Pushing Production

Increasing investments in the E&P segment

India’s crude oil production fell for the sixth consecutive year in 2017-18 to 35.68 million tonnes (mt), pushing the country’s import dependence further to 82.8 per cent and dampening prospects for the government’s plan to cut reliance on crude imports by 10 per cent by 2022. Meanwhile, domestic gas production

witnessed a meagre increase of 2.35 per cent, from 31.89 billion cubic metres (bcm) in 2016-17 to 32.64 bcm in 2017-18 (provisional figure). The country recorded its highest ever natural gas production from onshore blocks in 2017-18. Gas production from onshore blocks including coal bed methane (CBM) grew by 8 per cent to 10,639 million metric standard cubic metres (mmscm) in 2017-18 as compared to 9,858 mmscm recorded in the previous fiscal year. Liquefied natural gas (LNG) imports continued to bridge the gap in gas availability, accounting for 45.3 per cent of the country’s gas consumption needs.

The year 2017-18 witnessed significant efforts by the government to drive investments in the exploration and production (E&P) segment. It was marked by the government’s decision to hike natural gas prices for the first time after five previous price cuts. The government also allowed exploration companies to propose their own area/block for bidding. Further, it provided a uniform licensing system to cover all hydrocarbons such as oil, gas, CBM, etc. under a single licensing framework. These policy initiatives are expected to play a crucial role in reviving activity in the E&P segment.

Crude oil

During 2017-18, India produced 35.7 mt of crude oil, thereby registering a slight decline over the 36 mt produced in the preceding fiscal year. During the first two months (April-May) of the current fiscal year (2018-19), indigenous crude oil and condensate production decreased by 1.9 per cent as compared to April-May 2017. Considering the overall trend of the past five years (2013-14 to 2017-18), crude oil production registered a decline of 1.42 per cent.

In 2017-18 (until December 2017), the share of offshore production was about 51.1 per cent. The remaining crude oil production was from six states – Andhra Pradesh (0.9 per cent), Arunachal Pradesh (0.1 per cent), Assam (12.2 per cent), Gujarat (12.8 per cent), Rajasthan (21.9 per cent) and Tamil Nadu (1 per cent).

Looking at a company-wise scenario, India’s largest crude oil producer, the Oil and Natural Gas Corporation (ONGC) produced 22.25 mt, which is 3.56 per cent lower than the target for the period but marginally higher (by 0.14 per cent) than the production during the corresponding period of the previous year (2016-17). The shortfall was primarily due to non-realisation of production planned from the WO-16 cluster, the Integrated Development of the B-127 Cluster project and the NB Prasad field in western offshore; an increase in water cut in the wells of the Heera, Neelam and B-173 fields; and frequent power shut downs and low gas injection pressure in Mehsana and Assam hampering artificial lift operations.

Another major oil producer, Oil India Limited (OIL) also reported a decline in production. It produced 3.38 mt of crude oil in 2017-18, which is 9.58 per cent lower than the target for the period but 3.63 per cent higher than the production during the previous year. The key reasons for the shortfall in production are the less-than-planned contribution from old wells due to a rise in water cut in wells and a decline in total liquid production of wells of the Greater Hapjan and Greater Chandmari fields and the less-than-planned contribution of workover wells.

Private and joint venture (JV) companies such as Cairn India, Reliance Industries Limited (RIL) and the Gujarat State Petroleum Corporation (GSPC) together produced 10.06 mt in 2017-18, which is 5.38 per cent lower than the target for the period and 4.5 per cent lower than the production in 2016-17. The following were the reasons for the decline in production by key producer: around 85 oil wells of Cairn India’s Rajasthan block (RJ-ON-90/1) were closed due to various reasons such as high water cut, requiring workover job, etc.; underperformance of the Bhagyam oilfield owned by Cairn India; and the non-realisation of full-fledged production from ONGC’s CY-ONN-2002/2 oilfield owing to non-grant of the petroleum mining lease.

Natural gas

From 2013-14 to 2017-18, gross natural gas production declined at a compound annual growth rate (CAGR) of 2 per cent. In 2017-18, gross domestic gas production was 89.5 mmscm per day (mmscmd), an increase of over 2 per cent over the previous year.

Net natural gas production (gross gas production minus flare and loss by gas producing companies) too witnessed a declining trend during the period under consideration (CAGR of -2.13 per cent). In 2017-18, net gas production in India was 86.9 mmscmd, an increase of about 2.84 per cent over the previous year.

