A Rocky Foundation
Last month, the union cabinet deferred its decision to sign production sharing contracts (PSC) for 26 exploration blocks and 12 discovered oil fields. This will now be taken up by the new government that comes to power.
The delay is not new to the sector. The blocks and the discovered oil fields were awarded in October 1996 but the PSCs were not signed then. A year later, in October 1997, the matter was referred to a group of ministers that included the petroleum and finance ministers and the deputy chairman of the Planning Commission. They agreed to sign the PSCs for the 26 exploration blocks but the procedure never took place. Now it will be some months before a new government is in place. And perhaps longer before it decides to put its seal on the PSCs.
The episode encapsulates the governments efforts to open up exploration. While the sector was opened as far back as 1974, bidding began in 1991. To date, there have been nine rounds of bidding for exploration blocks and two rounds for discovered fields. A total of 35 exploration blocks and 30 discovered fields have been awarded in this period. But PSCs for only nine exploration blocks and 18 discovered fields have been signed.
This has resulted in an investment of only about $175 million in exploration and $1,500 million for development of discovered fields. As and when the government signs the PSCs for the awarded blocks, around $100 million will immediately become available for exploration. And it will double the exploration acreage under joint-ventures to about 1,80,000 square kilometre.
As for the PSCs that have already been signed, its been a case of mixed fortunes. In the case of exploration blocks, none of them have yet yielded any new oil reserves. For instance, Shell India Production Development BV (SIPD), the oil and gas exploration company of the $1,28,174.5 million Royal Dutch/Shell group, came to India in 1988. It started prospecting in the Kerala-Konkan basin in the same year. But even after spending $29 million, SIPD failed to strike oil. In fact, the company withdrew from India in 1992 to come back the following year.
The private sector attributes the dismal results to the poor quality of the blocks awarded in the first place. This is said to have dampened investor interest in the sector with only 11 bids coming in the last round.
Some others are more optimistic though. Take Essar Oil, which has been awarded five exploration blocks but PSCs for only three have been signed. It got two blocks in Rajasthan in mid-1993 for which the PSC was signed in 1996. Essar is now close to completing the first phase here which entails seismic survey and data processing for 100 line km with an investment of Rs 10 crore. The results are expected by April 1998.
We hope to get good hydrocarbon prospects here as across the border in the same basin, there are producing facilities, says S R Agrawal, director, Essar Oil Limited. Essar has roped in Polish Oil & Gas, which has seismic expertise, as a partner with a 25 per cent stake.
Essar also completed in mid-December the seismic survey for 500 line km in the BB5 block in Kutch. The data is currently being processed and results are expected by end-February. It is investing around $600,000 here.
SIPD has also made some progress in the block it acquired in Rajasthan. It has acquired the seismic data and identified a prospect where it will drill a well this year. It has so far invested $6 million and will invest another $12 million in drilling the well.
We have invested almost $40 million without finding a drop of oil in the country. That shows our commitment to India. But the government will have to speed up things, says Derek J Corbishley, managing director, SIPD.
Private players in the discovered fields have fared better. The fields were offered in 1992-93. The Ravva field in the Krishna Godavari basin is being developed by a consortium led by Videocon that includes Marubeni and the Oil & Natural Gas Corporation (ONGC). The expected crude yield from this field is 155 million barrels per year at a cost of Rs 8.3 billion.
The Ratna oil field on the Ratnagiri coast in Maharashtra, which will be developed by Essar and Premier Oil Pacific once the PSC is signed, is estimated to produce 87 million barrels with an investment of Rs 1,000 crore.
ONGC holds a 40 per cent interest in all these contracts. As also in the Panna-Mukta and Tapti fields, which are being developed by Enron Oil & Gas India Limited (EOGIL) and Reliance Industries Ltd (RIL).
In 1996, EOGIL and RIL spent about $250 million on a programme to boost production in the Panna-Mukta fields. As a result, oil production has gone up from 11,386 barrels per day (bpd) from 18 production wells in December 1994 to 17,932 bpd from 33 production wells in September 1997. The productive capacity was about 12,000-13,000 bpd at the PSC-signing stage. Now, the developers have initiated additional drilling at Panna to take capacity upto 45,000 bpd or 180 million cubic feet of gas per day.
