PM Narendra Modi looks to simplify oil and gas exploration regulations

PM Narendra Modi looks to simplify oil and gas exploration regulations

Investments in oil and gas exploration are crucial for India because they would make it less dependent on foreign oil and give the economy a considerable boost.

Anilesh S Mahajan, Associate Editor
At a time when global crude oil is priced at its lowest in a decade - $43.58 a barrel on the Brent scale (and gas price at global benchmark Henry Hub is $2.38 per mmbtu) - the challenge before Prime Minister Narendra Modi 's government is to be able to bring in investments in oil and gas exploration by simplifying regulations and bringing in predictability in the fiscal regime. Such investments are crucial for India because they would make it less dependent on foreign oil - its biggest import - and give the economy a considerable boost.
The first step seems to have been taken towards this end. After deliberations of 18 months, the NDA government has finally come out with consultation papers on new fiscal and contractual regime for award of hydrocarbon acreages. The petroleum ministry today invited comments from stakeholders on this. The new policy is expected in first quarter of FY 2016/17.
The consultation papers talked about moving towards new Open Acreage Licensing Policy or OALP, replacing opaque production sharing contracts (PSCs) with much simpler revenue-sharing regime for all future field auctions, along with a Uniform Licensing Policy (ULP). OALP will allow the players to choose the area for exploration rather than have the government identifying blocks and offering them in bid rounds. ULP will allow exploration of all types of hydrocarbons such as conventional oil and gas as well as unconventional shale oil and gas and coal-bed methane (CBM) with one licence.
Today, conventional oil and gas exploration is governed by NELP, while CBM has another policy. There is no regime for shale oil and gas. For future blocks, the NDA government is proposing to do away with the complicated and controversial current fiscal system of PSC based on Pre-Tax Investment Multiple (PTIM) and cost recovery payments. Along with this, the operators have to sell the gas at government determined price.
In October, to test the waters, the NDA government allowed pricing freedom for the gas produced from 69 small and marginal fields it plans to auction shortly, and are testing how market behaves.
There is a common feeling amongst the corporates, including Reliance Industries, Cairn India, ONGC , OIL and other gas producers, that the current price of gas and the formula to reach the price don't reflect the cost of producing gas and the risks taken to achieve it.
And they are pushing the government to open up. In October 2014, the NDA government approved a new pricing formula for all domestically produced natural gas. From October 1, gas is sold at $4.24 a unit. This is double the price of gas sold at Henry Hub - the world's busiest gas market. But the players in India believe that they can get much more, as India continues to pay more than $9 to import gas from Qatar. The debate continues.
The biggest argument is: the gas market in India is not mature enough to get into a free market era. The price balancing factors are not there. There is a considerable gap between demand and supply; the infrastructure to import gas is limited. The output of consumers of gas is heavily regulated or is still in subsidy cobweb. This makes one jittery about the free pricing mechanism.
Currently, the consumers of gas vary from city gas distribution or CGD projects, power, fertilisers and industry. The country produces 92 mmscmd gas against the demand of more than 400 mmscmd, and have infrastructure to import additional 40 mmscmd.
Obviously, natural gas is much clearer, and fits well into the country's plans to reduce carbon emissions. But there is a huge gap between demand and supply, which makes the balancing of the market difficult. The country is building up CGD infrastructure, and there is a fair bit of excitement in the market and private investment is happening. But this is happening because government has brought in CGD projects in the top priority of domestic allocation.
In power, India has 24 GW of installed capacity and most of them were stranded six months back for want of affordable natural gas. Out of this, 13 GW saw the light of day after the NDA government decided to support them with grid stabilisation funds. Freeing up gas market will hamper the fertiliser segment as well, and more price means more subsidy burden.
There is a flipside as well. Free gas pricing would also encourage private investments and possibility of availability of more domestic gas increases. But to make all this happen, along with policy interventions, NDA government will also have to strengthen supporting infrastructure. This includes building up of data repository, strengthening of DGH from mere technical arm of the petroleum ministry to a full-fledged regulator, deeper gas pipeline infrastructure and pushing for more import terminals.
If the proposals of the government become law, this could be the biggest reform in the country's oil and gas exploration in the past 15 years, since the New Exploration Licensing Policy was brought in by the first NDA government.