In the first two months of 2018-19 (April-May 2018), the gross gas production was 5,391 mmscm vis-à-vis 5,302 mmscm during the same period of the previous year.

Offshore production accounted for a 67.5 per cent share in total domestic gas production during 2017-18 (until December 2017). Total production from offshore fields has come down over the past few years (from both public as well as private and JV companies). Its share in total production too has come down from a high of 78 per cent in 2012-13. In terms of onshore production, Assam, Gujarat, Rajasthan, Tripura and Tamil Nadu are the key contributing states. Two public sector companies, ONGC and OIL, dominate natural gas

production in the country, and together accounted for about 80 per cent of the domestic natural gas production in 2017-18. ONGC is India’s biggest gas producer while RIL, the largest producer among private sector producers, is the second largest producer of natural gas. The other important producers are the British Gas-RIL-ONGC JV and Cairn.

Other petroleum products

In 2017-18, the total production of petroleum products (provisional) in the country stood at 254.4 mt, about 4.48 per cent higher than the 243.5 mt recorded in 2016-17. From 2013-14 to 2017-18, the production of petroleum products registered a CAGR of about 3.62 per cent. For 2018-19 (April and May), the production of petroleum products was reported to be 42.5 mt, higher than the 40.9 mt recorded during the corresponding period of 2017-18.

India not only imports but also exports petroleum products. The total import of petroleum products for 2017-18 was 35.9 mt, significantly lower than the 36.3 mt that was registered during the preceding fiscal year. Total exports of petroleum products in 2017-18 were 66.8 mt, an increase from 65.5 mt during 2016-17.

Exploration status

The government has signed production sharing contracts (PSCs) for 28 discovered blocks, 28 exploration blocks under the pre-New Exploration Licensing Policy (NELP) regime and 254 blocks under the NELP regime with national oil companies and private (both Indian and foreign)/JV companies as licensees for blocks. Thus, 310 PSCs have been signed (as of December 2017), of which 206 blocks have been relinquished or proposed for relinquishment by the operators and 104 PSCs are operational.

Further, the Directorate General of Hydrocarbons has identified 69 small fields for development. Overall, these fields are estimated to have 89 mt of oil and gas resources. Of a total of 46 contract areas bid out in May 2016, bids were received for 34 contract areas. Onland contract areas received 120 bids, which is quite stellar at a time when gas prices have persistently hovered on the lower side. So far, 30 contract areas have been awarded to 20 firms for exploration.

The cabinet had in February 2018 approved the second round of discovered small field (DSF) auctions, under which the government is offering a total of 60 DSFs with an estimated 194.65 million tonnes of oil equivalent (mtoe). The bidding process was supposed to be initiated in mid-June 2018, but has been deferred by a month.

In another major development, the government replaced the 18-year old NELP with the Hydrocarbon Exploration and Licensing Policy (HELP), which provides a uniform licensing system to cover all hydrocarbons such as oil, gas, CBM, etc. under a single licensing framework. As a part of the HELP, the National Data Repository (NDR) and the Open Acreage Licensing Policy (OALP) were launched in June 2017. The policy allows bidders to access geoscientific data through the NDR to assess the prospects of any area and propose their own area (block) for bidding. The bidding process under the OALP, Round I, commenced on July 1, 2017. There were 46 onland blocks and nine offshore blocks on offer. For the onland blocks, 92 bids were received while 18 bids came for the offshore blocks. The government is likely to award contracts for the first round of oil and gas auctions in July 2018.

Under the PSC regime (as of April 2017), an investment of about $40.6 billion has been made on E&P activities. Of this, an investment of $6.3 billion was on discovered fields, $8.1 billion on pre-NELP exploration blocks and $26.2 billion on NELP blocks.

Conclusion

Overall, the long-term outlook for the E&P segment remains positive, backed by a series of government initiatives taken in the past one-two years. The introduction of the HELP/OALP regime has undoubtedly brought optimism in the upstream segment. Nevertheless, the segment will have to overcome some key challenges pertaining to declining domestic gas production and increasing price volatility. For production to pick up adequately, the industry would need a floor price. Given the broad scope and substantial investment requirement under the OALP and DSF Policy, the key lies in effective and timely execution of projects.

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