Why oil sector doesn’t see a ‘HELP’ing hand

Wondered why domestic private sector and global players in the oil and gas business are yet to see the ‘HELP’ing hand of the Hydrocarbon Exploration Licensing Policy?

Well, unlike their public sector counterparts like ONGC, which have been singing accolades, private players believe it is not such a ‘simple story’.

The cost-recovery regime is at the root of it all.

While the Vijay Kelkar Committee did go with the current production-sharing contract (PSC) model — which allows the contractor to first recover its costs before sharing profits with the government — some members of the panel preferred a production-linked payment system.

This was also the recommendation of the C Rangarajan panel, which proposed a shift to production-linked payment in its report on the PSC mechanism for the petroleum industry. This regime would ensure that as the contractor earned more, the government would also do so, but only progressively.

Now, the Centre has plumped for a revenue-share model. This is a shift away from the profit-sharing model that allowed contractors to gold-plate costs to artificially depress profits.

This had spawned disputes and delayed projects as the government put each move of the contractors under the lens. The revenue-sharing regime is likely to obviate this problem.

As an industry player put it, the concept of production-sharing contract-based New Exploration Licensing Policy, or NELP, is slightly old fashioned, or prevalent in countries where national oil companies are dominant.

In many countries there are multiple models — revenue sharing, production sharing or customised. In the US and Canada, it is the states that play a more important role.

“We do not have any revenue sharing model or uniform licensing model for forming a base. At least, with this decision (revenue-sharing model), politics over the business has been resolved. Economically, what it would mean, we have to see. Besides, nobody wants to criticise the government as something is better than nothing,” said another industry player.

The other key aspect of the policy is a single licence for exploring any kind of hydrocarbon. This is expected to cut red tape as now there will be one policy framework, which will also hopefully plug the gaps in the NELP model.

Freeing up of pricing is the other major component of HELP. Not allowing contractors to profitably price their output had held back exploration activity despite the nation’s huge import dependence.

The Centre has also proposed differential pricing for the natural gas produced in difficult areas.

The new formula is based on average prices of more commonly available fuel — a combination of coal, naphtha, fuel oil, or just fuel oil, or LNG — whichever is lowest. At prevailing rates, the gas price will be close to $7 a unit.

However, contractors will have to revisit their costs as there are blocks that have both deep- and shallow-water discoveries. Averaging the price will be difficult if the same infrastructure is used.

Though guarded in its response, the industry feels “the challenge is in getting things moving and its implementation”. And, as an official said: “After a long time, the contentious issue of gas price was resolved in 2014, when this government came into power.

“But it is a misnomer that the government has freed gas pricing as a cap remains. Of course, ‘in principle’ it is a positive decision for incentivising gas produced from difficult areas.”

Much will depend on the implementation of the new policy. As a senior executive of a private oil firm said: “The devil lies in the detail… we have to see the policy nuances before we firm up our views.”

In fact, even industry body Association of Oil and Gas Operators remained muted in its reaction. Internally, players in both public and private sector agree that mostly the new policy has tried to correct the issues faced in the NELP regime.

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