New Framework: First OAL bid round receives a good response

First OAL bid round receives a good response

The introduction of the Open Acreage Licensing Policy (OALP) has been one of the biggest policy developments in the oil and gas sector in the past year. Introduced in July 2017, this new policy replaces the New Exploration and Licensing Policy (NELP) regime which was in existence for over 18 years. Under the previous licensing regime, which came into effect in February 1999, acreages were offered to participating companies through a process of open competitive bidding. India witnessed a total of nine rounds of the NELP from 1999 to 2010. However, despite these nine auction rounds, the country’s hydrocarbon sedimentary basin still remains largely unexplored with about 75 per cent of the basin yet to be fully explored.

Key features of the OALP

The OALP regime allows companies to select blocks or areas to explore and produce oil and gas from after studying the seismic data at the National Data Repository (NDR). Under open acreage licensing (OAL), companies can carve out any area that is currently not under any licensee, and show interest in undertaking exploration and production (E&P) activity in that area.

As per the OALP, once an area is selected, the government puts it up for bidding and the firm offering the maximum revenue share of the oil or gas produced from the area is awarded the block. Prior to the OALP, the government used to select and demarcate areas it felt could be offered for bidding in an exploration licensing round. The implementation of the OALP has ushered in a uniform licensing

system which covers all hydrocarbons under a single licence and policy framework. The new policy framework provides for a revenue sharing model for bidding for oil and gas blocks. Besides, it also provides marketing and pricing freedom for the oil and gas produced.

The new bidding mechanism allows an investor to submit an expression of interest (EoI) for undertaking work under a petroleum operations contract (POC) or a reconnaissance contract (RC). The bidding process under the first EoI cycle commenced on July 1, 2017, and interested entities could start submitting their EoIs for a particular area. This window was open till November 15, 2017, after which the evaluation of the EoIs began. If a contractor now wishes to migrate from an RC to a POC, he would be required to meet both the technical as well as the financial qualification criteria as applicable for the block. Progress under OALP bid Round I

Under the first round of the OALP, the Ministry of Petroleum and Natural Gas offered over 85 per cent (2.8 million square km) of the country’s 3.14 million square km of hydrocarbon sedimentary area for auction. The OALP bid round received an overwhelming response from investors and E&P players across the board. In August 2017, the Directorate General of Hydrocarbons (DGH) announced that it had received as many as 45 EoIs in just about a month’s time. In October 2017, this number shot up to 51 EoIs covering an area of approximately 60,000 square km for oil and gas exploration. According to the DGH, of the 51 EoIs received, 44 were for onland basins, six for shallow water basins and one for a deepwater basin.

The first EoI round closed on November 15, 2017 with 56 EoIs being submitted in all. The Oil and Natural Gas Corporation (ONGC) submitted EoIs for 41 areas while Vedanta’s oil unit, Cairn India, sought rights over 15 areas. Besides, the Hindustan Oil Exploration Company bid for one area in the round that was shunned by Reliance Industries Limited. Reportedly, Oil India Limited is another key bidder in the round, while the remaining bidders are smaller companies. The winners of the round will be announced by January 1, 2018. The bid process will close on March 1, 2018 and the blocks will be awarded on May 31, 2018.

Expected impact on the sector

One of the key impacts of the OALP regime will obviously be increased investments in the sector. It is expected that investments to the tune of $5 billion-$6 billion in exploration activities and another $20 billion-$30 billion for development activities will come in during the next four-five years.

In addition, the OALP will also accelerate the rate of exploitation of both the discovered and undiscovered hydrocarbon potential in the sedimentary basins. As per a new hydrocarbon reassessment report, India has discovered hydrocarbon resources of 12,076 million tonnes of oil equivalent (mtoe) and undiscovered hydrocarbon resources of 29,796 mtoe.

The country’s import bill is also expected to reduce post the implementation of the OALP, through an increase in domestic production. For the year 2015-16, India’s import bill for oil and gas was about Rs 5,817 billion, which accounts for 23 per cent of the total import bill.

Further, the RC option under the OALP will encourage the exploration of unexplored areas and improve the availability of E&P data, thereby resulting in the possibility of new discoveries. Moreover, the business environment for the E&P sector is also expected to improve due to a lower regulatory burden as well as pricing and marketing freedom.

Challenges and the way forward

While the policy is certainly one of the best ways of increasing investments and reducing the country’s import dependence, it comes with its own set of challenges. With the revenue sharing mechanism replacing the erstwhile production sharing contracts, contractors now will have to share their revenue with the government from the start of production (implying that they cannot recover their costs first), thus increasing the risk of the industry players. Overlapping of areas is another issue that the government will have to be prepared to address. As per the OALP, five extra points will be awarded to bidders for an acreage if they have already invested in the exploration and development of that area. However, a key point to ponder upon is whether this is enough since the investment needed for exploration alone is significant.

Nevertheless, given India’s high import dependence on both oil and gas (importing 80 per cent of the oil requirement and 50 per cent of the gas requirement), the OALP was the most logical step forward. This is especially true in the context of the government’s goal to reduce oil and gas imports to 10 per cent by 2022. It will be interesting to see whether the country can attract enough investment to meet this objective.