Reforms bring investment hope for hydrocarbons

The oil sector reforms could lead to unlocking of investments in hydrocarbon reserves valued at a cumulative Rs 2.33 lakh crore

The oil sector reforms announced by the Union government on Thursday could lead to unlocking of investments in hydrocarbon reserves valued at a cumulative Rs 2.33 lakh crore.

This includes Rs 1.8 lakh crore worth of oil and gas reserves that will be monetised as a result of the new policy, allowing marketing and pricing freedom for output from difficult areas and an additional Rs 53,000 crore reserves that will be tapped by companies under the contract extension policy.

Beside, the initiatives will help the government garner additional revenue of Rs 2,800 crore by increased royalty and cess from areas where contract extension will be granted. These levies will be payable by all the contractors during the extended period of contract in proportion to their participating interest.

"This will lead to additional government revenue of Rs 2,890 crore on account of additional royalty and cess as compared to the present concessional regime in these blocks. We will also get 10 per cent higher as the government's share of profit petroleum from these blocks," said a senior petroleum ministry official. The new policy of extension of Production Sharing Contracts will cover 28 small and mid-sized fields. As much as 15.7 million tonnes (mt) of oil reserves and 20.6 mt of oil equivalent gas reserves would be monetised during the extended period.

The policy for grant of licence extension will apply to small and medium sized fields like Panna Mukta Tapti of BG Group. The policy, however, kept out extension of Cairn India's prolific Rajasthan block.

Petroleum Minister Dharmendra Pradhan said the new policy of marketing and pricing freedom for difficult fields will help monetise reserves in 28 additional discoveries with a production potential of 6.7 trillion cubic feet or 190 billion cubic metres or 35 million standard cubic meters per day (mscmd). This is around 40 per cent of India's total annual natural gas output of around 90 mscmd currently.

The bulk of the investments in the new discoveries in Deep Water, Ultra Deep Water and High Pressure-High Temperature areas are lying untapped in the KG Basin blocks held by state-run Oil and Natural Gas Corporation (ONGC), Reliance Industries (RIL) and Gujarat State Petroleum Corporation (GSPC). The policy covers all discoveries where production is yet to start as on January 2016. Besides, it will benefit additional 10 discoveries which have been notified and whose potential is yet to be established.

"However, in the case of existing discoveries yet to commence production as on January 1, if there is pending arbitration or litigation filed by the contractors directly pertaining to gas pricing covering such fields, this policy guideline shall be made applicable only on the conclusion or withdrawal of such litigation or arbitration and the attendant legal proceedings," the ministry said.

Mukesh Ambani-owned RIL has filed an arbitration against the government seeking higher gas price for its Dhirubhai-1 and 3 gas fields in the KG-D6 block, even as a dozen other discoveries in the block are yet to begin production. Similarly, ONGC has around six-seven gas discoveries in the adjoining KG-D5 area. Also, GSPC's KG-OSN-2001/3 block has gas discoveries awaiting production.

The marketing and pricing freedom to be granted to firms for exploitation in such areas would be capped by a ceiling price that will be arrived at on the basis of landed price of alternative fuels. The ceiling price (in $ per mBtu) will be the lowest of three prices - landed price of Fuel oil; weighted average of the landed price of substitute fuels including coal, fuel oil and naphtha; and the landed price of imported Liquefied Natural Gas (LNG).

At the prevailing market rates, the new price would work out in excess of $7 per unit, compared to the current price of domestically produced natural gas at $3.8 per mBtu which is worked out every six months based on the average price of gas surplus countries like the US, Russia and Canada. The landed price-based ceiling for premium pricing will be calculated once in six months and applied prospectively for the next six months. The ceiling price will be based on price data of the trailing four quarters with one quarter lag.

The government said the decision is expected to lead to creation of huge employment opportunities. ONGC has estimated it would deploy 3,850 direct skilled labor, apart from 20,000 persons required for construction, in the development of discoveries in its KG-D5 block off the Andhra coast. Also, GSPC is currently deploying 690 personnel in its KG basin block.