Encouraging response

With just 34 of the 46 contract areas on offer attracting bids and multinational players staying away from bidding, it may be tempting to call the response to the first auction of oilfields in six years as tepid. But, that would be the classic ‘glass is half empty’ approach. The auction has to be seen in the context of the prevailing tough environment in the global oil industry, with prices remaining subdued for several months now after the precipitous fall from the highs of mid-2014. Oil companies worldwide have turned risk-averse, clamping down on investment and shedding flab. With prices not expected to recover through the next calendar year, one would have assumed that this would not exactly be the most propitious time to auction oilfields. And then there was the disadvantage that these small oil fields are in difficult terrain which the national oil companies found uneconomical to exploit. Yet, the Centre made bold and the result is encouraging, with 42 companies participating and putting in 134 bids for 34 contract areas, a bulk of them onshore.

Admittedly, there were a few factors that tipped the scales in favour of the Centre. First was the fact that these were discovered fields which means that the risks were lower compared to exploration blocks; the presence of hydrocarbon was already established. This attracted the smaller players whose risk appetites are considerably lower. Second was the changed rules of the game from the erstwhile NELP regime. The small oilfields were offered on revenue-sharing basis as opposed to profit-sharing and importantly, the successful bidders had complete marketing and pricing freedom. In the absence of cess and other levies, the taxation regime was also friendlier. This is also the first auction that will hand out a unified licence allowing the developers to tap hydrocarbon in whichever form it is present — oil, gas or shale gas. Simply put, the bidding terms were market-friendly and designed to attract bidders.

Given that some of the small players have no prior experience in the oil industry, the Centre has to examine their bids closely so as to ensure that only the serious ones emerge successful. The Centre also has to work closely with the field developers and the local authorities to ensure that approvals and clearances are not hurdles. Once hydrocarbon production commences from these fields, the challenge will be to identify the most efficient way of getting it to the market such as connecting to the nearest pipeline network or refinery. Here again, the Centre’s help will be crucial. These fields, put together, are estimated to hold about 625 million barrels of oil and oil equivalent gas, which is not much. Yet, it is important that the experiment with this auction succeed because it is the template for the auction of larger exploration blocks which will have to follow sooner than later.

COMMENT NOW