Poised to fail

New round of oil and gas auctions may not excite investors

The 10th round of the New Exploration Licensing Policy (Nelp), which was announced last Sunday, should see between 46 and 60 blocks to be offered at auction. The exact number will depend on inter-ministerial clearances. The blocks offered include areas recovered in the KG-D6 block from Reliance. Nelp-X switches from the production-sharing contracts (PSCs) used hitherto to a new regime. A draft note from the Cabinet Committee on Economic Affairs proposes extended exploration periods and longer tax holidays. The recent hike in gas prices (effective April 1, 2014) may be considered a positive factor by bidders.

But, despite sweeteners, the chances are Nelp-X will see low interest. The first nine Nelp rounds were, at best, marginally successful. Nelp was launched in 1999 to give impetus to hydrocarbon prospecting and reduce import dependence. But out of the 250-odd blocks bid out in nine rounds, just three have entered production. Cairns' fields in Rajasthan are the only unalloyed success. The KG-D6 basin, which was hailed as a massive discovery when Reliance struck gas, has since seen a trend of falling production coupled with litigation and controversy. Each Nelp round has seen diminishing interest. In Nelp-IX, only 13 of the 33 blocks that received bids in March 2013 have been allotted. As many as 106 blocks across nine rounds have been relinquished after allotment, without exploration.

The tepid responses are not so much about the proposed pricing, though of course that matters. The problems start with the inability to offer single-point clearances before putting up blocks for auction. The very fact that the number of blocks offered in Nelp-X is not yet known points to the inefficiency of the process. Multiple ministries are involved, clearances are uncoordinated, and few bidders are prepared to walk that labyrinth. There are other issues too. The production-sharing contract (PSC) used in the first nine rounds of Nelp proved to be poorly drafted and ambiguous. It incentivised the gold-plating of expenses since it offered the government revenue share only after costs were recovered. What is more, it led to a Catch-22 situation, where the government discouraged secondary exploration activities since that led to higher expenses. There have also been flip-flops on taxation policy and on the interpretation of terms of marketing.

The proposed new Rangarajan formula for revenue sharing isn't necessarily ironclad either. If it is poorly drafted, the details, in fact, could trigger new litigation. The new regime does remove gold-plating incentives by offering revenue share to the government from day one of production. It also incorporates penalty clauses, which may cause prospective bidders to baulk. The ambiguities and the inconsistent policy history mean that bidders must allow for the possibility that the policy environment may change again unpredictably. And, of course, a change of government in mid-2014 will increase the probability of policy changes. In addition, the government has announced an intention to move to an open acreage system, where it provides good seismic and geological data and asks prospectors to bid for blocks of their choice. That's an entirely different game from Nelp. It is a pity that all these issues have not been straightened out in 15 years and it is unlikely that bidders will believe that remedies will be found in a few months by a government due to end its term in office. Given the political circumstances, and the policy history, it is likely that prospectors will wait for more clarity rather than bidding enthusiastically in Nelp-X.