India’s upstream oil ache

Upstream activities, which form the basis of oil and gas value chain, has witnessed a fresh low in India due to a sharp fall in domestic production of oil and gas, resulting in greater oil imports. 

International Energy Agency’s World Energy Outlook 2015 has predicted India’s oil imports to double to 90 per cent from 3.7 million barrels/per day (mb/d) in 2014 to 7.2 mb/d by 2040. The current global oil price trajectory is signalling a downward movement and is projected to touch $20 a barrel in 2016, according to agencies like International Monetary Fund and Goldman Sachs. 

The existing low oil price, which now has dropped to below $30 a barrel, has already dried up upstream investments and is now delaying the next round of oil and gas bidding. The ninth round of National Exploration Licensing Policy (NELP) was conducted in 2010. As a result of this, low domestic hydrocarbon production has spurt India’s oil imports further, thwarting government’s ambitious goal of cutting down oil imports by 10 per cent by 2022. 

Ironically, natural gas, which is being considered bridge fuel to renewable energy and a means to reduce greenhouse gas emissions, has witnessed sharp decline in domestic gas production in India. During initial three years of the 12th Five Year Plan, the production of natural gas came down sharply during 2012-13, 2013-14 and 2014-15 recording 40.67 billion cubic meters (BCM), 35.406 BCM and 28.81 BCM (up to January 2015) respectively. Domestic crude oil production has followed suit by registering 37.863 MMT, 37.789 MMT and 30.360 MMT during 2012-13, 2013-14 and 2014-15 respectively. 

As far as India’s existing oil and gas resources are concerned, it has a total sedimentary area of 3.14 million sq km for 26 sedimentary basins comprising on-land, offshore and deep-water areas, wherein only seven basins are on production, leaving it as one of the least explored countries in the world. In the conventional hydrocarbon prognosticated resources of 15 sedimentary basins, assessed so far, there are 28.1 billion tonnes of oil and oil equivalent of gas, out of which 61 per cent of estimated hydrocarbon resources are under ‘yet to find category’.

Several reasons were put forth by oil and gas public sector undertakings (PSUs) and private companies for their production estimates going awry, both onshore and offshore. In the onshore, Oil and Natural Gas Corporation Limited (ONGC), for instance, cited delay in development of New and Marginal Fields of WO-16, etc, and drilling complications in D-1 field for fall in production; for Oil India Limited (OIL), the reasons were ageing oil fields, blockades and environmental problems. 

In the Offshore, the shortfall in natural gas was due to sand and water ingress as cited by Reliance Industries and high undersea temperature, besides tight permeability of reserves as noted by Gujarat State Petroleum Corporation Ltd (GSPC). Further, ONGC’s offshore plans have come to a halt after DeGolyer and MacNaughton reported a migration of 11.2 billion cubic metres of natural gas from ONGC’s KG-D5 field to RIL’s KG-D6 fields, making the development of balance volume of gas in ONGC’s field unviable. These reasons, therefore, prompted all the three companies to downgrade their reserves estimates, significantly. 

In addition, none of the oil and gas PSUs succeeded in improving their falling recovery factor of the ageing fields held by them and match it to those of global standards, despite using several increased oil recovery (IOR)/ enhanced oil reovery (EOR) measures.

Thus, India continues to be an important investment destination as far as its upstream sector is concerned due to vast untapped resources. According to the Managing Director of Hindustan Oil Exploration Company Limited, P Elango, India has still not gone deeper in the land to explore the resources, leave alone the deep-water resource. Compared to the world average of 45 per cent, India’s production from Mesozoic rocks are less than five per cent. 

Therefore, with vast untapped resources coupled with low oil price regime, the Indian government faces a daunting task to reverse the investment trends in upstream sector. This challenge will get even more arduous when India’s oil appetite will rise to fulfil its other development initiatives, such as the development of 100 smart cities and Make in India project.

Recently, the Modi government has taken several measures to make upstream sector more attractive for investments and the first step taken in this regard is the full scale re-assessment of the Hydrocarbon Resources of the total 26 sedimentary basins by March 2016. Such re-assessment is based on the enormous data been collected from Pre-NELP, NELP and Nomination Blocks. The last such exercise was carried out in 15 sedimentary basins, approximately two decades ago. 

Other upstream reform undertaken by the government is the approval to the Marginal Fields Policy (MFP) for development of 69 hydrocarbon discoveries made by ONGC and OIL. It is through this policy itself the government has decided to experiment with the other set of upstream reforms to test the waters before the start of new exploration bidding round. 

Uniform Licensing Policy (ULP), for instance, will enable companies to explore and produce all kinds of conventional and non-conventional hydrocarbons such as shale gas, coal bed methane, gas hydrates, etc., during the entire contract duration. Bidding invited for these fields for MFP would be on Revenue Sharing Model (RSM), ie, on the basis of the share of oil and gas a bidder will offer to the government upfront. Operators would have freedom to sell oil and gas on arm’s length market price, sans government interference. 

In addition, the government is working to provide more oil cess relief from the current cess of Rs4,500 per ton to the explorer, by either reducing cess rate further or to adapt more flexible ad valorem rate. This would be an important step to stop companies to curb their capital expenditure, thereby allowing them to have enough funds at their disposal for upstream investments. The government is also expected to deregulate natural gas price, which, at present, is pegged at $4.24 per million British thermal units. This extended upstream reform can arrest falling investments in natural gas sector and sustain multi-billion-dollar investment for developing gas finds, of which most are under deep sea and difficult areas. Therefore, India’s upstream sector alone can provide a cushion for Indian economy and heal the prolonged upstream oil ache, India is suffering from. 

Aforementioned reforms in the upstream sector could, therefore, be considered a welcomed step if the government succeeds in managing these reforms smoothly, communicate clearly and implement speedily and consistently for various stakeholders, including the public. 

The author is junior fellow with Observer Research Foundation, having research interests in energy policy