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‘Huge increase in recovery rate reflects the NELP’s success’

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V. K. SIBAL, DIRECTOR-GENERAL, HYDROCARBONS
V. K. SIBAL, DIRECTOR-GENERAL, HYDROCARBONS
Richa Mishra

We are working very aggressively for NELP VIII. We are acquiring data and upgrading all NELP blocks. After finalising the award of NELP VII we will proceed. NELP VIII can be expected early next year.

Richa Mishra

From being considered non-starters in the hydrocarbon scene, Indian companies seem to have emerged the winners with recent oil and gas discoveries. In the midst of all this activity is the Director-General, Directorate General of Hydrocarbons, Mr V. K. Sibal. In an interview with Business Line, he shared his views on the success ratio and the growth in the sector.

How do you grade the success ratio of various New Exploration Licensing Rounds (NELP)? Over the years how has the policy evolved? Do you see the perception of India changing among the international players?

There are two ways of looking at how NELP has helped India. Over the years, the NELP has been attracting more bidders. While in NELP I to II the average was one bid per block, or a maximum of 1.5, today we are getting more than three bids per block. In NELP VI, except for two blocks, the remaining blocks were awarded. In NELP VII, despite the confusion prevailing on certain issues, the response has been very good. We got around 185 bids for 45 blocks. Therefore, I think from the response point of view it has done extremely well.

If we look back, there were only two companies in India, ONGC and Oil India. Today, around 23 foreign companies are located in India, apart from domestic majors. The biggest gas find in 2002 (by Reliance Industries Ltd) and the biggest onland crude oil find after 22 years by Cairn in the Barmer basin are testimonials to the success of NELP, and have effectively negated the perception that India’s onshore and offshore assets do not have any oil and gas prospectively. Till date (this includes NELP and pre-NELP) we have 104 oil and gas discoveries.

The tremendous increase in the discovery rate speaks volume of success in India. The opening up of the upstream sector and the licensing policy with transparency has given the industry a growth impetus. Looking at the response, the kind of investments and success ratio in finding of oil and gas I think it has been tremendous success in India.

Has it changed how the international players view India? When NELP VII was put on offer, crude was at its peak; still there is a general perception that big players gave it a miss. Even the gas-rich areas saw few takers. What went wrong?

Regarding this, I would like to say that apart from our national oil companies, the number of private companies have increased in India, which is a very positive signal. We talk about energy security — the more companies in exploration, the more oil and gas they find at home, that translates into real energy security.

Today a number of European and Australian players are here. I believe nothing went wrong in NELP VII. Shifting of the bid closure date made bidders apprehensive. But the Government in its own right took time to give a decision. It did not want to open the bid while confusion was prevailing. Delay in decision was one cause. Exploration rounds were going on in other parts of the world. International companies spend lot of money on evaluating exploration blocks, and delays in the NELP-VII made them seek exploration acreages elsewhere. You will see that NELP VIII will fetch a much better response.

If we consider American companies — they work in a different way. I have experienced in their road-shows that they want producing assets before they bid for exploration licenses. Also, they have projects all over the world, which are competing projects, so any delay in decision-making here can change their priorities.

Besides, I don’t think that US companies not coming to India means we do not have international players in our exploration business. We have British Petroleum, BG, Petrobras, and ENI, to name a few.

So, from the technological point of view, even if the Americans don’t come, we are not losing out in knowledge. The number of discoveries speaks volumes about the quality of exploration going on in India. I can say that available data indicates that the East Coast is going to grow very fast. If rigs were available we would have, perhaps, one or two more discoveries similar to D6.

Coming back to NELP rounds, a basic question being asked is when many blocks of previous rounds are still lying unexplored, what is the rationale of putting more blocks on offer?

The point is that India is still highly under-explored. We have not been able to acquire all the data on onland and deep waters till today. If we have to offer the blocks in the market, they need to be updated in terms of data so that players can evaluate the prospectivity of the block. So it may appear to some people that we are selling the same blocks, but this is not true.

