Recent Developments

HELP expected to have positive impact

The year 2015-16 has been an important one for India’s oil and gas industry. The government announced a slew of long-awaited measures and policy changes which are expected to have a positive impact on the sector.

Indian Infrastructure briefly examines recent developments in the sector…

  • In March 2016, the Union cabinet approved the Hydrocarbon Exploration and Licensing Policy (HELP). The four main facets of HELP are: unified licence, open acreage, revenue sharing model, and marketing and pricing freedom.
  • With regard to the unified licence, exploration and production (E&P) firms are required to acquire a single licence to explore and produce all types of hydrocarbon reserves such as oil, gas, shale and coal bed methane.
  • Under the open acreage policy, E&P firms have the option to select exploration blocks without waiting for a formal bid round.
  • HELP also proposes a shift from the production sharing contract (PSC) to a revenue sharing regime. The new regime is a kind of “pay-as-you-go” model where the operator will have to part with a percentage of the gross revenues generated from the block. The government’s share of revenue will move in accordance with the total earnings of the developer from the block. The government will not be concerned with the cost incurred by the developer and will receive a share of the gross revenue from the sale of output (oil, gas, etc.).
  • Under HELP, E&P firms will have freedom in terms of pricing and marketing of the gas produced in the domestic market on an “arm’s length” basis. To safeguard the government’s share of revenue, the price will be calculated based on the higher of the prevailing international crude price or the actual price.
  • The government also approved “marketing (including pricing) freedom for gas produced from discoveries in high-pressure, high-temperature, deepwater and ultra deepwater areas”. Under the new policy, producers will be allowed marketing and pricing freedom for gas produced in these areas. The policy guidelines would be applicable to future discoveries as well as to existing discoveries that have not commenced commercial production as on January 1, 2016. However, in order to protect user industries from sharp increases, this freedom will be accompanied by a price ceiling based on the opportunity cost of imported fuels. The ceiling price would be lowest of the landed price of imported fuel oil, the weighted average import landed price of substitute fuels (coal, fuel oil and naphtha) and the landed price of liquefied natural gas. These prices will be reset semi-annually.
  • Another policy approved by the cabinet is for the grant of extension to PSCs for 28 (pre-New Exploration and Licensing Policy [NELP]) small- and medium-sized fields where recoverable reserves are unlikely to be produced within the remaining duration of the contract period. During the extended period of contract for these blocks, the government’s share of profit will be 10 per cent higher but the royalty and cess will be applicable at the prevailing rates of the nomination regime.
  • With regard to royalty rates for offshore blocks, a graded system has been introduced in which the royalty payable decreases from shallow water to deepwater and ultra-deepwater blocks. The new rates are in the range of 0-7.5 per cent, in comparison to the earlier range of 5-10 per cent. Royalty for onland areas has been kept intact so that state government revenues are not shaved off. Besides, cess and import duty exemptions have been retained from the NELP framework.
  • In July 2016, the government directed state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) to pay royalty to state governments (where the companies are operating) on the gross price for crude oil and not the net rate that is actually realised. ONGC and OIL offer discounts to re-fining companies on crude oil to make up part of the losses the latter suffer on selling cooking gas and kerosene at government-controlled rates. (These discounts also covered diesel till October 2014 when the price of the fuel was deregulated.) Thus, ONGC/OIL would raise a gross bill based on the prevailing international oil price but actual realisation would be lower after accounting for the subsidy discount. (According to the Oil Field Act, ONGC and OIL are required to pay 20 per cent royalty on the price of crude oil extracted from onland oil blocks to state governments.)
  • In May 2016, the Ministry of Petroleum and Natural Gas commenced the Discovered Small Fields Bid Round, 2016 and a technical information portal and an e-bidding portal were also launched. Discovered small fields are oil and gas blocks which have so far remained commercially undeveloped, but are now being focused upon as the central government is seeking to boost domestic hydrocarbon production. In the biding round, 46 contract areas consisting of 67 different small fields are being offered to investors globally, for exploration and production. Bids are being invited for developing and monetising these contract areas which have in-place volumes of 625 million barrels of oil and oil equivalent gas.

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