In a
major policy drive to give a boost to petroleum and hydrocarbon sector, the
Government has unveiled a series of initiatives. The Union Cabinet and the
Cabinet Committee on Economic Affairs in its meeting today has taken the
following decisions –
1. Hydrocarbon
Exploration Licensing Policy, HELP: An innovative Policy for future which
provides for a uniform licensing system to cover all hydrocarbons such as oil,
gas, coal bed methane etc. under a single licensing framework.
2. Marketing
and Pricing freedom for new gas production from Deepwater, Ultra Deepwater and
High Pressure-High Temperature Areas.
3. Policy
for grant of extension to the Production Sharing Contracts for small, medium
sized and discovered fields
4. Cancellation
of the Ratna offshore field award from ESSAR Oil Limited and assigning it to
the original licensee, ONGC. .
Hydrocarbon
Exploration Licensing Policy, HELP: Innovative Policy for future
The present
policy regime for exploration and production of oil and gas, known as New Exploration
Licensing Policy (NELP), been in existence for 18 years. Over the years,
various problems and issues have arisen.
Presently, there
are separate policies and licenses for different hydrocarbons. There are
separate policy regimes for conventional oil and gas, coal-bed methane, shale
oil and gas and gas hydrates. Different fiscal terms are also in force for
allocation of acreages for exploration for different hydrocarbons. In
practice, there is overlapping of resources between different contracts.
Unconventional hydrocarbons (shale gas and shale oil) were unknown when NELP
was framed. This fragmented policy framework leads to inefficiencies in
exploiting natural resources. For example, while exploring for one type of
hydrocarbon, if a different one is found, it will need separate licensing,
adding to cost.
The Production
Sharing Contracts (PSCs) under NELP are based on the principle of “profit
sharing”. When a contractor discovers oil or gas, he is expected to share with
the Government the profit from his venture, as per the percentage given
in his bid. Until a profit is made, no share is given to Government, other
than royalties and cesses. Since the contract requires the profit to be
measured, it becomes necessary for the cost to be accounted for and checked by
the Government. To prevent loss of Government revenue, these are requirements
for Government approval at various stages to prevent the contractor from
exaggerating the cost. Activities cannot be commenced till the approval is
given. This process of approval of activities and cost gives the Government a
lot of discretion and has become a major source of delays and disputes. Many
projects have been delayed for months and years due to disagreement between the
Government and the contractor regarding the necessity or lack of necessity for
particular items of cost, and the correctness of the cost.
Another feature
of the current system is that exploration is confined to blocks which have been
put on tender by the Government. There are situations where exploration
companies may themselves have information or interest regarding other areas
where they may like to pursue exploration. Currently these opportunities
remain untapped, until and unless Government brings them to bidding at some
stage.
The pricing of
gas in the current system has undergone many changes and witnessed considerable
litigation. Currently, the producer price of gas is fixed administratively by
the Government. This has led to loss of revenue, a large number of disputes, arbitrations
and court cases.
The current
policy regime, in fixing royalties, does not distinguish between shallow water
fields (where costs and risks are lower) and deep/ultra-deep water fields where
risks and costs are much higher.
The country currently
faces a situation where oil and gas constitutes a major and increasing share of
total imports. Oil production has stagnated while gas production has
declined. There is a need for concerted policy measures to stimulate domestic
production. Keeping in view this objective, the Government has enunciated a
new policy regime for exploration licensing, the Hydrocarbon Exploration and
Licensing Policy, HELP with the following key features:
·
There
will be a uniform licensing system which will cover all hydrocarbons,
i.e. oil, gas, coal bed methane etc. under a single license and policy
framework.
·
Contracts
will be based on “biddable revenue sharing”. Bidders will be required to quote
revenue sharein their bids and this will be a key parameter for selecting the
winning bid. They will quote a different share at two levels of revenue called
“lower revenue point” and “higher revenue point”. Revenue share for
intermediate points will be calculated by linear interpolation. The bidder
giving the highest net present value of revenue share to the Government, as per
transparent methodology, will get the maximum marks under this parameter.
·
An
Open Acreage Licensing Policy will be implemented whereby a bidder may apply to
the Government seeking exploration of any block not already covered by
exploration. The Government will examine the Expression of Interest and
justification. If it is suitable for award, Govt. will call for competitive
bids after obtaining necessary environmental and other clearances. This will
enable a faster coverage of the available geographical area.
·
A
concessional royalty regime will be implemented for deep water and ultra-deep
water areas. These areas shall not have any royalty for the first seven years,
and thereafter shall have a concessional royalty of 5% (in deep water areas)
and 2% (in ultra-deep water areas).
·
In
shallow water areas, the royalty rates shall be reduced from 10% to 7.5%.
