per cent to 15 per cent.
Currently, India imports 50 per cent of its NG requirement. This is because domestic production is hovering around a low of 28.6 – 34 billion cubic metres (bcm) in 2020-21 to 2021-22 (down from a peak of 52 bcm in 2010-11). There is a dire need to give a massive push to domestic output to meet the target. India has 26 sedimentary basins (SBs) covering an area of 3.4 million sq km that could be searched for hydrocarbon resources. Only six of the SBs are under commercial exploitation; these too are sub-optimally utilized.
Hydrocarbon exploration is a highly capital-intensive and technology-intensive business involving a long-gestation period. It is risk-prone especially when it comes to drilling in deep/ultra-deep and high-pressure/high-temperature (D/UD/HP/HT) fields in offshore areas such as the Krishna-Godavari (KG) basin. However, these areas offer maximum promise in terms of reserves.
Multinational companies (MNCs) such as ExxonMobil, Chevron Total etc. which have the technology and resources can be enthused to take long-term bets in the Indian hydrocarbon sector provided the government offers them an opportunity to earn an attractive return on their investment in a ‘sustained’ basis. This in turn, requires that their efforts in the discovery and development of NG fields don’t face regulatory hurdles leading to the commencement of production within a reasonable time frame and that they can sell the gas ‘freely’ at a ‘remunerative’ price. In all three areas, the MNCs faced impediments in the past. In recent years, the Modi – government has made significant progress in removing these though, a lot more ground remains to be covered. Let us look at the regulatory landscape.
Nearly 50 percent of SB area or 1.73 million sq km lies offshore. Out of this, until recently 0.69 million sq km lay in the prohibited zone (fondly referred to as ‘No go’ area) due to security reasons. Now, the incumbent government has released a 0.67 million sq km sedimentary basin lying offshore. This should give a big boost to exploration and production (E&P) activity.
Until hitherto, E&P firms were getting lease rights for short tenure though extendable by 10 years for gas/oil & gas fields and by five years for oil fields. They had to go to the bureaucrats to seek approval for an extension of the lease which came in the way of undertaking long-term investment commitment.
Now, the government has granted E&P rights over the entire economic life of the allotted fields (this could extend up to 30 years, even beyond depending on the available reserves and the pace of their exploitation) instead of the extant system of allowing extensions. This will enthuse global firms to undertake long-term investment bets as they know for sure in advance that they will get to operate the field for their entire economic life
The government has passed the Forest (Conservation) Amendment Bill, which says that seismic surveys (it is done in the initial stage to determine evidence of economically viable hydrocarbon resources below the ground) won’t be treated as a non-forest activity. This implies that explorers would be granted prompt access to forest areas, thereby saving time spent on seeking permits.
Under the Hydrocarbon Exploration and Licensing Policy (HELP), also known as the Open Acreage Licensing Policy (OALP) launched in 2017, E&P firms are allowed to pick up a block of their choice unlike the earlier New Exploration and Licensing Policy (NELP) (launched in 1999) wherein they had to accept what the government offered. Besides, under OALP, an operator gets a composite license to search for hydrocarbon in whatever form; for instance, if it is ‘shale gas’, she won’t need a separate license for extracting it.
For long, E&P efforts were hamstrung by cumbersome procedures, multiple approvals and bureaucratic red tape. Approvals were needed at every stage viz. preparation of field development plans (FDP) including its revision, and extension of the contract, drilling wells, conducting tests to determine the commercial viability of the field, annual work program (AWP), laying the pipeline, reviewing production and so on. As many as 37 processes and procedures were required to be followed by a firm-awarded block under NELP.
Team Modi has substantially liberalised and de-bureaucratised the approvals. It has identified 22 processes for which self-certification of documents by contractors is accepted. Besides, it has provided for pre-approved clearance of blocks which will substantially cut the time lost in taking approvals. The government is also keen to opt for globally recognised and accepted dispute resolution mechanisms and play-based exploration.
Moreover, the ‘revenue sharing’ model under the OALP (currently in vogue) allows the operator to share an agreed percentage of the revenue with the Government of India (GOI) unlike the production sharing contracts (PSC) under erstwhile NELP wherein she could fully recover the cost incurred in exploration and development of the field before sharing profits with the GOI. The former does away with an additional layer of approval which was intrinsic to the latter wherein the costs incurred at every stage were subject to official scrutiny.
Coming to the selling of NG and realisation therefrom, in respect of gas from fields given under HELP/OALP, the operators are allowed freedom of pricing and marketing. This is a big positive for E&P firms that are being allotted fields under this policy. Furthermore, supplies from the so-called marginal fields (there are a total of 149) previously with the central PSUs viz. ONGC and OIL auctioned to private entities during 2020/21 are also eligible for freedom of pricing.
However, supplies from the so-called Legacy fields which account for the bulk of the current gas supply are subject to government control over price as well as the marketing of the produce. The Legacy staff includes fields given to ONGC/OIL on a ‘nomination’ basis, those given under NELP and pre-NELP blocks. There are two price ceilings.
One, call it ‘normal’ price. Based on the recommendations of the Kirit Parikh committee and in force from April 1, 2023, this price expressed on a per million British thermal units (Btu) basis is arrived at by taking 10 per cent of the monthly average of the Indian crude basket in the preceding month and notified every month. The price thus calculated is subject to a price band of US$4-6.50 per Btu.
Second, there is a ‘premium’ price applicable to the difficult fields. These are deep/ultra-deep and high-pressure/high-temperature fields (the high-profile KG-D6 operated by Reliance Industries and neighbouring KG-DWN-98/2 operated by ONGC fall in this category). Technically though the price of NG flowing from these fields is market-determined, this is subject to a ceiling linked to the prices of alternate fuels, viz., fuel oil, naphtha and imported LNG.
Even as the committee has recommended de-regulation of difficult gas fields’ price by January 1, 2026, and that of normal price by January 1, 2027, the government is silent on this. Having substantially liberalized the regulatory space, besides removing the remaining hurdles, Modi needs to take the next logical step of unshackling marketing and pricing for supplies from the Legacy fields.
(The writer is a Policy Analyst, views are personal)
https://www.dailypioneer.com/2023/columnists/regulatory-boost-to-self-sufficiency-in-energy.html
https://www.dailypioneer.com/uploads/2023/epaper/september/delhi-english-edition-2023-09-29.pdf