India shifts fiscal regime to encourage investment
India is easing rules for exploration and production in an effort to lure investment to boost output
The south Asian nation, which relies heavily on energy imports, will start by auctioning 69 marginal oil and gas fields that have been relinquished by the national oil companies.
The 69 discoveries (63 of ONGC and 6 of Oil India), which hold 89m metric tons of oil equivalent in-place resources worth about $11bn, will be offered on a revenue-sharing model basis, said the oil minister, Dharmendra Pradhan.
Operators will be free to sell production to Indian customers at market-based prices for gas and liquids. It’s a positive sign, signaling that the government understands the marginal finds may otherwise remain undeveloped, said Abishek Agarwal, an Indian-based energy analyst at Australian investment bank Macquarie. Also for the first time they will be able to explore for all types of hydrocarbons, including coal-bed methane and shale, under a single license.
Pradhan described the move as “a paradigm shift in the fiscal management of the oil sector”. India operates a production-sharing contract regime (PSC) that allows cost-recovery before sharing profits with the government. The new system will cut government interference in the oil and gas sector, which has hampered project development in the past, by removing the skewed incentive for contractors to inflate capital spend. But it does raise the risk for operators.
The oil minister said the shift reflected the government’s thinking, which implies the next round of auctions, NELP X, expected by the end of the year, may also be based on this method. The bidding process for the 69 marginal fields is expected to start in three months, he added.
New Delhi’s move comes amid the backdrop of waning investor interest in the Indian hydrocarbon sector, with around 70% of Indian basins remaining largely under-explored.
A much-awaited deep-water gas premium policy, which could spur investments into developing the large-but-difficult resources found in the offshore Krishna Godavari and Mahanadi basins off the east coast, might be next, said Agarwal.
Analysts at investment house Bernstein believe that reforms are inevitable. “It is impossible for India to develop a 21st century economy without natural gas, which means pricing reform will happen.” They added it would unlock 6 trillion ft³ of discovered but undeveloped gas and restart exploration along India’s eastern margin.
Local media reports suggest ONGC may join Reliance Industries, which runs a joint venture with UK major BP, and the Gujarat State Petroleum Corporation (GSPC), in lobbying the government to offer premium pricing to all undeveloped discoveries instead of just new discoveries.
Without gas price reforms bullish projections for Indian gas demand growth might not materialize, a report from the Oxford Institute For Energy Studies recently warned. India’s new government promised its producers a higher price than the regulated level, almost doubling it to over $8/m Btu, but like its predecessors it eventually caved in to the demands of major consumers
India is the world’s fourth biggest oil consumer, but it meets only a fraction of its demand through local production. It wants to boost private and foreign participation in its industry, which is dominated by state-backed companies ONGC and Oil India.