Domestic Focus: Government auctions DSFs to increase production

Government auctions DSFs to increase production

India is the fourth largest consumer of oil and petroleum products in the world. Unfortunately, the country’s import reliance for these resources has been high and this has been a constant cause for concern for the government. The high dependence is reflected in the fact that the country buys about 80 per cent of its oil requirement and 40 per cent of gas from overseas markets. This is despite the fact that the oil and gas sector is among India’s six core industries.

While the recent crude price plunge has helped the economy save some forex, the need to develop domestic resources cannot be emphasised enough. Noting this, the government has taken a slew of policy measures to make the framework more conducive to domestic production. Thus, the decision to throw open idle oil and gas fields (discovered by public sector units) for bidding is well aligned with the overall target of enhancing domestic output.

Indian Infrastructure takes a look at the recent developments related to the ongoing auctions…

The auction

The government is offering 67 discovered small fields (DSFs) spread across nine sedimentary basins with the prime objective of monetising discovered fields and boosting domestic oil and gas production. These fields have been discovered by national oil companies (NOCs) – the Oil and Natural Gas Corporation of India (ONGC) and Oil India Limited (OIL). Given the small size of these fields, it is not economically feasible for the NOCs to take up production themselves. Hence the DSFs are now being offered to private companies under an exclusive policy which is designed to be investor friendly and is based on the easy-to-administer revenue sharing contract model. This model is in line with the government’s policy of “ease of doing business” in India.

The auction is an international competitive bidding round of acreage award for an aggregate of over 625 million barrels of oil and oil equivalent gas. Of the 46 contract areas, 26 are located on land, 18 are in shallow water areas and two are in offshore deep-water areas. While the inland fields are spread across eight sedimentary basins, shallow-water offshore fields are concentrated in the Mumbai offshore (west coast) region and the deep- water fields are located in the Krishna-Godavari (KG) basin (east coast). The bidding for these DSFs started on July 15, 2016 and the bids open on October 31, 2016. The previous exploration licensing round ended in March 2012.

Once a bidder is declared successful, it has to coordinate with the NOCs in order to obtain the petroleum mining lease (PML) or the petroleum exploration licence (PEL), as the case may be, in its own name. The bidder will then have three, four and six years for inland, shallow offshore and deep-water areas, respectively, to drill the specified number of wells and commence commercial production. In case production does not start within these timelines, the contract area will stand relinquished. Within six months of signing the contract, bidders are expected to pay the NOCs the book value of the wells and facilities which the NOCs will transfer to bidders on an “as-is-where-is” basis. Bidders also have an in-principle agreement with the NOCs to share the latter’s infrastructure in adjacent areas, under mutually acceptable commercial terms.

The contract will be valid for 20 years from the date on which the PML/PEL is transferred to the bidder. On mutual agreement, the contract duration can be extended by another 10 years. The government has reserved the right to terminate the contract if production ceases for over one year at any point in time and has assured that approvals for requests will not be unreasonably withheld.

Field information dockets, prepared by the Directorate General of Hydrocarbons (DGH), ONGC and OIL for each of the fields on offer, have been made available by the government. These dockets provide information on regional and local geology, field description, hydrocarbon discovery, sedimentary basin report, navigation data, etc.

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State disputes

Of the 67 DSFs, 12 are in located Assam. Following the announcement of the auction, some local political parties have criticised the government’s decision. The parties are against the privatisation of any oilfield in the state and believe that this will take away the people’s right over the state’s resources.

While the centre is constitutionally empowered to regulate and develop oilfields, the state is the actual owner of the land and natural resources. The ownership of offshore oilfields, on the other hand, rests solely with the centre.

Given this, the state’s claims seem justified but with the country’s high level of import dependence for oil and gas and the low economic feasibility for NOCs, privatisation with a cap on prices seems a favourable alternative.

Government support

From the transparent policy structure to the roadshows held all over the world, the Ministry of Petroleum and Natural Gas along with the DGH has left no stone unturned in making this auction a success.

To ensure administrative efficiency, operators will be issued a single licence for the exploration of conventional and non-conventional hydrocarbons. As an incentive, operators will have the freedom to sell oil and gas at “arm’s length” market prices. They will be also exempt from paying cess on crude oil.

The price of gas for calculating the government’s share of revenue will be the higher of the price actually obtained or the price determined by the government from time to time under the Domestic Natural Gas Pricing Guidelines. Similarly, the price of crude oil for calculating the government’s share of revenue will be the higher of the price actually obtained or the price of the Indian basket of crude oil arrived at by the Petroleum Planning and Analysis Cell on a monthly basis.

The contract has been designed to help the government reap dividends in case of a windfall from either a steep rise in prices or a quantum jump in production.

Promising prospects

A high petroleum import bill can impede the country’s upward growth trajectory. Given the government’s aim to reduce the dependence on imported oil and gas by 10 per cent by 2022, it has become imperative to focus on the domestic oil and gas sector not only for investment, but also for innovation, technology and better management.

With disputes holding up production at the KG basin, exploring all possible domestic options is necessary to meet the growing demand. The DSF auction, therefore, comes at the right time and the robust policy structure supporting it makes it an attractive proposition for the government, the NOCs and private players.