India sweetens oil block bids with lease reform, arbitration freedom

Expanded definitions, arbitration rights and lease flexibility mark major policy shift as government tries to revive interest in nearly exhausted oil exploration blocks

From the nine iterations of the oil acreage licensing policy (OALP), the major change in the tenth version, due out in August this year, will be twofold. The first of those is the expanded definition of mineral oils to include shale oil, shale gas and coal-bed methane. 

The other one is the freedom to pursue international arbitration in the event of disputes, as well as offering a longer lease period for the fields the companies win. 

Combined with the removal of windfall tax on domestically produced crude that was in effect since July 2022, prospective bidders now have a realistic chance to make profits from their discovered fields. That all of these changes have come through Parliament is significant, since executive notifications, foreign investors have discovered, could be overturned easily. The expanded definitions and wider rights to arbitration come from the amendment in the Oilfields (Regulation and Development) Act of 1948, passed by both Houses of Parliament by March 2025. 

The government is trying hard, especially because the basket of discovered blocks is almost exhausted and bidders from overseas are still AWOL. 

"The objective of the changes to the Oilfields Act is to create a more investor-friendly environment and enhance the global competitiveness of future oilfield contracts by addressing long-standing concerns of exploration companies," commented Rahul Chauhan, upstream technical research country lead at S&P Global Commodity Insights. 

Till the ninth round of the OALP, the petroleum and natural gas ministry has not really been able to get companies from abroad to bid for the fields. In the ninth round, for instance, the successful bidders were government-run ONGC, Oil India, and from the private sector, Vedanta. The two state-run ones submitted bids for 15 and six blocks. One of those is an ONGC joint venture with Reliance Industries Limited and BP plc. Vedanta won seven blocks. It had bid for all the 28 blocks. Several overseas oil explorers picked up the bid papers but did not finally sign on those. 

The lessons from those weak bids have gone home. In recent years, India has undertaken a series of upstream reforms, such as greater marketing freedom to producers. For instance, operators of a field could not directly sell locally produced crude into the market and needed government permission to sell crude and condensates within the country. Under the new policy, the government has written itself out of the function of allocating domestic crude and condensate output. 

There are still missing parts. One of those is the refusal by the states to bring fuel into the GST architecture. They are scared that this will cut into their tax revenue. One of the reasons why the Centre was able to impose the windfall tax in 2022 to cleave away the higher prices crude was realising then was this lack of clarity on GST on fuels. Even though the windfall tax has gone, the government has now imposed a higher excise duty on petrol. 

"The windfall tax was extremely unhelpful for the oil producers that were just emerging from a difficult period of low or barely remunerable prices. In an ideal scenario, India should pursue the opposite of windfall taxes, that is, aggressively expanding and incentivising production growth by all means necessary, because in an energy transition world, the risk of stranded assets is rising," according to Rajeev Lala, director for upstream companies and transactions at S&P Global Commodity Insights. 

IXth round of the OALP 

According to government data, there were 60 bids for the IXth round of OALP. Twenty-eight blocks spread over 1.36 lakh sq km were offered in eight sedimentary basins. Of these, nine blocks were onshore, eight blocks were in shallow waters and 11 blocks in deep water. 

In the previous eight rounds, 144 oil and gas blocks were offered for around 2.42 lakh sq km. The government has also launched a public consultation portal for comments on the Act. 

The ministry has a problem because the number of explored blocks has sharply diminished. For instance, in the latest round, 16 blocks were in the category-1 basins, which means they are reserves already in the production stage. Another 12 blocks were in category-2, which means they have contingent resources but are pending commercial production. Interestingly, no category-3 blocks, which have prospective resources and are awaiting discovery, were offered in this round. 

Bidders for the tenth round will await the results from the exploration data coming from ONGC and Oil India before deciding if they will bid. Meanwhile, the sweeteners the government has loaded up on, could come in useful in making them bid.