NELP, a test for oil & gas policies

Auctioning of exploration blocks in the oil and gas sector has come to be an annual affair for the Indian government, where officials, politicos and a handful representatives of some successful game-changing exploration companies go touring around the globe to display the hydrocarbon wares of the country. It is now almost a decade since the government launched this auction round christened as the New Exploration Licensing Policy. But this time around, the bidding for blocks is not just about attracting investors. The success/ failure of the auction round is a litmus test for the government and its policies. The results of this auction round is bound to throw up some interesting lessons and questions on India’s policy consistency, ability to honour contracts and its regulatory framework.

Consider this. Year 2009 has seen two major milestones as far as new oil and gas is concerned. In April, Reliance Industries began producing gas from its D6 block in the Krishna-Godavari basin on the east coast. It is estimated to pump out 80 million standard cubic metres per day of gas in four months from now, thereby doubling India’s gas production. Second, Cairn India has started production from Mangla fields in the western state of Rajasthan. This field is estimated to yield as much a 25% of India’s oil imports at its peak. The success of these two discoveries, which has now translated to additional oil and gas for India, should have been the biggest platform and a stellar year to attract investments.

But hold on, this is also the year which has seen the biggest uncertainties over policies and contracts in the energy sector. It has been a year fraught with legal battles, accusations and counter arguments, involving high stakes. There are questions being raised on contractual obligations, the independence of regulators and policies that govern the future of this sector. So much so that the success of the new finds and the additional availability of oil and gas in the country that has major macro-economic implications is somewhat lost amidst the rather ugly public spat.

The government, in particular the petroleum ministry, is having to spend time in resolving legal issues where it is a party, and answer questions raised on the consistency and transparency of policies. Even a welcome move by the finance ministry in clearing the air and extending tax holidays for future gas producers at par with oil producers (which was a grey area after Budget 2008-09 and has been a long standing demand by the industry) has failed to distract attention from the current controversy.

While the representatives of oil majors are careful not to make any adverse comments publicly, privately most of them are tracking the fallout of the current legal battle. The Directorate General of Hydrocarbons (DGH) was reported to have received letters from some of the global energy majors wherein they had expressed concern about the implications of the current public spat for the gas sector. Some have even gone on to say that the ongoing controversy, which is like a daily column and headline in every news bulletin, will end up as epitaphs to India’s oil and gas story. The fundamental question in this controversy on which the government needs to come clean is about contractual obligations. The Production Sharing Contract (PSC) is a legal document that binds the contractor and the government to certain obligations. Any move to break away the commitments or obligations will only deter investor confidence.

While it is commendable that the petroleum ministry, aided by the DGH, has launched its annual auction round under NELP-VIII, not deterred by the ongoing storm over the biggest gas find in India (showcased at almost every NELP roadshow since 2003), the final test of the pudding will lie in how many investors actually dip in to taste and eat the pudding. The much-famed road shows have already travelled across the Atlantic to the oil capital of the US in Houston where the Big Oil companies of the world take calls on when and where the money needs to be pumped in based on the future of the energy markets, the prospects of the sedimentary basins in various parts of the world and most importantly the laws/policies of the particular country. Petroleum ministry officials who attended the Houston and Calgary road shows are more than happy with the turnout and have come back optimistic that India’s oil and gas story is on track.

Private and national oil companies within India too have attended the first road show, this time in Mumbai, with the same (if not more as claimed by the petroleum ministry and DGH) enthusiasm and eagerness to bid for blocks. Going by the turnout which attracted energy majors like Exxon Mobil, Chevron, British Petroleum, not to forget by the Indian majors, Reliance Industries Ltd, ONGC, OIL, Cairn, there is every reason to believe that the legal tussle which has forced parliamentarians and law makers debate and huddle into late night meetings to ensure a fair stand has not impacted investment sentiment. So far so good. But does the story end here? Or is this the beginning of an illusive journey that may end up in dismay and disappointment.

Source: The Economic Times

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