·
The
contractor will have freedom for pricing and marketing of gas produced in the
domestic market on arms length basis. To safeguard the Government revenue, the
Government’s share of profit will be calculated based on the higher of
prevailing international crude price or actual price.
The new policy
regime marks a generational shift and modernization of the oil and gas
exploration policy. It is expected to stimulate new exploration activity for
oil, gas and other hydrocarbons and eventually reduce import dependence. It is
also expected to create substantial new job opportunities in the petroleum
sector. The introduction of the concept of revenue sharing is a major step in
the direction of “minimum government maximum governance”, as it will not be
necessary for the Government to verify the costs incurred by the contractor.
Marketing and pricing freedom will further simplify the process. These will
remove the discretion in the hands of the Government, reduce disputes, avoid
opportunities for corruption, reduce administrative delays and thus stimulate
growth.
Marketing and
Pricing freedom for new gas production from Deepwater, Ultra Deep water and
High Pressure-High Temperature Areas
Imports
of hydrocarbons occupy a large share of India’s total imports. Currently, over
three-quarters of the domestic requirement of crude oil and approximately a
third of domestic requirement of gas are met through imports. In terms of
macro-economic impact and also in terms of energy security, it is of paramount
importance that domestic production of hydrocarbons be increased.
Much
of the unexploited oil and gas available in India is in areas characterized by
deep water/ultra-deep water or high pressure/high temperature. The Cabinet
Committee on Economic Affairs approved a mechanism for pricing of domestically
produced natural gason 18.10.2014. Recognizing the need for incentivizing gas
production from deep water, ultra deep water and High Pressure-High Temperature
(HPHT) areas on account of higher costs and higher risks involved in
exploitation of gas from such areas, in principle approval was also given for a
premium on the gas price for the gas to be produced from new discoveries from
such areas.
Subsequent
to the decision of the CCEA, global oil and gas prices have fallen
substantially and are currently at the lowest level for over a decade,
affecting the attractiveness of the sector to potential investors. There are a
number of discoveries of gas in deep water/ultra- deep water, high
pressure/high temperature areas which have not been developed. ONGC and other
operators have been requesting a higher price for gas to be produced from such
fields, without which they may not be economical to bring to production.
Meanwhile, domestic gas production is showing a declining trend. It has
witnessed a decline of 17% in two years from 40.66 BCM in 2012-13, it fell to
33.65 BCM in 2014-15. With the economy growing at over 7%, demand for petroleum
products including gas is increasing. The sector thus faces a situation of
rising demand, falling production and consequently rapid increase in imports.
In
this background, after extensive consultations, it was felt that rather than
fixing a premium, it would be more appropriate to provide marketing and pricing
freedom to the gas to be produced from the new discoveries as well as existing
discoveries which are yet to commence production. However, in order to protect
user industries from market imperfections, this freedom would be accompanied by
a price ceiling based on opportunity cost of imported fuels.
After
a careful consideration of the country’s strategic, economic and environmental
interests and interests of both producing and consuming industries, a new
policy is being introduced which is balanced. The salient features of the new
policy are as follows:
·
For
all the discoveries in deep water/ultra-deep water/high temperature/ high
pressure areas which are yet to commence commercial production as on 1.1.2016
and for all future discoveries in such areas, the producers will be allowed
marketing freedom including pricing freedom.
·
To
protect user industries from any market imperfections, this freedom would be
subject to a ceiling price on the basis of landed price of alternative fuels.
To the extent that domestic gas can be produced and sold at a price below
import parity price, it will not only benefit the overall economy by boosting
employment and GDP and reducing imports, but also benefit the user industry by
lowering the average price.
·
The
ceiling shall be based on publicly available prices of substitute fuels and the
method of calculation shall be communicated transparently.
·
The
ceiling price shall be calculated as, lowest of the (i) Landed price of
imported fuel oil (ii) Weighted average import landed price of substitute fuels
(namely coal, fuel oil and naphtha) (iii) Landed price of imported LNG. The
weighted average import landed price of substitute fuels in (ii) above will be
defined as: 0.3 x price of coal + 0.4 x price of fuel oil + 0.3 x price of
naphtha.
The
Ministry of Petroleum and Natural Gas will notify the periodic revision of gas
price ceiling under these guidelines.
In the
case of existing discoveries which are yet to commence commercial production as
on 1.1.2016, if there is pending arbitration or litigation filed by the
contractors directly pertaining to gas pricing covering such fields, this
policy guideline shall apply only on the conclusion/withdrawal of such
litigation/arbitration and the attendant legal proceedings.
All
gas fields currently under production will continue to be governed by the
pricing regime which is currently applicable to them.