We upgrade the block in terms of prospectivity by providing more information in each round. BHP has picked up seven blocks in the recently offered round. Why? Because of the speculative survey data that DGH has acquired through India Span. And this has generated a new interpretation on the geological setting of the Western Coast.

Geology is an inexact science. No one till date has found an exact way of finding oil and gas. And the very fact that the success ratio worldwide till today is only 33 per cent is an indicator that nobody can say with confidence that a particular area has oil and gas or there is none at all. We can only say so after we have optimally explored the area.

We have a drilling density as low as 0.15 five wells per thousand square km, even on the East Coast. I think each block needs different geological thinking with more data being acquired and various companies evolving new models. Therefore, we bring some of the recycled blocks again and again to the NELP because we upgrade the prospectivity with the help of the additional data.

What issues on the policy front require more clarity? The recent confusion over whether natural gas can be defined as mineral oil. What are your views on this?

During NELP VII, the Finance Minister was misunderstood by most of the bidders. He very clearly said that as far as he is concerned, mineral oil definition doesn’t include gas. But he also said there are courts, tribunals which will decide on the issue. He did not specify what will be taxed and what will not, and whether there is any tax holiday or not. People became apprehensive that gas will not get a tax holiday. But you see, in all the previous NELP rounds, and even NELP VII, we have gone all over the world telling prospective bidders that exploration of gas will also get tax holidays. However, the operators wanted more clarity. Thus, a clarification was given.

I think both oil and gas should be taxed, or both should be given tax holiday, because exploration efforts for both oil and gas are same. In fact it is more difficult to evacuate gas than oil. Besides, while oil prices all over the world are well-defined, gas prices are still demographically different.

When are you going to offer the eighth round of NELP? By when are the awards for NELP VIII likely to be completed? What kind of investments do you expect in the NELP? Will we see an open acreage policy soon?

We are working very aggressively for NELP VIII. We are acquiring data and upgrading all NELP blocks. After finalising the award of NELP VII we will proceed. NELP VIII can be expected early next year. NELP VII contracts should be finalised shortly.

As regards investment, let’s be very clear that it’s the minimum work programme we get during the bids. So, what we assess is minimum investment. Let us take the example of Cairn Energy and Reliance. Their minimum programme was fixed at 6-7 wells but now they have drilled 100 wells. The minimal commitment would be close to $3-4 billion in the NELP rounds, assuming there is no discovery and everybody quits. In every round, minimal investment would be $2-5 billion. In NELP VI & VII a minimum investment of $4-5 billion is expected as exploration costs are also increasing. Giving more data and building trust and confidence is our strategy in NELP VIII.

From being considered non-starters in the hydrocarbon scene, Indian companies seem to have emerged the winners with recent oil and gas discoveries. In the midst of all this activity is the Director-General, Directorate General of Hydrocarbons, Mr V. K. Sibal. In an interview with Business Line, he shared his views on the success ratio and the growth in the sector.

How do you grade the success ratio of various New Exploration Licensing Rounds (NELP)? Over the years how has the policy evolved? Do you see the perception of India changing among the international players?

There are two ways of looking at how NELP has helped India. Over the years, the NELP has been attracting more bidders. While in NELP I to II the average was one bid per block, or a maximum of 1.5, today we are getting more than three bids per block. In NELP VI, except for two blocks, the remaining blocks were awarded. In NELP VII, despite the confusion prevailing on certain issues, the response has been very good. We got around 185 bids for 45 blocks. Therefore, I think from the response point of view it has done extremely well.

If we look back, there were only two companies in India, ONGC and Oil India. Today, around 23 foreign companies are located in India, apart from domestic majors. The biggest gas find in 2002 (by Reliance Industries Ltd) and the biggest onland crude oil find after 22 years by Cairn in the Barmer basin are testimonials to the success of NELP, and have effectively negated the perception that India’s onshore and offshore assets do not have any oil and gas prospectively. Till date (this includes NELP and pre-NELP) we have 104 oil and gas discoveries.

The tremendous increase in the discovery rate speaks volume of success in India. The opening up of the upstream sector and the licensing policy with transparency has given the industry a growth impetus. Looking at the response, the kind of investments and success ratio in finding of oil and gas I think it has been tremendous success in India.

