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India: Bid confusion threatens image

A WRANGLE over tax concessions is stalling efforts to carry through the country's latest round of exploration licensing. The seventh round of the New Exploration Licensing Policy (Nelp 7) was launched in December 2007, with 57 blocks up for grabs, of which 19 are in deep water off the west and east coasts, nine are in shallow water and 29 are onshore. The bid deadline was set originally for 11 April, but that target has been extended three times, with the latest one – at the time of going to press – being 30 June. The government says demand for licences has been high and that the delays have given "prospective bidders more time to prepare their bidding strategy".

But industry sources note that a big stumbling block has been confusion among potential bidders over changes to tax incentives offered under the Nelp framework. Under Nelp 7 legislation, "mineral oil" activities are eligible for tax holidays, but a dispute has flared up between the finance ministry and the oil ministry over whether gas, as well as oil, is covered by the term.

The oil ministry says historically gas has been covered by the term "mineral oil" and should continue to be so, while the finance ministry says gas should be excluded and not benefit from the same incentives. As companies often do not know whether they will discover oil or gas in any given block, differing incentives make a big difference to decisions about economic viability.

The dispute, which is being played out in parliament and the courts, risks doing serious damage to the country's growing reputation as a place in which foreign oil companies can successfully do business. "Stable fiscal policies and a string of recent discoveries have attracted a wide range of international companies in recent years," says Giles Farrer, Indian sub-continent analyst at Wood Mackenzie, a consultancy. "The tax-holiday issue could cause companies to review their upstream investment plans. This may be particularly true for companies with no existing assets in the country."

Previous Nelp rounds have been dominated by domestic companies, such as state-owned Oil and Natural Gas Corporation (ONGC) and Reliance Industries, with large foreign companies, such as BP, Total, BG and Eni, taking a modest amount of acreage; Cairn Energy, which has become one of the UK's most valuable companies following exploration success in Rajasthan, has been among the most active upstream investors in the country.

This time, however, the Indian authorities have been trying to cast the net more widely, sending high-ranking oil ministry officials on international roadshows. But the majors remain unlikely to take large upstream positions: they will be deterred not only by the confusion over tax incentives, but also by the inferior quality of the acreage on offer in Nelp 7, compared with the areas that were offered last year, analysts say.

Smaller Indian and foreign players are likely to play a more active role in the round. Notable new entrants could include the world's largest steel firm, ArcelorMittal, which wants to bid for acreage as part of a strategy to diversify away from its core steel business. Other new players are already gaining access to the sector through farm-out agreements. Hungary's Mol, for example, has agreed to take a 35% stake in an ONGC block in the northwest, with exploratory drilling at one well expected to begin by the end of the year.

The government hopes to attract around $3.5bn-worth of investment through Nelp 7, given the $8bn forthcoming from the six previous Nelp rounds since 1999. These have resulted in around 50 discoveries in around 15 of the 162 blocks awarded, adding around 4.5bn barrels of oil equivalent (boe) to reserves.

The licensing delays come at an inopportune moment for the government, which is desperate for investment in the sector to boost production and add to reserves to reduce its oil-import bill. The limited success of domestic companies' search for overseas assets, as they compete with rivals from China and elsewhere, has also increased pressure on the domestic sector to deliver. ONGC has said its overseas production was likely to total around 180,000 boe/d in the financial year to March 2009, a rise of only 10,000 boe/d over 2007-08.

Domestic recoverable crude reserves at the end of financial year 2006-07 were estimated at a little over 5.5bn barrels, with gas reserves of around 1.1 trillion cubic metres (cm), according to the oil ministry. Domestic oil production in 2006-07 stood at 0.68m b/d, falling way short of consumption at refineries, which totalled some 1.1m b/d.

The failure to boost domestic production significantly over the previous five years – it was 0.65m b/d in 2000-01 – indicates how badly the country needs to reinvigorate its exploration programme, analysts say. Some Indian oil companies – especially ONGC – have attracted criticism from the oil ministry in the past for failing to pursue exploration with the same vigour that they have developed refining and other downstream opportunities. Provisional figures for April 2008 suggest any improvements have yet to feed through, with some 0.68m b/d of crude produced in the month.

But the Nelp years of India's dash for domestic oil and gas have been marked by some success. The large gas discovery made on deep-water block KG D6, in the Krishna-Godavari basin, by operator Reliance (90%) and its minority partner Canada's Niko Resources (10%) in 2002 is scheduled to start production in the second half of 2008. With estimated reserves of around 200bn cm, initial production of 40m cm/d will rise to a peak of 80m cm/d. It is also expected produce oil at around 50,000 b/d.

Some market observers speculate that the imminent start-up of this new supply and the finance ministry's efforts to reduce tax breaks for the gas sector may not be unconnected.

 

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