How Minister Pradhan can leverage a crude oil rally

A spike in crude oil prices, which could put Finance Minister Arun Jaitley at a disadvantage as he prepares for his Union Budget, but may prove to be an advantage for Dhamendra Pradhan, Minister for Petroleum and Natural Gas.

On Thursday, Pradhan and his team will launch bids under the Open Acreage Licensing Programme (OALP) that allows players in the upstream space to carve out their own areas for exploration and production (E&P) and place bids. On offer are 46 onland blocks, eight shallow water blocks and one deepwater block.

Typically, when oil prices are high, the appetite for companies to go into the E&P business goes up. It is in this backdrop that expectations are running high that India’s hydrocarbons hunt space, which has been lying subdued, may see some activity.

Whether Pradhan and his team will get the deliverables or not, only days to come will show.

Ajay Arora, Partner and National Leader - M&A, EY, sees OALP as an opportunity to create interest among hydrocarbons explorers and producers, as there are positive undercurrents.

“The players have a better opportunity to evaluate and assess data in a more structured manner. Oil prices are also giving positive signals and, finally, E&P has not seen much action for a while, so this will test the appetite of the players,” he said.

OALP was launched on June 28, 2017, under the Hydrocarbon Exploration Licensing Policy (HELP) based on a revenue-sharing model with pricing and marketing freedom.

The programme means the end of the story for the New Exploration Licensing Policy, which has been in existence till now.

“India is offering a very good model revenue sharing contract. But the question is with how much confidence we have been able to market it. January 18 will be the test,” said Sunjoy Joshi, Chairman, Observer Research Foundation.

Echoing a similar sentiment, energy expert Narendra Taneja said: “This auction under HELP will usher in a new era in India’s E&P life. It is, however, important that a new open culture is also shepherded in across all E&P spectrums to make the new move a success.

The open acreage will attract players who are confident of their experience, expertise and technology. The scheme is best suited for them.” An expression of interest (EoI) submission portal for OALP was open from July 1 to November 15 last year for the first round. EoIs were sought under two categories — petroleum operation contract (POC) and reconnaissance contract (RC).

The POC allows a full range of exploration, development and production, while the RC allows only exploration with a two-year term that comes with a provision for a one-year extension.

OALP is an ongoing process — even as the Centre sets out to close the first round by May, EoIs for the second round are going on. In the first round, 57 EoIs were received under the POC category, mostly from domestic players.

According to the Directorate General of Hydrocarbons, 55 EoIs with 59,282 sq km area have been finalised to be put up for bidding spread over 10 sedimentary basins — Mumbai basin (2 blocks), Cambay basin (11), Rajasthan basin (9), Assam Arakan basin (19), Kutch basin (2), Krishna Godavari basin (5), Cauvery basin (3), Ganga valley (1) and Himalayan Foreland basin (1).

Former ONGC Chairman RS Sharma said the government has been wanting to unlock the exploration sector, but the regulatory regime needs to be more attractive to inspire investments. There is also a need for an impartial regulator, he said.

“We cannot afford to adopt an approach like oil rich countries. We have to be more persuasive, give more comfort to an investor as well as extend more fiscal incentives. Remember, E&P is not a revenue generating activity, so services for exploration activity should be totally tax exempt,” he added.

Public policy commentator Aashish Chandorkar said: “The 55 oil blocks which have a valid EoI cover almost 60,000 sq km. So the interest is significant.”

However, most of the EoIs have come from ONGC and Cairn, so one can’t be quite sure if new bidders can be added for many blocks, he pointed out.

“But even if the government eventually allots 20,000-25,000 sq km, that will be good. It will still mark a good improvement over the current 1,02,000 sq km area under exploration. It would also be a test case for HELP, the new policy. The government can use this to change conditions,” he observed.