Extension of exploration period may yield oil bounty in North East

Govt has allowed pricing freedom for natural gas production in NER

Latest News
Extension of exploration period may yield oil bounty in North East

The North Eastern Region (NER) of the country is all set to benefit as the Cabinet Committee on Economic Affairs (CCEA) chaired by PM Narendra Modi last week extended the timeliness for exploration and appraisal period while operating the hydrocarbon blocks, thus taking into consideration geographical, environmental and logistical challenges.

Also, the exploration period has been increased by two years and appraisal period by one year. Further, to stimulate natural gas production in NER, the government has also allowed marketing, including pricing freedom for natural gas to be produced from discoveries which are yet to commence production as on July 1, 2018. The production sharing contracts (PSCs) in NER will be benefited from this special dispensation.

Speaking to media last week, petroleum minister Dharmendra Pradhan said the decisions will help boost production in NER. The decision was taken based on recommendations in 'Hydrocarbon Vision 2030 for North East' which was released in 2016 , outlining steps to leverage the hydrocarbon sector for development of the region. The objectives of the plan is to leverage the region’s hydrocarbon potential, enhance access to clean fuels, improve the availability of petroleum products, facilitate economic development and to link common people to the economic activities in this sector. The states covered include Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim and Tripura.

As per the vision documents, the focus is on pipeline connectivity for carrying liquefied petroleum gas (LPG), natural gas, and petroleum products, oil and lubricants (POL); building refineries and import links; and development of compressed natural gas (CNG) highways and city gas distribution network. Besides production, other focus areas include exploring hydrocarbon linkages and trade opportunities with several neighbouring countries like Bangladesh, Myanmar, Nepal and Bhutan.

In another key development, the CCEA’s policy framework is about sharing of statutory levies like royalty and cess among all contractors of a pre-NELP block (awarded before 1999) in proportion of their participating interests, while earlier the entire burden of statutory levies was on public sector units [PSUs - viz Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd (OIL)]. Besides, these statutory levies have been made cost recoverable with prospective effect, which will allow upstream companies to recover these before sharing profits with the government.

“This will benefit pre-NELP exploration blocks in which fresh investment for additional development & production activities is expected as sharing of royalty and cess, and cost recoverability of same will help in making additional investment commercially viable for licensee company; ONGC/OIL.” the ministry said in a statement.

According to K Ravichandran, senior vice president and group head - corporate sector ratings, Icra Ltd, the proposed measure is a significant positive for PSU upstream companies as they had to earlier share 100% of statutory levies like royalty and cess, even as their participating interests were 30-40%. Because of negative net present value (NPV) in such projects resulting from high statutory levies, PSU upstream companies had been delaying the process of approving capex for further exploration in these blocks. However, the latest policy change could accelerate decision making. While the statutory levies’ burden for private upstream companies having stakes in such pre-NELP blocks will increase, it will be partly offset due to cost recoverability allowed for the same on a prospective basis.” 

“Moreover, they could see positive cash flows from the development of these fields, which were otherwise stalled on account of the reluctance of the license holders (PSU upstream companies) to approve the capex.” added Ravichandran.

Anoop Bhatia, vice president and sector head - corporate sector ratings, Icra Ltd, said that many pre-NELP blocks have either been facing a natural decline in output or stopped production due to a stalemate over developmental plans and incremental investments in these areas required to sustain or improve the production levels.

Find your daily dose of news & explainers in your WhatsApp. Stay updated, Stay informed-  Follow DNA on WhatsApp.

Live tv