Industry experts say such developments only underscore the need for private investment. PSUs like ONGC, on the other hand, say that the private sector has shown no initiative in discovering prospects but is only clamouring for ONGC to release fields it has already discovered and invested in.
The fact is that India has a very large sedimentary area of 3.14 million square km covering 26 basins and an estimated resource base of 28 billion tonne. So far, exploration has been confined to the onshore resource base and upto a water depth of 200 metre bathymetry. Only 15.9 per cent of the total area has been well explored. Another 16.8 per cent area has got poor attention while exploration has barely been initiated in another 17.7 per cent area.
Take Bombay High, the countrys largest oil field. While it has the potential of off-shore basins, ONGC has not drilled beyond a water depth of 200 metres. So almost 85 per cent of the area has yet to be explored properly. That will entail an investment of about $50 billion over the next 15 years. Now ONGC has chalked out plans to go for deep sea exploration in the Bombay offshore and Kerala-Konkan basins, among others.
The government too has decided to start afresh. A New Exploration Licensing Policy (NELP) was announced in February 1997. This seeks to address some of the complaints of the private sector like the indictment that better blocks are reserved for ONGC and Oil India Limited (OIL).
Under NELP, national oil companies will have to compete with private ones for exploration licenses instead of getting them on a nomination basis. Moreover, both will be allowed to market their produce without reserving the first option for the government.
Also, in order to avoid delays caused by the bidding process, exploration blocks will be allotted on an open acreage system. So companies will be able to apply for blocks at any time and not be restricted to bidding rounds. The entire country will be divided into grids. Any company interested in a block will have to submit a letter of Expression of Interest (EOI). All EOIs received for a particular period will be consolidated and published. Companies interested in these blocks could then offer counter-bids before a cut-off date. These will then be evaluated on the basis of the announced criteria.
NELP also offers adequate fiscal incentives. Cess, pegged at Rs 900 a tonne, has been abolished. Royalty payments for crude will be on advalorem basis for onshore areas at a rate of 12.5 per cent and 10 per cent for offshore areas against 20 per cent now.
The 1997-98 budget also granted infrastructure status to exploration and production activities. This means a five-year tax holiday from the date of commercial production and a 30 per cent concession on income tax for the subsequent five years.
And national oil companies will get the international price for crude produced in areas acquired under NELP. As of now, there is a cost-plus formula that ensures them a 15 per cent return on net worth. Under NELP, ONGC will also get international price for crude produced from PSCs in Ravva, Panna-Mukta and Ratna.
NELP also addresses data problems. The Directorate General of Hydrocarbons (DGHC) will be responsible for providing seismic data, which it will offer at a low cost.
The terms offered in NELP are attractive and we will take part in the first round of bidding, which is for the offshore area, in a big way, asserts Corbishley.
But the fresh initiative seems to headed the way of earlier attempts. Under NELP, the first round of bidding was to take place in August 1997. But this didnt happen as the Petroleum Tax Code (PTC), essential to invite bids for 47 blocks, was not ready.
The PTC will codify all existing fiscal incentives for exploration. On the basis of the PTC, the petroleum ministry will draw up a model contract which will be offered to all companies. While the PTC was cleared by the finance minister in October 1997, it had to be ratified by parliament before the decks could be cleared to invite bids.
In spite of the good terms, NELP has not raised much interest among international giants like Exxon, Mobil, Chevron and Shell primarily because of the governments track record in implementing policies and its inability to publish accurate geological data on the blocks offered, says Suresh Iyer, an analyst with Mumbai-based stockbroking firm, P R Subramanyam and Sons.
Yet, any further delay could only harm the countrys oil economy. After all, reserve accretion in the eighth plan period (1992-1997) was only 573 million metric tonne against a target of 1,325 million tonne.
Says Santonu Jana, research analyst, UTI Securities, The main cause could be that petroleum reserves in India, although substantial when coalesced, are spread thinly. Such a distribution pattern implies that major finds will be very few and the cost of exploration and production very substantial. All the more reason to speeden up the exploration process.
(With inputs by Papiya Pal)