The slippery slope of oil exploration keeps India heavily import-dependent

Successive Indian governments have formulated policies that tended to nurse consumers of energy at the expense of producers. The current dispensation is no different. Motorists have taken comfort in frozen pump prices and gas price caps but producers face high taxes, and restrictions on pricing freedom.

The government is focused on revenue generation rather than production maximisation. But protecting the interests of consumers, and imposing high costs on upstream operators, may work in nations endowed with copious oil reserves and relatively negligible domestic demand, such as Saudi Arabia, Qatar or Russia. Not so in the case of energy-deprived countries like India — it only makes the nation increasingly dependent on foreign oil and gas, weakening energy security.

Check out these numbers. Domestic production of crude oil has declined 23 per cent to an estimated 29 million tonnes last fiscal from nearly 38 million tonnes or 763,000 barrels a day (b/d) in 2013-14, according to oil ministry data. India’s oil product demand rose over 40 per cent during the period, driven by a cocktail of higher GDP, subsidies and lower-than-market prices of transport and cooking fuels.

Crude output in February dipped to a low of 575,000 b/d. To put it in perspective, domestic production met 24 per cent of our oil demand back in 2014. Today that figure has shrunk to 13 per cent. State-run explorers lack the heft, finance and expertise of oil majors to arrest declines from ageing fields, and for deep-water developments.

The impact on energy security is glaring. India’s dependency on imported crude as a percentage of consumption was at an all-time high of 89.2 per cent in February against 84 per cent in 2020-21, and 77 per cent in 2014, government data shows. This is despite Prime Minister Narendra Modi’s call in early 2016 to reduce crude imports by 10 per cent by 2022.

The decline in India’s oil output has turned structural in spite of decades of toil by ONGC and Oil India, and a slew of exploration policies, beginning 1991. The results of two decades of oil sector reforms reveal the following results. Neither producers nor fuel marketers have pricing freedom, key to facilitating investments. No oil major is drilling in India. Reliance Industries, which has the distinction of discovering the world’s biggest gas find in early 2000 in the Krishna Godavari basin, hardly participates in auction rounds. State-run ONGC, the country’s biggest oil and gas producer, is staring down the barrel of declining output from its fields, unable to attract majors, nor make enough money to risk expensive developments.

Submission of bids for the eighth drilling round of the open acreage licencing policy, announced last July, under the latest Hydrocarbon Exploration Licencing Policy, for 26 oil and gas blocks, was postponed for the third time to May 2023 for lack of interest.

Policy and fiscal unpredictability coupled with lack of investor protections and arbitrations have kept the world’s most technologically advanced drillers — ExxonMobil, Chevron, Shell and Total — out of India. They have ignored India despite several policy measures since the 1990s, like a New Exploration Policy, a Hydrocarbon Exploration Policy, an open acreage policy and numerous roadshows.

ONGC is unable to take its memorandums of understanding (MoUs) with ExxonMobil and TotalEnergies forward because of demands by the majors. For instance, Exxon has demanded a “clear and practical framework to administer the laws and the frameworks and the contracts”, Melinda Dillingham, commercial manager, ExxonMobil, said at a recent event. Exxon has also sought guarantees from New Delhi, an industry official said. There will be no windfall taxes or new taxes imposed on crude production; arbitration will be international and not involve local courts; and, finally, no criminal charges will be slapped on Exxon officials in case of any incidents.

The majors are less flexible when it comes to Indian investments because unlike, say, Guyana or Mozambique, where they also operate, India’s prospectivity needs to be proved. And policy risks are high. Take the case of UK explorer Cairn Energy. India’s reputation among petroleum investors was severely dented after New Delhi’s attempts to tax Cairn Energy, violating international investor protection agreements, ended in years of arbitration. New Delhi ended up losing the case in December 2020, prompting the government to scrap the retrospective tax law, a key to many disputes.

Arbitration with Reliance and BP over cost and other issues at India’s biggest gas discovery, and a festering dispute with Vedanta over extending a contract for its Rajasthan area have also made foreign investors pause.

Vedanta, India’s second biggest oil producer after ONGC, deducted around $90 million from the government’s profit share in Mangala Area, claiming the 10-month-old windfall tax violates the contract’s fiscal terms. The production-sharing contract for the Barmer basin does not have any provision for a windfall tax; in fact, it prohibits any new levies that upset fiscal stability, an industry official said. The extension for Barmer is still mired in dispute with the Supreme Court asking New Delhi last November to reconsider raising its revenue share from the Barmer block by 10 per cent. A previous ruling by the Delhi High Court saying that the government has a right to change contract terms as long as they are in public interest and serve the purpose of maximising revenue generation also caused concern among investors.

India already takes away 70 per cent as its share from older areas, which contribute to most of India’s output, an industry official said. Vedanta has said that it will invest $5 billion in Rajasthan to treble output to 500,000 barrels a day — equivalent to 85 per cent of India’s 575,000 barrels a day production. But it is demanding a much longer extension than the 10 years offered now because of huge costs involved in polymer flooding techniques for enhanced oil recovery, with expensive chemicals enhancing operational costs, company CEO Nick Walker told reporters some time back.

ONGC and Oil India have also been affected by the windfall tax, which when first imposed in July was around $40 a barrel. The wildly fluctuating levy makes it impossible for private explorers to plan multi-year, multi-billion dollar long gestation deep-water projects, and leaves less with ONGC for investing in rejuvenating ageing areas, industry officials said.

A floor of $4 per metric million British thermal units (mmBtu) on domestic gas extracted from older areas provides earnings stability for ONGC and Oil India, said Prashant Vasisht, vice-president at ratings agency ICRA, in response to the government coming out with a new gas pricing policy this month. There is no reason provided for a $4 floor or a $6.50/mmBtu cap, a fertiliser industry official said. New gas discoveries, and revival of ageing fields require humongous investments, and pricing freedom, the official said.

India could take a leaf out of Bangladesh’s upstream policies. Bangladesh, a prolific gas producer faced with dwindling output after explorers like South Korea’s POSCO and ConocoPhillips backed out of contracts citing unfavourable terms, revamped its policies. Now, ExxonMobil has joined hands with Dhaka to explore untapped deep-water areas in the Bay of Bengal. Dhaka’s new terms propose reducing its share of profit gas, trebling the purchase price of the fuel to $10 per million cubic feet a day from less than $3/million cubic feet a day, and permitting exports.

The Directorate General of Hydrocarbons is hoping to see reforms on investor protection codified by Parliament soon, said S L Das, a senior DGH official, at a recent event. Higher legislative-level guarantees, which are also at an advanced stage and expected to be passed soon, perhaps by the next parliamentary session, should help.