It is difficult to find data that could support the Directorate General of Hydrocarbons’ claim that India’s oil and gas exploration licensing policy ranks “amongst the most attractive in the world”.

No global oil major seems interested in India, except perhaps British Petroleum, which bought into already-discovered assets. Between 2000 and 2011, the oil sector attracted foreign investments of $3.1 billion. Reliance-BP and (Indian-owned) Cairn plan substantial investments, but they are into discovered fields. In the 264 blocks awarded under the first eight rounds of the New Exploration Licensing Policy—the 16 awarded under the 9th round is too recent to count here)—only 68 discoveries have been reported.

Oil minister Veerappa Moily’s statement that India is floating on oil and gas may be a hyperbole but another data point underscores the potential-vs-actual reality: India has 205 billion barrels of prognosticated hydrocarbon resources, but only 73 billion barrels of oil and gas have been established through exploration.

Despite the potential, oil companies are disinterested in India. Why? Unfriendly policy regime, say oil companies. Production sharing contracts are not honoured. The government, which can only advice the operators, imposes its will on them. ‘Oil’ and ‘gas’ are treated differently, although the costs and risks are the same. For instance, there is a 7-year tax holiday for oil, but not for gas.

The Association of Oil and Gas Operators (AOGO), which has among its members Reliance, ONGC, GAIL and Cairn, has much to say about policy. Excerpts from an interview with Ashu Sagar , the Secretary-General of the Association:

What are the major issues facing the oil and gas operators in India?

Oil and gas Operators face problems of semi-functional Management Committees, delayed decisions, interference in operations beyond the scope envisaged in PSC, Exploration in PML (Petroleum Mining License) areas being disallowed or ring-fenced, difficulties of early monetisation, differential tax treatments of oil and gas, regulatory issues and attempt to over-ride the operators judgements. These go poorly in a country with challenging geology and energy shortage.

Upholding the sanctity of contracts is a major issue.

At a holistic level, the real issue facing industry is that bureaucrats are process-bound. The Government processes are made for approving spend for a deterministic revenue, or a deterministic product or a deterministic facility. Existing processes are not designed for participating in high risk high value ventures with probabilistic outcomes, where lots can go wrong and a huge spend may only have a dry hole to show for the effort and money.

Through PSCs the Government has acquired the authority to be a part of managing process. There is no time value. These processes are also not time-sensitive. Effective costs soar.

You have often spoken about the Production Sharing Contracts being violated. Why not go to court for redressal?

Courts are a matter of last resort. Indian legal system virtually guarantees that the dispute shall not be resolved for many years and the uncertainty shall continue. I am sure you recall the gas tax holiday dispute arising out of interpretation of section 80 IB(9) of IT Act. The matter rose around 2006. It is still in Court and likely to remain so for many more years. Meanwhile uncertainty continues.

You insist on market-determined pricing for gas. Will you ask for some kind of protection if the prices fall below what they are now?

Unfortunately, the contracts do not give us any downside protection on product prices. PSC fields continued production in 1997-98 when the oil price went down below $10 a barrel. Internationally, many companies went bust. (However) What is undesirable is an attempt to freeze the upside unilaterally. It is entirely open to Government to change the terms in the next round of NELP to administered prices or prices with a floor and ceiling and take the consequent bids from the private industry.

In the next round of NELP, if the government indeed brings in a ceiling and a floor---what do you think its impact will be, in attracting bids?

Every company has a different risk-reward profile. Before bidding, every company simulates its likely rewards and upsides, as well as risks and downsides, based on many variables.

These are long term contracts, lasting over 30 years. Both capital expenditure and operating expenditure change with oil price. You have to be clear whether the limits you mention are defined as an absolute number or with respect to oil price. You also have to be clear what guarantees Government is offering, to pay the current prices if the bottom falls out of the gas market – say with a shale or hydrate bonanza within next 30 years. These scenarios are possible. Again, alternate energy sources are possible in that time frame. Making product price-fixed or in a fixed range -- in an absolute sense -- without making any commitments on keeping costs stable or market volumes, is generally not a good idea. It is better to pass these risks to businesses.

Many, including the Ministry of Finance, feel that that oil and gas companies that had committed supplies of gas should first supply the contracted quantity at the old price before they become entitled to the hiked price. Your reactions?

The government has a body of experts in DGH and Institute of Reservoir Management. They receive all the data. They also ask Operator to run any additional tests if required. The government also has access to all the internationally established consultants.

All parameters in testing are determined by third parties that have an international reputation to preserve. One cannot assume that an oil company under PSC can deliberately reduce production without everyone in the above organisations knowing about it.

The gas supplies in the sales contract are made as per written down protocols to tackle all the contingencies. Oil and gas companies must supply as per that contract. You can also be sure that the buyers shall enforce whatever rights they have and shall not be short changed.

How does the Association view the emerging shale gas regulations in India?

AOGO is not aware of any new policy or regulation at this time. The lack of progress is because Government does not permit the work in shale rock, and facilitation measures for inter-policy conflict resolutions are not in place. The Government should set down approval processes of Exploration (of Shales) with environment, water, land acquisition & ROU policies etc.

>(ramesh.m@thehindu.co.in)

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