India is one of the fastest growing major economies in the world and the third largest consumer of petroleum products after US and China. India is heavily dependent on import of crude oil to meet its energy needs. Net imports of crude oil have increased from 111.50 metric tons during 2006-07 to 202.85 metric tons during 2015-16.1 In the above backdrop, the Government of India ("GOI") has set a target to reduce dependence on crude oil imports by 10% by 2022. In this regard, GOI's priorities are energy access, energy efficiency, energy sustainability and energy security.2 Towards achieving this, the GOI has been taking several initiatives for increasing exploration and production ("E&P") of domestic hydrocarbon resources. The launch of new hydrocarbon exploration licensing policy for award of hydrocarbon acreages in the upstream sector of India on 30 March, 2016 ("HELP") is one of such initiatives.
Two key pillars of HELP are Open Acreage Licensing Policy ("OALP") and National Data Repository ("NDR"). The modalities for operationalisation of OALP have been notified on 30 June, 2017. Under the OALP, bidders will: (i) have access to geoscientific data through NDR to assess the prospect of any area; (ii) have the opportunity to carve out exploration blocks of their choice from the Indian sedimentary basin; and (iii) be able to bid for the blocks twice in a calendar year.
GOI has received expression of interest ("EOI") for 57 blocks which are carved out by the bidders under OALP in the first window from 1 July, 2017 to 15 November, 2017. Out of these blocks, notice inviting offer ("NIO") for international competitive bidding of 55 blocks was released on 19 January, 2018. The bid closing date is 3 April, 2018 and the award is scheduled for June, 2018. This is the largest offering of hydrocarbon acreages by GOI in the past 8 years.
Salient features of HELP
HELP introduces a simplified, transparent and investor friendly regime for attracting investments in the Indian oil and gas sector from domestic and foreign investors and replaces the previous New Exploration Licensing Policy ("NELP"). The salient features of HELP are:
- Uniform license: The bidder is now allowed E&P of all conventional as well as non-conventional hydrocarbons resources covered under both the Oilfields Regulation and Development Act, 1948 and Petroleum and Natural Gas Rules, 1959 in an awarded block under one license. This will reduce the unnecessary delays and costs borne by bidders under NELP in liaising with several government authorities for separate licenses. For example, while exploring for one type of hydrocarbon, if a different one was found, it required separate licensing under NELP.
- OALP: Under the NELP, the bidders could choose only from among the blocks offered by GOI and accordingly had to wait for GOI to undertake bidding for blocks which were of interest to the bidders. Further, the bidders were hesitant to bid due to non-availability of geological data for blocks offered by GOI. However, under OALP, the NDR has been set up at the Directorate General of Hydrocarbons ("DGH") to make the entire upstream oil and gas information and data available to the bidders. A bidder (an Indian or a foreign company either singly or in association with other companies) can after studying the data through NDR propose an EOI, throughout the calendar year in two windows without waiting for announcement of bids, for any block that: (i) falls within the Indian sedimentary basins; (ii) is free of petroleum exploration licenses or petroleum mining licenses; and (iii) is not indicated as "No-Go" under the NDR. Under the EOI, the bidders can choose one of the following contracts:
- Petroleum operations contract ("POC") permitting exploration, development and production operations in any of the onshore, shallow-water, frontier, deep-water and ultra-deepwater blocks for all types of hydrocarbons for a period of 6 years with a provision of extensions as per OALP. Terms of POC will be as per the revenue sharing contract approved by GOI. A model revenue sharing contract is made available online by GOI; or
- Reconnaissance contract ("RC") permitting only exploration operations in any of the blocks for all hydrocarbons for a period of 2 years with a provision for an extension of 1 year. The bidder will be entitled to license the exploration data during the contract period, provided prior permission of DGH is required if license is given to companies of neighbouring countries or to such companies as notified by DGH. Upon completion of 80% of the work programme commitments, the bidder is entitled to migrate to POC for that block.
For the purpose of these contracts, DGH has classified the areas into different zones based on the quantum of geological and geophysical data available. Area having sufficient data is denoted as Zone 1; area having moderate data is denoted as Zone 2; and area having no data is denoted as Zone 3. EOI will be accepted based on type of contract applicable for that zone. RC is not applicable for Zone 1.
DGH will evaluate the EOI on a first-come first-serve basis, at its discretion accept or alter the carved area for which EOI has been submitted and call for competitive bids by releasing a NIO. Any bidder who has submitted EOI will be obliged to participate in the bid, provided the deviation in the area finalized by DGH and put to bid is not more than 50% of the area applied by the bidder. As part of its bid, the bidder needs to submit the required technical, financial information and its work programme. The bidder scoring the highest marks as per the evaluation matrix provided under OALP will be awarded the contract.
- Revenue sharing model in place of a profit sharing after cost recovery model under NELP: Under HELP, contracts are based on biddable revenue sharing model as against the production sharing after cost recovery model under NELP. The GOI will now not be concerned with any cost incurred by the bidders in E&P of oil and gas. Bidders are required to quote in their bids revenue to be shared with the GOI at lower revenue point and higher revenue point. This has the maximum weightage for evaluating the bid and the bidder quoting the highest net present value of revenue share offered to the GOI (by applying 10% discount rate) will get the maximum marks. Government share of revenue (net of royalty and taxes on sales) is payable by the bidder commencing from the date of production. Under NELP, the extent of cost recoverable by the bidder from the revenue generated and the division of revenue between the GOI and bidder as per their production sharing contracts had become one of the most contentious issue.