Has it changed how the international players view India? When NELP VII was put on offer, crude was at its peak; still there is a general perception that big players gave it a miss. Even the gas-rich areas saw few takers. What went wrong?

Regarding this, I would like to say that apart from our national oil companies, the number of private companies have increased in India, which is a very positive signal. We talk about energy security — the more companies in exploration, the more oil and gas they find at home, that translates into real energy security.

Today a number of European and Australian players are here. I believe nothing went wrong in NELP VII. It’s similar to what happens in the capital market when the Sensex rises or falls. It is mainly based on speculation. Here also, it was more a question of the perception of players. Shifting of the bid closure date made bidders apprehensive. The impression gained ground that the Government was interfering. But the Government in its own right took time to give a decision. It did not want to open the bid while confusion was prevailing. Delay in decision was one cause.

Exploration rounds were going on in other parts of the world. International companies spend lot of money on evaluating exploration blocks, and delays in the NELP-VII made them seek exploration acreages elsewhere. You will see that NELP VIII will fetch a much better response.

If we consider American companies — they work in a different way. I have experienced in their road-shows that they want producing assets before they bid for exploration licenses. Also, they have projects all over the world, which are competing projects, so any delay in decision-making here can change their priorities. Besides, I don’t think that US companies not coming to India means we do not have international players in our exploration business. We have British Petroleum, BG, Petrobras, and ENI, to name a few.

So, from the technological point of view, even if the Americans don’t come, we are not losing out in knowledge. The number of discoveries speaks volumes about the quality of exploration going on in India. I can say that available data indicates that the East Coast is going to grow very fast. If rigs were available we would have, perhaps, one or two more discoveries similar to D6.

Coming back to NELP rounds, a basic question being asked is when many blocks of previous rounds are still lying unexplored, what is the rationale of putting more blocks on offer?

The point is that India is still highly under-explored. We have not been able to acquire all the data on onland and deep waters till today. If we have to offer the blocks in the market, they need to be updated in terms of data so that players can evaluate the prospectivity of the block. So it may appear to some people that we are selling the same blocks, but this is not true.

We upgrade the block in terms of prospectivity by providing more information in each round. BHP has picked up seven blocks in the recently offered round. Why? Because of the speculative survey data that DGH has acquired through India Span. And this has generated a new interpretation on the geological setting of the Western Coast.

Geology is an inexact science. No one till date has found an exact way of finding oil and gas. And the very fact that the success ratio worldwide till today is only 33 per cent is an indicator that nobody can say with confidence that a particular area has oil and gas or there is none at all. We can only say so after we have optimally explored the area.

We have a drilling density as low as 0.15 five wells per thousand square km, even on the East Coast. So, in terms of international standards, it is still highly under-explored. I think each block needs different geological thinking with more data being acquired and various companies evolving new models. Therefore, we bring some of the recycled blocks again and again to the NELP because we upgrade the prospectivity with the help of the additional data.

Besides, some of the steps taken recently also validate my argument. Like posting all technical data on the Internet. We don’t shy away from showing regional data as well as petro-physical logs that help bidders to evaluate the blocks more meaningfully.

What issues on the policy front require more clarity? The recent confusion over whether natural gas can be defined as mineral oil. What are your views on this?

During NELP VII, the Finance Minister was misunderstood by most of the bidders. He very clearly said that as far as he is concerned, mineral oil definition doesn’t include gas. But he also said there are courts, tribunals which will decide on the issue. He did not specify what will be taxed and what will not, and whether there is any tax holiday or not.

People became apprehensive that gas will not get a tax holiday. But you see, in all the previous NELP rounds, and even NELP VII, we have gone all over the world telling prospective bidders that exploration of gas will also get tax holidays. However, the operators wanted more clarity. Thus, a clarification was given.

Personally, I think both oil and gas should be taxed, or both should be given tax holiday, because exploration efforts for both oil and gas are same. In fact it is more difficult to evacuate gas than oil. Besides, while oil prices all over the world are well-defined, gas prices are still demographically different.