Production
Enhancement:
The
decision is expected to improve the viability of some of the discoveries
already made in such areas and also would lead to monetization of future
discoveries as well. The reserves which are expected to get monetized are of
the order of 6.75 tcf or 190 BCM or around 35 mmscmd considering a production
profile of 15 years. The associated reserves are valued at 28.35 Billion USD
(1,80,000 Crore) The country’s present gas production is around 90 mmscmd.
Besides, these there are around 10 discoveries which have been notified and
whose potential is yet to be established.
There
would be substantial employment generated during the development phase of these
discoveries and a part of it would continue during the production phase of the
block. As an illustration, ONGC has estimated that in the development of
discoveries in the block KG-DWN-98/2, there would be deployment of 3850 direct
skilled workers. Besides, these there would be around 20000 persons required
during the construction phase. These personnel will take care of fabrication
workshops, marine crew in barges, civil works of onshore terminal etc.
Policy for grant of extension to the
Production Sharing Contracts for small, medium sized and discovered fields
28 small, medium
sized fields discovered by National Oil Companies (ONGC and OIL) were awarded
to Private Joint Ventures through Production Sharing Contract (PSC) between
1994-1998 for periods varying from 18 to 25 years. These Contracts are
effective from different points of time. The earliest of PSCs were signed in
the year 1994. Out of 28 PSCs, two fields in which the duration of the PSC had
expired in 2013 had been granted extension up to 2018. The remaining PSCs
would start expiring from 2018.
For many of
these fields the recoverable reserves are not likely to be produced within the
remaining duration of contract. Further, in certain fields where additional
recovery of hydrocarbons can be obtained only through capital intensive
Enhanced Oil Recovery/Improved Oil Recovery (EOR/IOR) Projects, the payback
period would extend beyond the current duration of the contract.
A uniform and
transparent policy for extension of the remaining reserves is required to be
put in place to enable the contractors to take investment decisions for
exploitation of the remaining reserves. It is expected to expedite decision
making, enable timely planning by the contractors, and lead to increased oil
and gas production.
The following process and
guidelines for extension of contracts for small and medium sized discovered
fields is being put in place:
(i)
The
contractor should submit the application for extension of Contract at least 2
years in advance of the expiry date, but not more than 6 years in advance. The
Director General Hydrocarbons (DGH) will make a recommendation within 6 months
of submission of application by the contractor. The Government will take a
decision on the request for extension within 3 months of receipt of the
proposal from DGH.
(ii)
The
Government share of Profit Petroleum during the extended period of contract
shall be 10% higher than the share as calculated using the normal PSC
provisions in any year during the extended period. For example, if the current
profit share, is 10 or 20%, it shall become 20 or 30% respectively.
(iii)
During
the extended period of Contract, the royalty and cess shall be payable at
prevailing rates and not at concessional rates stipulated in the contracts.
(iv)
The
extension of these PSCs would be considered for 10 years both for oil and gas
fields or economic life of the Field, whichever is earlier.
Production
Enhancement:
The
policy for PSC extension will lead to production of hydrocarbons beyond the
present term of PSC. The reserves which are likely to get monetized during the
extended period are of the order of 15.7 MMT of oil and 20.6 MMT of Oil
Equivalent of gas. The reserves associated with this field would lead to
monetization of reserves worth USD 8.25 Billion (around 53000 Crore). The
monetization of these reserves would require an additional investment of USD 3
to 4 Billion.
Employment Generation Potential:
The
extension of these contracts is expected to bring extra investments in the
fields and would generate both direct (related to field operations) and
indirect employment (related to service industry associated with these
fields).
The extension of
contracts would also envisage that the present employment levels in these
fields are maintained for a longer period of time.
Presently,
medium sized fields are employing around 300 personnel for field operations
while for small sized fields this would be around 40 to 60 persons.
The investments
in these fields may also lead to construction and laying of facilities which
would employ several unskilled labourers, over and above the skilled labourers.
Transparency
and Minimum Government and Maximum Governance:
With
a view to enable the E&P companies to take investment decisions for
exploitation of the remaining reserves this extension policy has been approved
so as to grant extensions in a fair and transparent manner.
The
policy aims at bringing out clear terms of extension so that the resources can
be expeditiously exploited in the interest of energy security of the country
and improving the investment climate.
Ratna
Field
The
Ratna Offshore Field, located south-west of Mumbai, was discovered in 1971 by
ONGC. The field was tendered out and tentatively awarded to ESSAR Oil Ltd. in
1996. Ever since then due to a number of administrative and legal
uncertainties, which were raised and examined at various times,the contract was
never finalized. As this field has remained without exploitation for over 20
years since its initial tendering, the Government has now decided that it will
be assigned to ONGC on nomination basis. This will enable this long pending and
proven oil reserve to come into production, and create new employment.
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AKT/SH/