Today, the story of the global oil and gas industry vis-à-vis India’s is a paradoxical one. Amidst dwindling demand and robust supplies, the international hydrocarbon industry is throwing up difficult economic choices for each country, often resulting in decisions defying trends seen in other countries. Exploration activity is one area where this can be seen clearly. On the one hand, the year 2015-16 marked the nadir of global exploration activity in the past 60 years; on the other, India stepped up its efforts to find hydrocarbon reserves in its own territory. The move is in line with the aim of reducing energy import dependence by 10 per cent by 2022, and thus has a robust policy backing.
Indian Infrastructure analyses the current scenario of the country’s hydrocarbon exploration segment…
Globally, in 2016, hydrocarbon discoveries dipped to the lowest level in six decades, as players put on hold their plans owing to low prices, as well as growing difficulties in finding new reserves. According to global business information provider IHS Markit, there were only 174 oil and gas discoveries in 2016, sharply contrasting with an average of 400-500 discoveries per year up until 2013.
Moreover, expenditure incurred for carrying out exploration activities fell from $100 billion in 2014 to $40 billion in 2016 (as per Wood Mackenzie estimates). The slowdown in exploration activity reflects the tight financial position of companies resulting from persistently low crude oil prices, as well as the structural shift in the industry towards onshore shale and similar reserves (especially pronounced in North America).
Given the fact that it takes about seven years (on average) to bring a discovery onstream, the current scenario may result in a dearth of petroleum products within the next decade or so. As the world is looking to decarbonise, this fits the picture. However, alternative sources of energy, though growing fast, still face a number of hurdles in becoming the new normal. Against this backdrop, a paucity of petroleum supplies may lead to unprecedented economic repercussions in the coming years.
Scenario in India
The Indian context is completely different, hence, the “paradox”. In recent years, the government has laid renewed emphasis on finding new hydrocarbon reserves, with the aim of reducing the country’s imports by 10 per cent by 2022. (India imports 80 per cent and 40 per cent of its oil and natural gas requirement respectively.)
As per the latest information from the Directorate General of Hydrocarbons (DGH), a total of 225 hydrocarbon discoveries (116 of crude oil and 109 of natural gas) have been made under the production sharing contract (PSC) regime across 63 blocks. Of these, 64 (40 crude oil and 24 natural gas discoveries) are already in production. The Cambay basin has the largest number of discovered fields (72) in the country thus far.
In terms of policy framework, the centre has meticulously planned to ramp up output (through greater discoveries).
In 2016, the new Hydrocarbon Exploration and Licensing Policy (HELP) was introduced, replacing the New Exploration Licensing Policy (which had been in place since 1997). The key features of the new policy were the introduction of the revenue-sharing regime, marketing and pricing freedom, and a single licence for the exploration of all types of hydrocarbons.
HELP introduced a shift from the PSC to the 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 gross revenues generated from the block. The government’s share of revenue will move in accordance with the total earnings reaped by the developer from the block. In essence, the government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of output (oil, gas, etc.).
Marketing and pricing freedom
Under HELP, the company will have the freedom to price and market gas produced in the domestic market on an “arm’s length” basis. To safeguard the government’s share of revenue, the same will be calculated based on the higher of the prevailing international crude price and the actual price.
Single licence for exploration of all types hydrocarbons:
HELP requires companies to acquire just one licence to manage all kinds of hydrocarbon reserves such as oil, gas, shale and coal bed methane. Thus, a single licence will be given to firms offering the maximum revenue to the government for the exploration and production of all forms of hydrocarbons in their blocks.
Blocks will be allocated under the open acreage policy, wherein companies can submit bids for areas of their choice. Under the policy, a bidder may apply to the government seeking the exploration of a new (unexplored) block. The government will then examine the expression of interest. If the block is found suitable for award, competitive bids will be invited. This will enable faster coverage of the available geographical area.
Meanwhile, the recently released three-year strategy paper by the NITI Aayog also reiterated the government’s stance. On the exploration and production front, the think tank has proposed that another 25 per cent of the present sedimentary area be awarded for exploration. Some of the other key suggestions are launching the Open Acreage Licensing Policy by March 2018, undertaking a seismic survey of unawarded acreages, rationalising all discoveries under the PSC, and establishing the National Data Repository in the near term. In addition, it has been suggested that the upstream and downstream regulatory framework be altered to enable the simultaneous exploitation of all hydrocarbons, and a new policy be formulated to resume exploration in “S” type small blocks (that are facing contractual violations) and another policy for the sharing of upstream infrastructure by new developers.
The past few months have witnessed a surge in hydrocarbon finds. During the year 2016-17, the Oil and Natural Gas Corporation (ONGC) made 23 oil and gas discoveries, a 35 per cent jump over the 17 finds made in 2015-16. Of these, 12 discoveries are new prospects (a “potential trap” which may contain hydrocarbons), while 11 are new pools (presence of subsurface hydrocarbon accumulation). The discoveries have cumulatively produced 38,809 tonnes of oil and 23.78 million standard cubic metres of gas during the year. As the company aggressively scouted for new reserves, it drilled as many as 100 wells.
Exploration in the north-eastern region has also picked up pace, as envisioned in the Hydrocarbon Vision 2030 for Northeast India. In March 2017, ONGC began exploration works in the region (specifically in Assam), in a bid to attract more gas-based industries to the area. The company has already established 40 billion cubic metres (bcm)-45 bcm of gas reserves in Tripura.
Another public sector unit, Oil India Limited (OIL) is following in ONGC’s footsteps. It commenced a survey to check for the presence of hydrocarbons in Manipur. The expedition survey will take another two years and is scheduled to be completed by April 2019. Post that, the centre and the DGH will reflect upon the next steps.
The way forward
India is the third largest energy consumer in the world, and its demand for energy is far from diminishing. Thus, the demand side is assured. The problem lies on the supply side. The changing global landscape, with a growing focus on energy sustainability, adds to the multidimensional challenges being faced by the Indian oil and gas industry. While increasing the exploration effort is good from the perspective of energy security and selfsufficiency, the competing sources of energy must not be ignored.
While petrochemicals used in industries will be difficult to substitute, well-thought-out plans for electric vehicles (arguably the biggest consuming segment of the oil and gas sector) are already on the table. Besides, cost-benefit analysis must also be undertaken as the relatively easier hydrocarbon finds have already been tapped. At this stage, planning is of the utmost importance. India has to clearly assess its future source-wise energy needs, while simultaneously ensuring sustainability. Till the time that all the energy segments are moving in silos, a misplaced energy market certainly seems to be likely.