Despite Union petroleum minister M Veerappa Moily’s desperate attempts to woo them, domestic and global oil and gas companies are unlikely to participate enthusiastically in the 10th round of New Exploration Licensing Policy (Nelp X) auction that is likely in January.
Most industry participants dna spoke to stressed that like previous two Nelp auctions, the upcoming one is also likely to get tepid response from global giants such as BP, British Gas and Shell. Even private gas companies are not too keen to invest any further in India due to several regulatory issues.
“For multinationals to come and invest in India, two things are key — clarity on gas pricing policy and investor-friendly production sharing contracts (PSCs),” a senior official from a state-owned upstream oil company said on condition of anonymity.
After the gas pricing row with Reliance Industries Ltd (RIL; read related report on this page), most exploration and production (E&P) players have become more cautious and want clearer and transparent PSCs. Interference of the Comptroller and Auditor General (CAG) and the Central Bureau of Investigation (CBI) has also irked industry players. Delays in approvals mainly from environment and defence ministries, too, have impacted investor sentiment. In the last two months, BHP Billiton and Santos have decided to relinquish nine and two gas blocks, respectively.
In the nine rounds of Nelp auctions over the past 15 years, the government had awarded 254 oil and gas blocks, of which only 163 are operating, while three are producing. And 88 were relinquished.
India now has hardly any onshore or shallow exploration opportunities and most of future exploration will be in deep sea, which requires huge investments and involves maximum
risk. Such high-risk investment also demands high returns, which are possible only with higher gas prices, another official from a state-backed upstream oil company said.
While the government has already declared its intention to hike natural gas prices from April 2013 based on the Rangarajan Commitee recomendation, the Cabinet note on the decision is yet be notified. Gas prices are likely to double from the current $4.2 per unit as per the Rangarajan commitee’s formula.
RIL, the country’s largest E&P player, has already indicated that unless there is clarity in government policies, it may not participate in future E&P bids.
“If this kind of situation continues, then I don’t think we would be interested to invest more; we may find better destinations and there are other businesses also,” a senior RIL official told dna. BHP Billiton and Niko Resources declined to comment for this report.
The move towards revenue- sharing model instead of the current cost recovery model is also likely to make the 10th Nelp auction less attractive.
“A PSC is always better, particularly in the Indian context when you have very low prospectivity and high regulatory risk; revenue-sharing will certainly disincentivise E&P players,” the RIL official said. For revenue-sharing, an E&P player has to pay the government irrespective of the costs. The cost of exploration could be lower or higher than expected; if it’s higher, the E&P player concerned would stare at a loss.
But the government is in favour of the revenue-sharing model as it is easy to administer and would also help it to avoid CAG and CBI audits and other hassles.
Under the current cost-sharing model of PSC, explorers are first allowed to recover capital and operating expenditure under a specific formula before sharing profits with the government. The shift to revenue-sharing model in oil and gas exploration contracts was proposed by finance minister P Chidambaram in his 2013 Budget speech.
Reasons for pendency
Legacy policy issues unresolved since 2009
Adverse CAG comments on several production sharing contracts (PSCs)
CBI cases on DGH and oil minstry staff resulting in demoralisation
Failure to understand that rigid PSCs needed systemic remedy and not quick fixes