Oil and gas production continues to elude discovered small fields

Five years after the first discovered small field (DSF) auctions for hydrocarbons, project developers continue to face multiple issues. Till now, none of these discoveries have begun production and officials from many new entrants to India’s upstream oil and gas exploration sector point fingers towards delays in clearances and faulty data.

“The efforts of the Directorate General of Hydrocarbons are in creative construct, yet achieving the mission of expediting domestic production is being hampered owing to delays in policy decisions. There is a need to become adept to the new realities of the oil and gas sector to avoid contract area dissertations, and low level or artificial-engagements. These are inhibitors to investment, engagement, employment and increasing production,” D N Singh, Secretary General, Association of Discovered Small Field Operators told Business Standard.

Singh is the chief executive officer of Ganges Geo Resources, a Mumbai-based Oil and Gas Enterprise that won five contract areas in the second DSF bid round held in 2019.

According to oil ministry officials in the know, 42 petroleum mining leases (PML) have been granted for production from DSF blocks. Grant of the leases implies that the operator can start production. Besides, it is estimated that around eight  blocks have been declared unfeasible for hydrocarbon exploration till now.

DSF and vision

Under the DSF-I (2016), the Ministry of Petroleum and Natural Gas offered 67 Pre-Explored Small and Marginal Fields termed as 46 contract areas. These were then estimated to have 625 million barrels of oil-in-place and 2 million standard cubic metres per day (mmscmd) of gas reserves.

For perspective, India imports 1656.58 million barrels (roughly 226 million tonnes) of crude oil every year. This comprises around 84 per cent of India’s total crude oil requirement. While the quantum of assets auctioned under DSF is much lower than the country’s consumption, any attempt to boost local supplies is in line with Prime Minister Narendra Modi’s vision to lower import dependence.

In March 2015, PM Modi had set a target of lowering India’s crude oil import dependence by 10 per cent from what was then 77 per cent. This target was to be achieved by 2022. Come 2021, the consistent decline in domestic production and sustained increase in fuel demand has pushed up crude import dependence. The current import levels are roughly 10 per cent more than 2015.

The goal of the DSF auction exercise was also to let public sector undertakings--Oil and Natural Gas Corporation (ONGC) and Oil India (OIL)--focus on larger fields while the smaller ones would be given to new players who want test the waters. In addition to freeing up capital for deployment in more lucrative assets, ONGC and OIL also managed to get rid of less prolific contract areas according to their estimate. DSF -1 saw 17 first time new small and medium private entrants to India’s oil and gas exploration sector.

Concerns and delays

To prevent non-serious players from gobbling up the assets on offer, the DSF bid rules mandated a minimum work programme criterion as an award parameter. This largely means that companies who promised to drill more wells had a better shot at winning the blocks on offer. In addition to the drilling work was the mandate to start commercial production failing which the contract area would stand relinquished. There was also a strict timeline for project implementation.

These have become major concerns now for some of the players. In their representations, the DSF players have sought a relaxation in timelines for honouring their commitments. There have also been requests to change the methodology for changing the government’s revenue share calculations.

With the crude oil prices crashing and most DSF assets nowhere near production, DSF players have shifted gears to recovering their bank guarantee amounts. Players are seeking a 75 per cent cut in bank guarantee commitments while also looking for exit clauses from contracts.

“New companies that have bid for these blocks do not completely understand the complexity of upstream operations when they enter the business. They generally hire consultants whose only priority is to ensure that their clients win the blocks. This leads to them making tall claims (of minimum work program and revenue share commitment) while bidding to bag the blocks,” an official from a company that was awarded a DSF block said.

“It is later on when the new developer faces reality, they fret. Delays in environmental clearances and encroachments are major issues, too,” he added.

The second round of DSF bids were called in August 2018. There were 25 contract areas covering 59 discovered and pre-explored oil and gas assets with 190 million tonnes of oil and gas reserves. This auction saw 11 new small and medium private first time Entrepreneurs, being awarded with 23 Contract Areas.