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India looks at testing new waters with oil gamble

Oil prices are at their lowest in last six years, and there are no signals of price spikes in short term.

twitter-logo Anilesh S Mahajan        Last Updated: September 24, 2015  | 14:09 IST

Anilesh Mahajan, associate editor
Globally, oil and gas is rated as a high-risk high-return business. The Indian government seems to be echoing the same sentiment by putting 69 marginal and small fields up for auction. Oil prices are at their lowest in last six years, and there are no signals of price spikes in short term. On September 2, when the petroleum minister Dharmendra Pradhan made the announcement, oil prices were at record low of $49 per barrel. These marginal fields have potential of 87 MT of oil.
Is the gamble worth it? Only time will tell. But an attempt has been made to test the waters before Indian announces the tenth round of new exploration and licensing policy, or NELP. There is a shift in policy, whereby India is drifting towards revenue-sharing model instead of prevalent cost recovery model of production-sharing contract. Bidders will be asked to quote the revenue they will share with the government at low and high end of the price and production band. Previously, the CAG had criticised the cost recovery model and found the allegations of gold plating of several cost attributes.
The new method was suggested to the UPA government by a committed headed by economist C Rangarajan. But there is a flip side as well. The new marginal fields policy presupposes prudence on the part of developers. They will be expected to consider an overall exploration, development and production costs along with volume and price estimates, to determine the rate of returns from these fields. This is slightly easier for marginal fields as they were abandoned by OIL and ONGC after discovering hydrocarbons. These two PSUs found these fields commercially unviable, because of the size, geographies, prices and other efforts required.
The technical arm of the ministry, the Directorate General of Hydrocarbons, has most of the relevant data which reduces the risk for operators. But they don't have similar data for NELP, which will make the way for revenue sharing modelled contract more difficult. India does not have a data repository. In the last three rounds of NELP, India could not attract much of global majors due to various reasons. Paramount among them was inconsistent policies, poor data repository and lack of marketing freedom. India is ready to offer roughly 50 blocks, but before that it has to rectify various things, including the reputation of not honouring contracts.
India is offering marketing and pricing freedom for both oil and gas produced from these blocks. The oil production and pricing is directly linked to the international prices, where as gas price formula is weighted average of four international hubs, and stays at half of Indian import prices. It has to be seen how much freedom government can allow to these operators.  
These marginal fields may not attract biggies such as Shell, Chevron, Total, BP, Saudi Aramco, Petronas, and may end up been taken over by the technically-sound lean companies, but these majors would be observing how the Indian establishment behaves and reacts during these rounds for marginal fields.

It is very simple. The success or failure of these rounds should not imply on the fate of NELP, but one must welcome the lessons learnt.


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