Nelp VIII a damp squib

The eighth round of India’s ‘liberalised’ oil and gas exploration auctions ended with a whimper as a large number of companies stayed away. The show was salvaged to an extent by state-owned Oil and Natural Gas Corporation (ONGC), which bid for 25 of the 36 blocks that saw investor interest, and won 17 out of this. Reliance Industries, the other big exploration major, was conspicuous by its absence and chose to bid for just one coal-bed methane block.

The eight round of bidding under the New Exploration and Licensing Policy (NELP) showed investor interest in India’s oil and gas exploration sector declining. A total of 70 land and sea blocks were offered in the eighth round, compared with 55 and 57 blocks on offer in the sixth and seventh rounds.

However, only around half of the blocks had any bidders at all, compared with 79% last year and 94% in the round before that. Only 23% of the total blocks had more than one player show interest, compared with 71% in 2006 and 46% last year.

Besides the overall climate of economic uncertainty, industry watchers ascribed the poor performance to the government’s flip-flop on the pricing freedom given to explorers.

Despite promising “marketing freedom” to explorers, including the right to sell oil and gas at market prices, the government recently told the Supreme Court of India that it had the final authority to determine the prices and beneficiaries. The change of stance had drawn letters of threat and protests from foreign companies that had invested in the exploration sector in the country. None of the big oil companies has participated in the bidding process since the 2006 round.

“People are concerned about pricing and government policy,” Tony Regan, a Singapore-based oil consultancy Tri-Zen International told Bloomberg. “There is still a lack of clarity,” he said.

Besides, industry participants pointed out, the quality of the blocks, too, were not up to the mark. “The blocks were recycled, risky and relinquished,” rued one player, who chose to sit out of the process.

Vijay Iyer, partner with Ernst & Young, pointed out that the government cannot afford to ignore big foreign companies. “India needs majors such as Exxon as they will bring in the technology needed for drilling in deeper waters. I don’t see the majors coming in with the gas controversy,” he said.

However, Director General of Hydrocarbons, the government official in charge of the endeavour, said it had not gone back on its commitments on pricing freedom. “The government has not deviated an iota from that [pricing freedom].. It was a disinformation campaign that the government was deviating from the production sharing contracts [with explorers],” he said, apparently refering to the high-profile legal battle between the Ambani brothers.

The dip was also visible in the number of participating companies, which fell to 45 from 95 last year. Number of foreign companies fell to 7 from 21. As a result, total number of bids, across all blocks, slipped to 76 from 181 last year.

The situation, however, was better in case of coal bed auction for extracting gas (methane). The science behind locating and extracting coal gas is simpler that finding oil and gas in partially explored blocks. As a result, against an average of around 1 bid per block in the oil and gas round, coal bed auction saw a total of 26 bids for 8 out of the 10 blocks on offer. Two blocks, located in Jharkhand, remained unbid for.

The surprise winner in the coal gas auctions was Ahmedabad-based Deep Industries which saw off stiff competition from Essar Energy. Deep emerged the highest bidder in 7 while Essar had to be content with one coal block.