Consider this paradox. Petroleum and natural gas accounts for about 15 per cent to India's GDP; but since 2000, the sector has contributed only 1.87 per cent ($6.87 billion) of foreign direct investment inflows.
It was with the intention of changing these skewed statistics that the Narendra Modi government announced a fresh round of explorations almost eight years after the last round of the New Exploration and Licensing Policy (NELP), modified and labelled the Open Acreage Licensing Policy (OALP).
Under this new policy, the bidder is being given the opportunity to carve out the area it wants to explore (rather than being permitted a specified area), along with a simplified revenue-sharing model with marketing and pricing freedom. The idea was to reduce some of the infirmities of NELP that dissuaded Big Oil from participating in the past.
Despite these significant policy tweaks, only nine companies
including four from the private sector participated in the first rounds of auctions for 55 blocks that got underway mid-January and closed on May 2. Although the results of these auctions are yet to be declared, Business Standard learns that none of the prospective bidders were foreign oil majors. This relatively poor overall response was ascribed to the country’s indifferent geology that does not support significant oil reserves. But experts believe that this is not the only reason foreign players stayed away.
“Since NELP round started in 1999, India has seen investments of $28-30 billion in the hydrocarbon sector but returns have only been $12 billion. What governments should understand that this is high-risk business and government should also ensure good returns for the investors, instead of tightening the screws on them in the name of regulation,” said R S Sharma, former chairman and managing director of state-run Oil and Natural Gas Corporation (ONGC).
A clause in the bid document that a holding company with a participating interest in a block needs government approval to undergo structural change is a case in point. Uncertain tax policies also contribute to the problem, particularly with multiple arbitrations and controversies over retrospective tax.
Reliance Industries, which produces oil and gas from the Krishna-Godavari basin, has been involved in a headline-grabbing arbitration with the government of India over penalties for not meeting targets and on issues of cost recoveries (both of which impact the revenues the government earns from the joint venture). Cairn Energy has been embroiled in litigation over the payment of retrospective tax for the sale of its Rajasthan assets to Vedanta in 2010. “The lack of stability on policies is also a cause of concern for investors,” said an industry source on condition of anonymity.
Profit petroleum, the technical term for the formula that determines the government’s share of revenues from a block, has, in fact, been a major deterrent for private participants in oil and gas exploration in India. According to the original formula, companies
that put in higher investments are allowed higher cost deductions. This, however, reduced the government’s share of profit petroleum, so the government recently tweaked the formula to retain its share at earlier levels even when the private investor makes higher investments, a policy that is unlikely to attract prospectors in areas with unproven reserves.
The story of foreign players exiting for regulatory issues started way back in 1980 when global major Chevron exited India citing commercial reasons. It was later followed by British Gas, Gazprom, Eni, Dart Energy, Santos, StatOil, Brazil's Petroleo Brasileiro and BHP Billiton Petroleum. Most of these exiting majors cited bureaucratic reasons and some complained that they did not even get access to their block.
The numbers tells the sorry story. In the nine rounds of NELP, 254 blocks were awarded, 156 were relinquished with only 98 being operational now. According to petroleum ministry, 117 companies
are operating in India, out of which 48 are foreign firms.
Not that these policy infirmities have dampened enthusiasm among those who have bid. Information exclusively accessed by Business Standard suggests that Anil Agarwal-led Vedanta had bid for all 55 blocks on the current round and has reportedly won about 40 of them. The only other private sector company that may win a block is Hindustan Oil Exploration Company (HOEC). State-run Oil India (OIL) has won at least eight blocks, more than what ONGC got during this round. On the other hand, Dilip Shanghvi's Sun Petrochemicals and Selan Exploration Technology that bid for one block each have lost their bids.
Is this enthusiasm a triumph of hope over experience? “All these are story of the past, the current government means business. Never in the country’s history would have such intensive explorations happened in such liberal terms terms for the industry. We expect more private sector and global players to participate in the second round of OALP that is already open,” said P Elango, CEO chief executive officer of HOEC.
The last date for the submissions of expressions of interest for OALP –II is May 15. A team of officials, headed by petroleum minister Dharmendra Pradhan will be holding a roadshow in Dubai on India’s exploration and production sector, on May 14.
“We are ready to walk the talk with investors and understand their issues. We have already set a separate handholding mechanism for investors to get all the clearances. I believe as bids are open throughout the year now, global majors would have been in a wait-and-watch mode and with the success of OALP-1, more players are going to come up,” said a government official.