First-time explorers to gain less despite aggressive Nelp bidding

Indian companies, which are keen to gain the experience of operating an oil block, have bid aggressively in the latest round of the New Exploration Licensing Policy (Nelp VII) where these firms will not recover any of their investment in the block in case of an oil or gas discovery. This apart, they will also give away a significant portion of their profits to the government.

Interlink Petroleum, a Bombay Stock Exchange-listed company which reported sales of Rs 1.18 crore and a loss of Rs 70 lakh in 2007-08, and EnSearch, a privately held company based in Noida, has tentatively won one small block under Nelp VII by bidding for zero cost recovery and 72 per cent sharing of the profits with the government.

“These companies want the label of being operators of an oil block. That opens up windows for them to bid for bigger and more prospective blocks in future auctions in India as well as overseas,” said an official with an advisory firm which advises oil companies on structuring their bids.

These blocks, called ‘S-block’, received the maximum number of response and do not require prior experience of exploration for bidding and the hydrocarbon reserves are small compared to other blocks.

Companies winning the S-blocks have to drill a minimum of one well, which will cost around $10 million at today’s market rate for hiring a rig and other related costs. In addition, the firms will have to complete a minimum work programme including seismic surveys.

Indian Oil Corporation (IOC), on the other hand, has also gained provisional control of another block under the auction by bidding for 7 per cent cost recovery and an 81 per cent share of the profits with the government.

IOC beat Interlink-Ensearch in this block after the latter offered to give 71 per cent of its profits to the government compared with 81 per cent offered by the state-run oil major.

Under the Nelp regime, companies have the option of recovering the entire investments they make in an oil or gas block from the sale of the hydrocarbons. These companies then start sharing the profits with the government from the day they have recovered the costs. Reliance Industries, for example, will recover the entire $11.2 billion it is spending in producing gas from its Nelp I block in the Krishna-Godavari basin before it starts sharing the profits from the sale of the gas with the government.

If Interlink-Ensearch and IOC discover oil or gas in their Nelp VII blocks they will start sharing their profits with the government from the first day itself.

IOC’s bid to recover 7 per cent of its investments means that the company will set aside only 7 per cent of the profits from the sale of the oil from the block every year in order to recover its total costs.

“It’s their strategy. With the price of oil at current high levels, they think they can create value,” said VK Sibal, director general in the Directorate General of Hydrocarbons (DGH), the government agency which overseas the Nelp auctions. Oil prices are currently at $109 per barrel, around 35 per cent higher than what was a year ago.

If the companies do not complete the work programme like undertaking seismic surveys and drilling one well they have to pay a penalty to the DGH. “These penalties are a small fee to pay,” said the Delhi-based analyst.

Analysts say Adani Welspun had earlier picked up operatorship in two oil blocks in Thailand, where rules for bidding are less stringent. “They used that experience to bid for blocks under Nelp VI and won a couple,” said a Delhi-based analyst, who did not want to be named.

An official with IOC said the company can use the experience of operating Nelp VII blocks when it bids for oil and gas blocks across the world.

Sibal said that Nelp VII blocks will be awarded by the end of this month. “We are working towards it and are on track,” he said. An empowered committee of secretaries is likely to meet this week to discuss the Nelp VII awards. The recommendations of the secretaries’ committee will then have to be approved by the Cabinet Committee on Economic Affairs, before the final contracts are signed with the winners of the blocks.