Oil &amp; gas policy

Despite an excellent production-sharing contract (PSC) regime, Indian oil and gas block auctions have not attracted the big daddies in the business, the Exxons and the Chevrons. The reason, according to those tracking the industry, is the “uncertainty in policy implementation” and “government interference”.

Under-achievement

The New Exploration Licensing Policy (NELP) was created in 1997. Between 1998 and 2012, there were nine rounds of oil and gas block auction, in which 254 blocks were awarded. Of that 178 are active and 78 have been relinquished.

Although 126 discoveries have been made in 41 active blocks, commercial production has commenced only in three blocks. The reasons for the delay vary from inadequate technology to delayed regulatory approvals. Today, only two blocks—the Reliance Industries-operated D6 block and the Gujarat State Petroleum Corporation-operated Cambay onshore block—are producing oil or gas.

Uniform licensing

The proposed Uniform Licensing Policy for award of hydrocarbon acreages under a new contractual system and fiscal model will lift all restrictions on explorers hunting for hydrocarbons. In keeping with what the explorers have been seeking for long, they can hunt for all kinds of resources: oil, gas, coal-bed methane and shale.

Until now the country has been offering exploration blocks under specific policies: NELP for oil and gas, and CBM policy for coal-bed methane.

The blocks for the tenth round of NELP auctions will be offered under the new policy. This time too the hitch is the fiscal regime, with policy-makers yet to reach a consensus. The new policy does away the current system of cost recovery and replaces it with an incremental production-based system. Under the cost recovery concept, a contractor first recovers his expenditure before sharing the profit with the government.

Under the production-linked system, which is said to be more transparent, the government starts earning revenues from day one of production. According to the Petroleum Ministry, this regime will also mean less intervention in routine exploration activities.

Implementation issue

However, those in the hydrocarbon business in India and even some within the government endorse the cost recovery regime. They argue that the production-sharing contract regime is the most appropriate because the risk is divided. They say the government could opt for different fiscal regimes for onshore and deepwater blocks.

The cost recovery regime requires close scrutiny of costs since there is an incentive for the contractors to book as costs all expenses that do not reflect the true economic cost to them.

A shift in regime may not directly result in more revenues for the government but it will ensure that as the contractor earns more, the government will get progressively higher revenue. Besides, it will also safeguard the government’s interest in case of a windfall arising from a price surge or a surprise geological find.

Uniform exploration will also mean that there will be no overlaps of blocks for exploring oil, gas, shale or CBM. At present, when implementing the CBM policy and the NELP, it is seen that resources in certain blocks cannot be explored owing to separate contractual conditions. Besides, shale horizons, which are not yet awarded to private players, have remained unexploited. Open Acreage Licensing

The government also wants to simultaneously launch the Open Acreage Licensing Policy (OALP), which allows an explorer to study the data available and bid for blocks of his choice. It remains to be seen what kind of fiscal regime will be offered for the OALP. Also, blocks already awarded under the nine NELP rounds will continue to operate under the existing regime.

A major challenge before the government will be to monitor all the fiscal regimes without being intrusive. Can it be done?