- Freedom in pricing and sale of crude oil and natural gas in domestic market: The bidders will now have the freedom to sell crude oil or condensates exclusively in the domestic market through a transparent bidding process on arm's length basis. Further, the bidders can either sell the gas produced domestically or export it on arm's length basis. Under NELP, the price of gas was fixed administratively by the GOI and has led to a large number of disputes, arbitrations and court cases between the GOI and bidders. The bidders have been requesting a higher price for gas, without which they stand to incur commercial losses.
- Concessional royalty regime: The deep water and ultradeep water areas shall not have any royalty payable to the Government for the first 7 years, and thereafter a concessional royalty of 5% (in deep water areas) and 2% (in ultradeep water areas) is payable. Further, in shallow water areas, the royalty rate is reduced from 10% to 7.5%.
- Failure to attract investors: The new policy has failed to attract interest from major players in the sector. From among major participants in the sector, only Reliance Industries has submitted an EOI. Pertinently, no foreign company has submitted an EOI. One of the reasons for this lukewarm response is perhaps the new revenue sharing model. NELP provided for production sharing after cost recovery model. Accordingly, sharing of production was only post recovery of cost of investment, and to that extend provided protection to the bidders in terms of recovery of investment. Unlike the production-sharing contracts under NELP, the new revenue sharing model under HELP provides that government's share of revenue is payable by the bidder commencing from the date of production.
- Onerous obligations: The OALP provides for discretionary powers to the DGH to accept the area for which EOI has been submitted or alter/modify the area after due evaluation. However, basis for exercise of such discretion is not provided under the OALP. Accordingly, in spite of such alteration/modification, EOI applicants will be obliged to participate (submit a bid acceptable to DGH) in the subsequent bidding. The obligation to participate will not be waived unless the deviation in the area finalized by DGH to be put up for bidding is more than 50% of the area for which EOI is submitted. Participation bond3 submitted along with the EOI will be forfeited if the EOI submitting party doesn't participate in the bidding process.
- No compensation for discovery under RC: OALP awards an EOI applicant incentive of five marks at the bidding stage. An RC contractor is also allowed this benefit when such contractor submits an intent to migrate to a POC contract. Such intention to migrate is deemed to be an EOI. Apart from the benefit of 5 marks at the bidding stage, there is no other mechanism to compensate such RC Contractor. The RC contractor is not provided any monetary benefit under the OALP. Since the investment for exploration is significant, it can be argued that, to make it more attractive, GOI could have provided adequate compensation for the exploration activities during the RC.
- Minimum pricing for calculation of GOI's revenue: Although HELP provides that the contractor will be free to sell the crude oil exclusively in domestic market through a transparent bidding process on arm's length basis, for calculation of GOI's revenue, GOI has prescribed a floor for the price.
In case of crude oil and condensate, HELP provides that, for calculating GOI's revenue, the minimum price will be the price of Indian Basket of Crude Oil4, or if the price arrived through bidding is more than the price of Indian Basket of Crude Oil then GOI's share will be calculated based on the actual price realised.
Similarly, for natural gas, HELP provides that the contractor will have freedom for pricing and marketing of gas produced on arm's length basis. However, for calculation of GOI's revenue, minimum price will be a price calculated as per Domestic Natural Gas Pricing Guidelines. If the price discovered through arm's length basis is more than the calculation based on Domestic Natural Gas Pricing Guidelines issued by the GOI from time to time, then GOI's revenue will be calculated based on actual price realised.
In line with the "Digital India" initiative, formation of NDR for India's hydrocarbon basins will provide an important data resource. India continues to use the data obtained from the resource assessment of Indian sedimentary basins carried out in 1990 by Indo-Soviet resource appraisal group and by ONGC in 1996. Re-assessment of hydrocarbon resources in sedimentary basins of India including deepwater areas was ordered to be carried out in January 2014, and the report is yet to be submitted.5 Out of the 26 known sedimentary basins in the country, only seven are currently producing oil and gas, and about 75 per cent of India's sedimentary basins are yet to be adequately explored. Once NDR is adequately updated and required technical information is available at low cost, given the growing domestic energy demand, a healthy E&P activity can be expected. The introduction of the concept of revenue sharing and freedom of marketing and pricing under OALP is in line with GOI's policy of "Minimum government - Maximum governance" and "Ease of doing business". OALP also intends to minimize GOI's discretion in decision making, reduce disputes, reduce administrative delays and thus stimulate growth in the oil and gas sector in India.
Given the early days of the policy, it is difficult to make a prediction regarding the future of HELP. Like for any new policy, it can be said that HELP may face its own set of issues. However, certain HELP provisions such as the OALP and NDR do seem to be steps in the right direction to stimulate hydrocarbons E&P activity in India.
- Energy Statistics 2017 issued by Central Statistics Office, Ministry of Statistics and Programme Implementation, Government of India
- Annual Report 2017-2018 issued by Ministry of Petroleum and Natural Gas, Government of India
- Participation bond of value of USD 150,000 per sector for POC and USD 30,000 per sector for RC
- Indian Crude Basket is weighted average of Dubai and Oman (sour) and the Brent Crude (sweet) crude oil prices as calculated by Petroleum Planning and Analysis Cell on a monthly basis.
- India's Hydrocarbon Outlook, A Report on Exploration & Production Activities 2016-2017, Directorate General of Hydrocarbons, Ministry of Petroleum and Natural Gas