New energy regime

Investment in exploration may finally take off

On Monday, the government proposed a major change in the regime governing exploration of oil and natural gas. From the earlier profit-sharing model, future blocks will be bid out on a revenue-sharing basis. The New Exploration Licensing Policy (NELP), which has gone through nine rounds of bidding over more than a decade, is thus going be substantially altered. The earlier regime had become controversial. In order to calculate the government's share, the private licensee's costs had to be deducted - and this, according to the government auditor, opened up the possibility of artificially inflating or "gold-plating" those costs in order to reduce the payout to the government. Companies would bid by quoting the minimum work programme they would undertake; they could first recover their investments and only then begin sharing profits with the government. Now, however, bids will have to specify the share of revenue the government will receive from oil and gas blocks being sold, depending on the stage of production and on the overall fuel market scenario.

The industry is pleased with the new policy; one participant was quoted in this newspaper as suggesting that the new regime would lead to investments worth $50-$60 billion (Rs 3.25 lakh crore to Rs 3.9 lakh crore, according to the current exchange rate). Perhaps that is less due to the structure of revenue sharing than to other promised aspects of the policy. For one, companies involved in natural gas production might now be permitted pricing and marketing freedom, as opposed to the complicated and contested formulae for pricing that exist in the current case. Companies are also pleased at the possibility of "uniform licensing" that would grant them the right to explore various hydrocarbons in the block that they win at auctions - methane, shale oil, and so on. Finally, there might be a shift to "open acreage", in which companies can bid for blocks that they wish to explore, and then it is up to the regulator to "authenticate" the geological data. These - especially pricing freedom - might attract investment.

However, a certain degree of caution is warranted. Simply put, the NELP process - however difficult to administer - did have certain theoretical advantages in structure particularly with regard to deep-sea exploration. On the high seas, the risks and costs associated with exploration are high; cost recovery and a defined block with geological data did reduce perceived risks. In addition, if the final policy requires companies to fix a profile for their eventual oil and gas recovered, it may prove excessively restrictive, and a serious disincentive. Eventually, however, the proof of the proverbial pudding shall be in the eating. The purpose of exploration policy is to unlock petroleum reserves and attract investment; if investment increases as a result of this change, then that is what matters. Certainly, what is welcome is that the government has taken the long view: that it has recognised that it is expanding infrastructure that matters, not maximising year-to-year revenue. This is a sensible approach, and one that has not been visible in many other sectors in the past few years.