Lending a ‘HELP’ ing hand: new policy a welcome change

Anand Kalyanaraman BL Research Bureau | Updated on January 20, 2018

Long awaited move to improve domestic oil and gas output finally gets going

For a country that imports three-fourth of its crude oil needs and about a third of its gas requirements, the HELP (Hydrocarbon Exploration Licensing Policy) regime that will replace the NELP (New Exploration Licensing Policy) comes not a day too soon.

Despite nine rounds of NELP auctions so far since 1999, India remains largely unexplored — about 75 per cent of the sedimentary basin is not fully explored yet. Over the past few years, domestic oil and gas output has been declining while imports have been rising to meet the demand.

The HELP — a follow through to the consultation paper put up by the Ministry of Petroleum and Natural Gas in November last year — seeks to address key pain points in the NELP that inhibited domestic hydrocarbon output growth.

It is also an extension of the liberal rules introduced last September for auction of the marginal blocks surrendered by ONGC and Oil India.

Key changes

Contracts under the HELP will be based on ‘revenue sharing’ instead of the ‘profit sharing’ under the NELP.

More transparent and easy-to-implement, ‘revenue sharing’ will do away with the dispute-prone cost-recovery calculations necessary under ‘profit sharing’.

That said, since contractors will bear higher risk, it remains to be seen whether they would be game for the revenue sharing mechanism, especially for deep water blocks where costs and risks are very high.

The unified licensing policy under HELP will allow exploration and production of all hydrocarbons such as oil, gas, coal bed methane and shale oil and gas in a block, a significant improvement over the NELP, which required separate licensing for different types of hydrocarbons.

Contractors will now also have the flexibility to request bidding for any block on-tap under Open Acreage Licensing. Earlier, they had to wait for the government to auction blocks, and could only bid for blocks that were put up for auction.

Importantly, the Centre has taken steps towards pricing and marketing freedom for domestic gas. But it has hedged on this key reform.

One, the freedom to price and market is restricted to new gas production from difficult terrains – deepwater, ultra deepwater, and high pressure high temperature areas.

Next, the price will be subject to a ceiling-based on a formula, involving the import price of alternative fuels such as fuel oil, coal, naphtha and liquefied natural gas (LNG).

Gas fields that are currently under production will not have this pricing and marketing freedom, and will be continue to get the price as per the formula currently applicable to them. So, while ONGC’s yet-to-be-developed offshore KG-DWN-98/2 block may see some benefit from the new pricing regime, RIL’s producing KG-D6 block may not. The Centre has smartly ring-fenced its share of the profit by basing the calculation on the prevailing international price or the actual price, whichever is higher.

Contract extensions

Finally, the grant of extension of production sharing contracts for 28 small, medium sized discovered fields is welcome. The extension will be for 10 years, both for oil and gas fields or economic life of the field, whichever is earlier.

This will remove uncertainty and help contractors plan their investments in these blocks.

Cairn India’s Rajasthan block contract though, has been kept out of the largesse. Also, the Centre has sweetened the deal for itself by increasing royalty and cess to prevailing rates from concessional rates, and by increasing its share of profit by 10 percentage points during the extended period.

Published on March 10, 2016

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