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Picking through the crumbs

Flushed with Cairn Energy's success, the firm's exploration director, Mike Watts, takes great enjoyment at industry conferences in putting up a map of Southeast Asia showing the huge number of wells drilled across the region by the biggest seven oil companies in the world. The red dots outside India total 8,000. Inside the country? Well, it's somewhat fewer – 12. Steve Hawkes reports.

Cairn Energy shocked the industry to its foundations when revealing in January last year that it might just have found more than 1bn barrels of oil in the Indian desert in Rajasthan. What's more, it was on a block sold for loose change by Shell, the company that had just told the City it had far less oil than it thought. The supermajors are finally sitting up and taking notice.

Watts' chart only goes up until the mid-1990s, but it is more than enough to prove his point that India has long been overlooked. This is starting to change. Watts is just one of the industry experts Indian officials have taken with them on a global roadshow designed to attract companies to bid for one of the 20 blocks put up for grabs by Delhi in NELP V, the latest licensing round from an ever-more progressive-thinking government. Crowds have flocked to conferences in London, Houston, Dubai and Calgary in unprecedented numbers.

The potential has changed

VK Sibal, who, as director-general of hydrocarbons in India, has taken on the process of making the country more appealing for foreign explorers, says: "All the data rooms are full. In previous years, no-one came. We were in Moscow last week expecting 30 companies and there were 80. Our message is that investment conditions have changed. The potential has changed."

Sibal's hand is strengthened not only by the record oil price, but also by the first smattering of world-class discoveries in the country. Cairn's stunning find in Rajasthan came two years after Reliance and Niko Resources recorded the world's biggest gas discovery in 2002, in the deep-water Krishna-Godavari (KG) basin, off the eastern Andhra Pradesh coast – some 12-14 trillion cubic feet (cf).

As luck would have it, just as Sibal and his touring party prepared to take off to Australia and Malaysia for the last two legs of their promotional journey at the beginning of March, state-owned ONGC made a "significant" find in the very same KG basin. Preliminary estimates put reserves in and around the new field at 4 trillion cf, but this could be just the tip of the iceberg. The find is ONGC's third in the region and it has another 12 blocks nearby.

The discoveries have helped change attitudes towards India, traditionally a country best known for its huge dependence on energy imports. The country has limited domestic reserves of oil and gas, with most located off the western coast and in the northeast. Crude production is around 0.8m barrels a day and half the country's oil requirement is brought in from overseas – a figure that is set to grow. Analysts Global Insight says that by 2010 India will be able to meet only 20% of its total demand from domestic sources.

It was against this background that, in 1999, the government launched Hydrocarbon Vision 2025, setting several targets and pledging industry reform. The backbone to this was the New Exploration and Licensing Policy (NELP), which aimed to stimulate domestic output by openly encouraging foreigners to bid for upstream projects (see box). NELP V looks like being the most competitive yet. The closing date is 31 May and 26 bid documents have already been submitted.

Flexible terms

As well as new discoveries – 21 in total in the last four years – oil executives have been encouraged by the changing economic picture. Not only are the country's notorious petroleum subsidies gradually being phased out, but foreigners are allowed 100% cost recovery and can repatriate all their profits in US dollars. There is no longer mandatory state participation and no minimum expenditure during the exploration period of a contract. Essentially, production-sharing contracts have become far more flexible.

Cairn became one of the first overseas firms to operate a field in India – Ravva in the KG basin – and Watts admits to being amazed by the transformation that has taken place over the past decade. "While obviously a democracy, India was run almost on Soviet lines. We had to sell our gas in 1995 to state-owned firms. We then managed to secure a better price and now we can sell to the highest bidder in a free market. That change has come in just 10 years."

The new environment is also attracting scavengers. The UK's Burren Energy took the City by surprise earlier this year announcing a deal to buy into the only publicly quoted Indian explorer, Hindustan Oil Exploration. It bought an initial 26% stake, but plans to raise this to 46%. Chief executive Finian O'Sullivan says the motivation behind the deal was simple – as India's hunt for energy forces ONGC into ever more lavish projects overseas, more will come up for grabs in its home market.

He says: "My interest in India is to look at the crumbs, large and small, that are left over by ONGC. People joke that one of the reasons people say there's still a lot to be found in India is that ONGC hasn't done a good job. What may no longer appeal to them, Hindustan can pick up."

Sibal claims only 18% of India's sedimentary basin has been explored and that the country has "one of the lowest drilling densities in the world". His department insists there could be as much as 80bn barrels of oil and oil equivalent in India's deep-water basins.

Whether the long list of companies that roll off his tongue as showing an interest in NELP V – ChevronTexaco, ConocoPhillips, Marathon and Shell – follow their commitment through remains to be seen. But at least they are looking. Up for grabs are eight offshore blocks – including six in deep water – and 12 onshore, spread across the KG basin, Rajasthan and Gujarat.

NELP VI, which is not yet formally planned, could go even further by forming a structure that allows firms to approach the government with plans for blocks they covet rather than waiting for them to be auctioned.

Nelp licensing rounds 
NELP I (Jan 1999): 38 offshore/10 onshore blocks on offer. Bids received for 26 blocks

NELP II (Dec 2000): 16 offshore/9 onshore blocks on offer. Bids received for 23 blocks

NELP III (Jun 2002): 20 offshore/7 onshore blocks on offer. Bids received for 23 blocks

NELP IV (Sep 2003): 13 offshore/11 onshore blocks on offer. 44 offers received on 21 blocks

NELP V (Jan 2005): 8 offshore/12 onshore blocks on offer. Bidding due to close on 31 May 2005

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