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India struggles to expand its upstream

The Indian government is hoping that new regulations will encourage investment in the upstream oil and gas sector to offset rising imports

Shashi Shanker, the chairman of India's state-owned Oil and Natural Gas Corporation (ONGC), says his firm is investing Rs 920bn ($14.15bn) in 35 major projects, including 14 to bring new finds to production and six to improve recovery from ageing fields. ONGC also plans to almost double its natural gas production within five years. But it has some significant hurdles to overcome.

ONGC is the country's biggest gas producer, accounting for nearly 80% of the 70m cubic metres a day current output, and almost 70% of oil production coming from mature fields. The state company had targeted output of 22.73m tonnes (179.57m barrels) of crude oil in 2015-16, but managed only 22.37m. The company's oil output also missed targets in the previous two years.

ONGC's planned gas production in 2015-16 was 23.91bn cubic metres, but the company managed just 21.18bn cm.

Ageing fields and contractual issues are among the reasons for low production of crude oil and natural gas, from both ONGC and Oil India Limited (OIL). Around 75% of ONGC's oil and gas production comes from just 15 fields, including those in Ankleshwar and Rudrasagar, which were discovered in 1961 and came onstream the same year. They are still producing. So, too, is Mumbai High, where output began in 1976.

Alay Patel, senior analyst for Asia upstream at consultancy Wood Mackenzie, says ONGC needs to implement existing and proven asset recovery technologies alongside emerging ones to keep the ageing fields online. The company should identify new pay zones in the producing fields which may entail remapping some of them. Production facilities will also have to be periodically revamped.

Patel said it was unlikely that ONGC would meet its target of doubling natural gas production within five years. This could be because of delays in procurement and awarding tenders, or failure to get requisite approvals in time. Geological uncertainty would be another hindrance because of reservoir challenges, particularly off the east coast.

Gas strategy

Meanwhile, the federal Indian government is targeting an increase in the share of gas in the country's energy mix, from 6.5% to 15%, in the next few years. Patel said gas pipeline infrastructure should be built out to help achieve this. While growth in power sector gas demand is vital to support new infrastructure and expand overall gas usage, this still isn't happening. Companies may need to look at co-generation as an option to boost gas into power.

Today, India is heavily dependent on imports for meeting its domestic crude oil and natural gas needs. It imported around 82% of its total oil demand in 2016-17, while liquefied natural gas imports accounted for about 40% of total gas consumption. India is the fourth-largest LNG importer after Japan, Korea, and China, and has four terminals with a combined capacity of 27m tonnes a year. However, the capacity is expected to rise to 47.5m t/y by 2022.

The assumption is that India's expanding economy will demand ever-rising volumes of energy, meaning increasing supplies from abroad, with the fossil fuel demand-supply gap widening.

The federal government, realising the seriousness of the situation and the need to reduce dependency on imports, has initiated reforms aimed at enhancing domestic production.

In 2016 it introduced a new Hydrocarbon Exploration and Licensing Policy (Help) to encourage upstream investment.

Help gives operators the freedom to market produced oil and gas domestically through a transparent bidding process, and alleviates the conflicts experienced in the previous New Exploration Licensing Policy (Nelp) licensing policy. Help does away with cost recovery based on pre-tax investment multiples and simplifies the revenue-sharing model. With the introduction of Help, India plans to reduce its oil and gas import dependency by 10% by 2022. But it will be a few years until the impact of the new policy can be assessed.

Apart from Help, the government is banking on investments from other reforms in the petroleum sector, including Open Acreage Licensing (OAL). Patel believes that a number of issues need to be tackled, like infrastructure and competition within the gas sector through diversified supply sources.

Equally important will be demand. Consumers should be in a position where gas is truly cost-competitive viz a viz alternate fuels without any incentives. This is essential for true gas market liberalisation.

Patel added that the operator mix in the country needs to be diversified. Currently, there are a handful of operators and this needs to increase considerably. However, this is a longer-term measure and OAL should help in this regard over time. OAL is attractive to investors because it allows companies to select explorations blocks or areas after studying seismic data. Investors also have the option to bid for oil and gasfields throughout the year.

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