What are your views on the ‘windfall’ profit?

It is an absolutely wrong perception that producers earn windfall profit on oil production. When the price of oil goes up, there is a built-in mechanism within the Production Sharing Contract (PSC) that takes care of the Government’s interest in its share of profit petroleum. The fiscal is in tranches of investment multiples. If the prices are going up, the investment multiple goes up.

Take, for example, RIL. If the tranche goes up, the Government gets higher profit — 90 per cent of profit. It means that if the prices go up, the Government earns the so-called windfall tax. Therefore, I don’t think that the operators are getting away with a higher price. While 90 per cent goes to the Government, 10 per cent goes to operator.

People who are talking about windfall tax and comparing it with different countries must remember their regimes are different. In some countries, there is a royalty regime while others follow a negotiable regime. Even the PSC regime differs from country to country. Our PSC is robust and comprehensive. It covers all aspects. It gives a huge push to exploration. The PSC is transparent and everything is defined well.

So, you don’t see any tinkering with the PSC in forthcoming rounds?

Most people ask me whether our PSC needs a revision. There may be fine-tuning; for example, we did fine-tune the fiscal measures in the recent rounds — investment multiple, instead of tranche, it should be continuous.

When are you going to offer the eighth round of NELP? By when are the awards for NELP VIII likely to be completed? What kind of investments do you expect in the NELP? Will we see an open acreage policy soon?

We are working very aggressively for NELP VIII. We are acquiring data and upgrading all NELP blocks. After finalising the award of NELP VII we will proceed. NELP VIII can be expected early next year. NELP VII contracts should be finalised shortly. As regards investment, let’s be very clear that it’s the minimum work programme we get during the bids. So, what we assess is minimum investment. Let us take the example of Cairn Energy and Reliance. Their minimum programme was fixed at 6-7 wells but now they have drilled 100 wells.

The minimal commitment would be close to $3-4 billion in the NELP rounds, assuming there is no discovery and everybody quits. In every round, minimal investment would be $2-5 billion. In NELP VI & VII a minimum investment of $4-5 billion is expected as exploration costs are also increasing. Giving more data and building trust and confidence is our strategy in NELP VIII.

Investor confidence is growing with each NELP round because the signal sent by the Government is that we are transparent and trustworthy. Yes, we are working on open acreage policy and building the national data repository. Data legacy and its recovery and populating the same are activities that take time.

The issue of cost revision by exploration companies has been raised in certain quarters. What are your views on the subject?

Although we have benchmarked the costs, we must remember that rates are going up. And if queries are raised, we are more than happy to investigate and give the report. In fact, in one instance, we got it done through an international consultant, who validated our position. Besides, there are proper systems we have created in the DGH.

We do surveillance of production, material procurement, capex and opex. We have benchmarked costs and approve the budget accordingly. But budget approval has really nothing to do with cost recovery. If the cost is found to be higher after auditing — for instance, there are some heads under which the operator incurs expenditure, such as public relations — we do not give cost recovery in such situations.

The budget is meant for exploration activity as per the initial work programme, and it is audited. Only then is cost recovery allowed. Capex comes in during the development plan period — when equipment, infrastructure expenses are incurred. Procurement is also done with the approval of the management committee, followed by auditing. Capex and opex are basically estimates.

When an operator is preparing a budget for three years, it is possible that by the time the activity is completed, drilling costs and other costs may change, so there are continuous reviews. Enough checks and balances are considered while approving the budget. Despite this, oil exploration is a volatile industry. One more aspect to be considered is that if the operator increases the cost when the field development plan is being executed, he is going to lose.

Because in lower tranches the Government’s profit is very less — say the operator takes 85 per cent of the burden and the Government takes only 15 per cent. Hence, it is in interest of the operator if he reduces the cost rather than increasing the cost, as he bears the brunt of higher cost. When the investment multiple is three or four — then the Government share is 90 per cent — by then, all the cost has already been recovered and there is hardly any impact of opex or capex on profit petroleum.

(This article was published in the Business Line print edition dated September 30, 2008)
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