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Help arrives in India

India's government has sweetened its upstream terms, hoping to spur much more activity

India needs its own upstream to produce more energy. Companies are willing and now the government thinks it has struck a formula to spur the investment.

Domestic firms still dominate. Oil and Natural Gas Corporation (ONGC), plus another government-run explorer, Oil India Limited (Oil), have been stalwarts, while private-sector firms Reliance Industries (RIL) and Cairn Energy bite at their heels.

But, so far, their best efforts haven't been sufficient to keep a hefty import bill from rising still further—about four-fifths of the oil and gas India consumes is extracted abroad. The Directorate General of Hydrocarbons (DGH), the regulatory division of the Ministry of Petroleum and Natural Gas, says total crude output in fiscal year 2015-16 was 36.95m tonnes (about 0.74m barrels a day)—69% sourced from the so-called nomination regime—typically fields entrusted to state firms—and 31% from production-sharing contracts. Natural gas production was 32.249bn cubic metres, dominated again from the nominated contracts.

Reserves, though, are nothing to sniff at. Crude oil deposits, reckons the DGH, amount to more than 5bn barrels—Asia's second-biggest endowment—and gas around 1.2 trillion cm, according to BP. Now India needs more exploration.

But there is progress. The National Data Repository (NDR) project, a recently formed government body to compile upstream data, is in an advanced stage of completion. Producers are getting busy. In financial year 2017, ONGC made 23 hydrocarbon discoveries, adding reserves of 65m tonnes of oil equivalent.

ONGC says it will start producing from blocks in the Krishna Godavari basin (KG-DWN-98/2) and Ratna and R-Series oilfields offshore Mumbai by 2019. Coal-bed methane blocks in Jharkhand State should be on stream by 2020. The Daman offshore fields, now producing, will be ramped up next year. It means that, after more than a decade of fairly static output, ONGC expects to increase gas production by nearly 30% over the next three-four years—a return on investment of around $11bn.

More is coming. The firm says it will invest Rs50bn ($0.78bn) drilling new wells, installing a new platform, and exploring to extract more gas from the Bassein (or Vasai) gasfield in the Arabian Sea. Bassein, 80km offshore Mumbai, now produces 24m cm a day.

The real gains could be made elsewhere. India has 26 sedimentary basins spanning more than 3m square kms—about 1.35m of which is in deep water. So the scantily explored offshore, thought to hold more than half the country's known reserves, offers promise. Most recoverable reserves are found in India's west, near Mumbai but also onshore in Gujarat. The Assam-Arakan Basin, in the northeast, which is already producing, holds about 22% of the reserves.

The private sector is gaining some verve. Cairn India already produces about 150,000 b/d from the Rajasthan block in northwest India, though the government wants the assets there to yield 300,000 b/d. RIL, along with joint venture partner BP, recently announced plans to invest another $6bn in gasfields in Krishna Godavari.

More heavy spending will be necessary. To plug its supply-demand gap with home-grown energy, India wants $25bn in investment in the next few years—a cornerstone of a strategy that aims to reduce imports by 10% by 2022.

Offering Help

Reforms to the investment regime should offer some assistance. Last year, the government replacing the New Exploration & Licensing Policy, with the Hydrocarbon Exploration Licensing Policy, designed to speed up the approvals process and sweeten the terms for investors. It also introduced the Discovered Small Fields (DSF) policy, Uniform Licensing policy and a new revenue-sharing mechanism for future upstream contracts.

Alay Patel, an India analyst for Wood Mackenzie, says the changes are welcome. "The manner in which the DSF-1 contracts proceed will be a good road test for the various new policy initiatives in the sector, like Help. These are targeted to some extent towards reducing bureaucracy, which was a big hindrance in the past." Geological uncertainties remain, says Patel, "and it is really important to attract companies who are willing to take on these risks."

Alongside the revamps to upstream policy, the government is also planning to incentivise the use of biofuels. It's another effort to curb imports—though previous initiatives have had mixed success.

For all the government's efforts to stimulate more upstream activity, the producers still want more. ONGC has lobbied for liberalisation of gas pricing, which it thinks will spur more supply and open up a new sedimentary basin. Patel says the government could also offer incentives for enhanced and improved oil recovery—essential in a country where many producing fields are now so mature. Also critical, will be India's efforts to diversify its operator mix: more foreign firms are needed.

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