An ambitious roadshow

The New Exploration Licensing Policy, announced recently by the Central government, will integrate India's petroleum sector with the global market. However, the question is - for better or for worse?

THE New Exploration Licensing Policy (NELP-II) announced recently by the National Democratic Alliance (NDA) government gives you a feeling of deja vu. It offers a gilded package of extremely attractive terms to potential investors in the oil secto r, not unlike those offered by the P.V. Narasimha Rao-led Congress(I) government in the early 1990s to investors in fast-track power projects - a generosity that has almost crippled the once healthy Maharashtra State Electricity Board (MSEB). A year afte r a sub-group set up by the Prime Minister's Office (PMO) brought out a report - the Indian Hydrocarbon Vision 2025 - recommending a proactive and pre-eminent role for the government in accelerating the pace of oil exploration and production through the device of a fiscal package, the NDA government invited bids from private and foreign investors to invest in 25 oil and gas exploration blocks in the country.

The 25 blocks that are now on offer under NELP-II include eight deep-water blocks and three shallow-water blocks on the west coast, five shallow-water blocks on the east coast and nine onland blocks - two each in Gujarat, Uttar Pradesh and West Bengal an d one each in Assam, Orissa and Rajasthan. For the first time, deep-water blocks on the west coast and blocks in petroleum-rich Gujarat and Assam have been included in the NELP. Union Minister for Petroleum and Natural Gas Ram Naik claimed that all the b locks are located in proven and promising sedimentary basins. Under NELP-II, companies can bid for any or all of the 25 blocks either singly or in association with others through an incorporated or unincorporated venture. Each of the participating compan ies in the consortium must have a minimum interest of 10 per cent in the equity.

The policy lays down no minimum expenditure on exploration, no signature, discovery or production bonuses and no compulsory state participation. Moreover, it provides a seven-year tax holiday from the date of commencement of commercial production, zero c ustoms duty on imports required for petroleum operations and other attractive terms. It also promises 100 per cent cost recovery on exploration, production and development. More crucially, it offers full recovery of all royalties paid to the Indian gove rnment for the oil or gas extracted. The policy also offers the option of a 10-year amortisation of all exploration and drilling expenses. The successful bidder who hits black gold can sell it in the domestic market not at international prices, but at im port parity prices that include not only the cost of the oil or gas, but also the transportation cost right up to the nearest port. An exploration licence or a mining lease acquired by the successful bidder can be assigned with the approval of the Govern ment of India.

The fiscal package will be evaluated on the basis of the percentage of profits that the bidder offers to share with the Government of India after all the costs have been fully met. The model production-sharing contract (MPSC) envisages varying rates of p rofit-sharing to be offered by the bidder depending upon the pre-tax investment multiple achieved by the bidder. (The investment multiple is the net investment made by the successful bidder after all the exploration, production and development expenses h ave been recovered and the royalties paid.) The profit-sharing rates are biddable. The three biddable parameters in the offer are: 1. work programme commitment, 2. profit-petroleum share expected by the contractor at various levels of pre-tax multiple of investments reached and 3. percentage of annual production expected to be allocated to cost recovery.

Considering that most of the blocks are proven basins, thanks to the substantial resources already invested in proving them, the terms offered under NELP-II are attractive. There is no stipulation of targets for investments in exploration and each contra ctor can stretch the exploration up to seven years in three phases (eight in the case of deep-water blocks). Hence, bidders can quote attractive terms just to pre-empt others and corner the blocks. The negotiability of certain provisions in the relinquis hment clause provides scope for such behaviour. The assignability of the contracts makes such behaviour all the more lucrative, especially when global oil prices are high. A similar experience in the telecom sector should not be forgotten - Himachal Futu ristic Corporation Limited bid astronomical licence fees and won several circles in order to pre-empt other serious bidders.

There are no signature bonuses to be paid for resources already invested and the investor is entitled to full recovery of all costs, including royalties paid to the government. The Panna-Mukta deal came under severe criticism for, among other things, the paltry signature bonus it paid. However, in the present case, even such a fig leaf has been dispensed with. Royalty has been pegged at 12.5 per cent for oil and at 10 per cent for natural gas. However, this can also be fully recovered by the contractor as part of costs.

The cost-plus approach might have adverse consequences just as it had in the power sector, although the manner in which this would work is quite different. Under the NELP, there is scope for inflating the exploration and production cost, especially when different technologies and equipment are brought in. Whether the management committee envisaged in the production-sharing contract (with two government representatives) - with its potential for corruption - will effectively check cost-padding is anybody' s guess. Since the policy envisages full cost recovery (with the option to do so in 10 years), profit-sharing can be delayed till such time as all the costs are recovered. Since the contractor can sell the produce in the domestic market at import parity prices, it is not clear what benefit the government expects from the deal except some foreign exchange saving. In any case, the saving in forex would be offset partially or entirely by the repatriation of certain costs such as equipment cost, technical f ee and so on allowed to the investors. Whether the residual gain in forex justifies the depletion of domestic oil reserves is a moot point.

Despite its generous terms, NELP-II is an improvement over the earlier policy in certain respects. There is a conscious effort to introduce a modicum of transparency in the bidding process since the weightages and broad parameters for bid evaluation have been explicitly set out. The bids will be evaluated on the basis of weightage to the extent of 6 per cent for technical capability of the bidder, 4 per cent for financial strength of the bidding consortium, 60 per cent for "committed work programme" and 30 per cent for the fiscal package offered.

The production-sharing contract signed under the first phase of NELP has since been revised, incorporating the suggestions of 43 companies and organisations from the petroleum sector. A MPSC is one of the documents that adorns the shiny folder handed out by the Ministry. The government has also put on sale basin information dockets, data packages and additional data items which prospective investors can use in their bidding considerations. Apart from the data viewing centre in New Delhi, two centres are being opened at the Indian High Commission in London and the Indian Consulate in Houston for inspection of data on exploration blocks and to provide clarifications to potential investors.

The anxiety of the government in ensuring adequate response to the offer is evident in the numerous roadshows that it has organised to peddle its project to prospective customers. The last date for submission of bids is March 31 and the bids would be ope ned on the same day. Whatever else it does, NELP-II will integrate India's upstream petroleum sector with the global marketplace - for better or for worse.