Oil & Gas: A discouraging history

Past mistakes in the hydrocarbons auction must be avoided

The government is set to put the exploration licences for 42 hydrocarbon blocks up for auction in the next round of its licensing process. The Directorate General of Hydrocarbons has announced that 26 oil and gas blocks and 16 blocks for coal-bed methane will be available in this round. The oil and gas blocks might be of particular interest; three of them are on land, and of the remaining, 15 are “ultra deep-water”. The government clearly hopes that there will be reasonable private sector participation in this auction: After meeting with representatives of the sector in Houston, Union petroleum minister Hardeep Puri said on Twitter that “There is an unprecedented interest in Indian exploration and production by global oil companies”. Certainly, without adequate capital and technology investment from global leaders, the stated target of 1 million square kilometres being under exploration by 2030 is unlikely to be met. In early 2022, only about 0.2 million square kilometres were under exploration.

It must be admitted, however, that past experience in this sector has not been encouraging. After a long gap — following much public discussion about licencing mechanisms and pricing formulae — the new Hydrocarbon Exploration and Licensing Policy (HELP) was announced, and the first round of 55 blocks auctioned in January 2018. Among the liberalisation measures announced was that companies themselves could select blocks of their choice, and had greater freedom over marketing and pricing. Yet foreign oil companies were not interested; and among the Indian private sector, interest was mainly from Vedanta. Eventually Vedanta won 41 of the 55 blocks on offer, and picked up another 10 in subsequent rounds. But other than that, the blocks have gone overwhelmingly to public sector firms. That is clearly not what the HELP system was designed for. As an attempt to attract global investment into the sector, it has not been performing up to par. Between 2011 and 2021, oil and gas deals (excluding Vedanta’s purchase of Cairn India) were a mere $26 billion. The latest round could also have similar results. Of the eight oil and gas blocks on offer earlier this year, six got a single bid from a particular public sector company.

The need for greater area under exploration in India can hardly be overstated. The current energy crisis has once again underlined how dangerous it is to be almost entirely dependent on foreign supplies for India’s oil and gas needs. While India has fortunately escaped scars on its external account during the current phase of unpredictable fossil fuel prices, that may not be the case forever. It is vital both strategically and from the point of view of economic security that a greater proportion of oil and gas is explored and produced domestically. This can only happen, however, if the government’s rhetoric on attracting foreign investment into the sector is matched with a genuinely open attitude. Past disagreements — tax demands on Cairn, the dispute over KG-D6 production — cast a long shadow over private participation in the sector. The private sector’s lack of interest in the downstream sector — visible in the failed attempt to privatise BPCL — also reflects a lack of trust that there are secure profits to be made in India. It is this impression that the government will have to change if it is to meet its ambitious 2030 targets.