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Vedanta is bullish on Indian crude; Reliance still passive

Vedanta has won 51 blocks out of the 87 that were auctioned in the three rounds of bidding under OALP.

Nevin John | Avirat Parekh | June 17, 2019 | Updated 18:25 IST
Vedanta is bullish on Indian crude; Reliance still passive

The hydrocarbon exploration and production (E&P) in India remains a negligible business in the global landscape, given the output and low investments coming in for finding oil and gas in the country. On March 2016, when the government introduced a new Hydrocarbon Exploration & Licensing Policy (HELP) and Open Acreage Licensing Policy (OALP)--which replaced the 20-year-old New Exploration & Licensing Policy (NELP)--the aim was to attract private investments in the sector, revive the sinking production and reduce the country's crude import by 10 per cent. But as the second round of bidding under the OALP is going to conclude, it seems that Anil Agarwal's Vedanta group is the only serious private player, which is bullish on India's E&P story.

According to the media reports, Vedanta has won 51 blocks out of the 87 that were auctioned in the three rounds of bidding under OALP. It won 41 blocks in the first round and five each in the recently concluded second and third rounds. But the major private oil refining company, Reliance Industries (RIL) along with its joint venture partner BP Plc, has applied for just one block and bagged it. The rest of the blocks were won by public sector majors ONGC and OIL. The government is yet to announce the successful bidders. These blocks auctioned under OLAP are projected to fetch an investment of around Rs 1.4-1.5 lakh crore but the analysts estimate much less and they reason it with the enthusiasm of bidders. Under the OALP policy, the blocks are awarded to companies that offer the highest revenue share to the government.

RIL and BP are not keen on the new assets offered by the government since they already have four oil and gas producing blocks and another set for exploration. RIL said it recently received the approval for MJ project (also known as D55) in Block Krishna Godavari (KG) D6 for development. MJ is the third of three new projects in the Block KG D6 integrated development plan. It had earlier received approval for the development of 'R-Series' deep-water gas field in June 2017 and Satellites cluster in April 2018. Together the three projects are expected to develop about 3 trillion cubic feet (tcf) of discovered gas resources with a total investment of around Rs 35,000 crore. These projects together, when fully developed, will bring about 1 billion cubic feet a day of new domestic gas on-stream, phased over 2020-2022, said the company in a statement.

Mukesh Ambani, Chairman of RIL, said, "Bringing these three discoveries to production, as promised in 2017, by leveraging the existing infrastructure has been the primary objective of the Reliance-BP Joint Venture."

Bob Dudley, BP Group Chief Executive said, "We are building an important upstream business in India, helping to supply the country's growing gas market." India today consumes over 5 billion cubic feet a day of natural gas and aspires to double gas consumption by 2022. Gas production from KG D6 integrated development is expected to help reduce India's import dependence and amount to over 10 per cent of the country's projected gas demand in 2022, said RIL.

RIL's gas production from KG basin has been shrinking in the last decade because of the geological constraints. And that is why they roped in BP Plc, which has the technology to revive the production, by selling 30 per cent stake in its hydrocarbon assets for over $7 billion.

In the last financial year, the revenues for the RIL's oil & gas business in India decreased by 3.4 per cent to Rs 2,613 crore. The company continued making EBIT (earnings before interest and tax) losses, but losses reduced to Rs 216 crore from Rs 834 crore. The gas production from KG-D6 field went down by 58 per cent in the fourth quarter, while Panna-Mukta fields faced 25 per cent reduction in crude oil and 16 per cent reduction in natural gas.

At the same time, the revenue from oil and gas business of Vedanta has risen by 39 per cent to Rs 13,223 crore in the last financial year, while the earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 41 per cent to Rs 7,656 crore. Vedanta's subsidiary Cairn India is investing about $3.2 billion in its lucrative Mangala on-shore oil field. The company grabbed the assets put on the block by the government because of its success in E&P.

Can India revive its E&P sector?

The country produced 34.2 million tons (MT) of crude oil in 2018-19. Offshore and onshore fields produced 16.9 MT and 17.3 MT, respectively. India's dependence on imported oil, valued at $112 billion, increased to almost 84 per cent in 2018-19 with rising crude price, depreciation of rupee against dollar and reduction in domestic production. Overall oil consumption increased to 212 MMT in the last financial year. The country is the world's fourth largest energy consumer and India's energy demand is expected to double by 2035 vis-a-vis 2016.

These statistical brackets and figures aren't enough to inspire the ongoing investments in India's natural resource exploration sector. Numerous governmental schemes have been undertaken including policy changes to re-incentivise the market.

Foreign investment has been seen as the potential capital resource, which can boost the E&P landscape.

But the government is facing various issues in order to influence investment in the sector. The upcoming budget, according to sources, will reduce cess levied in oil and gas exploration.

International crude prices fell in June with Brent now hovering around $62 a barrel, the pressure points like supply squeeze from Venezuela and Iran, extension of production cuts by the Organization of Petroleum Exporting Countries (OPEC) and tension in the Gulf region may force the government to make the E&P policy attractive for achieving its crude import reduction the target of 10 per cent.

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