Prime Minister Narendra Modi has set an ambitious target of cutting India’s import dependence for oil from existing around 80% to 67% by 2022 and further down to 50% by 2030.
To meet the target, his government has taken several initiatives to create a conducive ‘policy’ and ‘regulatory’ environment for boosting domestic production of hydrocarbons. A path-breaking policy initiative was introduction in July, 2017 of the Hydrocarbon Exploration and Licensing Policy [HELP] in place of the subsisting New Exploration and Licensing Policy [NELP] that was launched in 1999.
Also dubbed as Open Acreage Licensing Policy [OALP], under HELP, bidders can get a single license for exploration and production of conventional hydrocarbons such as oil, natural gas as well as unconventional including shale gas and coal bed methane [CBM] etc. They can pick up a block of their choice. They are allowed freedom of pricing and marketing.
Unlike profit-sharing model under NELP wherein, companies first recover their investment and only thereafter, begin sharing profit with government, HELP offers revenue sharing contract. The blocks are awarded to those companies that offer the highest share of revenue. Under this model, the government starts getting its share from the day one of the commencement of production. The new regime provides a ‘certain’ and ‘stable’ policy environment.
Recently, the government has also cleared a policy which will allow mining of unconventional hydrocarbons from the fields already awarded under NELP or nominated in regimes prior to NELP.
OALP under HELP has led to encouraging results as under the first round, the government is all set to award all of 55 blocks on offer [46 on-land and 9 offshore covering a total area of 59,282 sq km] to Vedanta Cairn: 41, Oil India Limited [OIL]: 9 and Oil and Natural Gas Corporation [ONGC]: 2.
However, a worrying aspect continues to be with regard to pricing of hydrocarbons. For crude oil, until 2015-16, despite the price of domestic crude linked to its international price, ONGC/OIL were forced to give discount to downstream oil PSUs to share a portion of the under-recovery on sale of refined products viz. diesel, kerosene, LPG etc at low price. This hampered former’s ability to generate cash for undertaking investment. From 2016-17, the government has discontinued with this practice.
While, this was helped by decline in international prices of crude and the refined products, now that global prices are firming up, there is a risk that government may resurrect discounts. In this scenario, the ability of ONGC/OIL to generate the required internal resources will suffer.
The pricing of natural gas poses a bigger challenge. Currently, there are multiplicity of pricing regimes depending on the source of supply. As per guidelines in vogue since November 1, 2014, for all of domestic supplies from fields given under NELP as also blocks given on ‘nomination’ to ONGC/OIL under pre-NELP, the price is a weighted average of prices at 4 global locations viz., Henry Hub [USA], NBP [National Balancing Point] [UK], AGR [Alberta Gas Reference] [Canada] and Russian price.
However, for fields given under pre-NELP wherein the agreement with the contractors did not require approval by the government, the prices as mentioned therein apply.
For gas produced from deep/ultra-deep, high-pressure/high-temperature [HP/HT] fields which present challenging physical and geological environments, from March, 2016, the government has allowed ‘premium’ pricing linked to prices of alternate fuels including fuel oil, naphtha and imported LNG [liquefied natural gas].
Finally, for fields given under HELP/OALP as also for marginal fields and CBM, ‘market-based’ pricing is allowed.
The prices vary widely. The existing supplies of conventional hydrocarbons – bench-marked to 4 global locations – is priced at about US$ 3 per million Btu. The premium price from difficult fields is more than double this or about US$ 7 per mBtu. The market-based price from OALP fields would be even higher [given the huge shortfall in indigenous supply versus demand] nearer the price of imported gas of over US$ 10 per mBtu. Then, you have price for pre-NELP areas not requiring government nod.
Such a heterogeneous price structure gives conflicting signals to producers. They are unlikely to pay much attention to development and production from fields which get the lowest price. Some companies for instance, ONGC have under them ‘normal’ [onshore or offshore/shallow] as well as ‘difficult’ fields. Lured by higher price, it will be prompted to focus more on the latter. Already, ONGC has raised concern over inadequacy of price for existing fields.
Under the ‘difficult’ category, there is lot of ambiguity with regard to eligibility of particular field for premium price. Given that the policy was introduced from March 2016, will the fields which started production before this date [e.g. KG-D6 operated by Reliance Industries Ltd] be eligible for higher price? There are cases wherein the field was discovered before March 2016 but production commences after this date [KG-D2/ONGC]. Will they qualify?
The operators already producing oil and gas have been allowed to produce unconventional hydrocarbons viz. CBM, shale gas etc from the same fields. Whereas, for the latter, the government has allowed market-based price, the former gets much lower formula based price. Given the huge differential in price, the operator will be tempted to claim more supplies under the unconventional category.
The subsisting pricing regime [highly differentiated] leaves lot of scope for discretion making it susceptible to manipulation, nepotism and corruption. It leads to uncertainty of the policy environment and could be the biggest stumbling block to investment in exploration, development and commercialization of fields.
The government should put an end to this by retaining a single formula-based price [read: November, 2014 guidelines] which should be uniformly applied to all supplies irrespective of the field [normal or difficult], hydrocarbon type [conventional or unconventional] and the timing of discovery or commencement of commercial production.
As regards, difficult fields which entail higher capital expenditure on their development, the same will be more than offset by much higher production. If, however, the operator is unable to achieve committed production or does just a fraction of it [e.g. KG-D6] then, any level of price howsoever high cannot make the field viable.
A uniform pricing regime together with HELP/OALP will create an ambience just right for achieving the goal set by the prime minister for reducing dependence on oil import to 50% by 2030.