Policy Support: Attempts to increase production and reduce the oil import bill

Attempts to increase production and reduce the oil import bill

India has seen a continuous growth in the consumption of petroleum products. However, domestic production has failed to keep pace with this growth in demand. This has led to a massive spike in imports. Taking cognisance of this very high import dependence, the government announced that it would like to bring oil and gas imports down to 67 per cent by 2022 from the 2015 level of 78 per cent. As per data available from the Petroleum Planning and

Analysis Cell, Ministry of Petroleum and Natural Gas (MoPNG), India’s import dependence in 2017-18 actually increased to 83 per cent.

In this backdrop, the MoPNG introduced a number of policies and reforms aimed at increasing domestic output. These include policies and initiatives such as the Discovered Small Fields Policy (DSF), the Open Acreage Licensing Policy (OALP), marketing and pricing freedom of coal bed methane (CBM), inclusion of shale under petroleum, the Auto Fuel Vision and Policy (AFVP), 2025, the National Policy on Biofuels (NPB), 2018, the National Seismic Programme (NSP) and the National Data Repository (NDR).

Indian Infrastructure takes a look at the recent developments under these policies…

Experience of DSF-I

Approved by the government in September 2015, the DSF Policy was one among a slew of policies expected to help reduce the country’s dependence on oil and gas imports. The first bidding round, DSF-I, was launched on May 25, 2016. It offered 46 contract areas consisting of 67 fields spread across nine sedimentary basins. Bids for DSF-I were received until November 21, 2016.

The Directorate General of Hydrocarbons (DGH) received 134 e-bids for 34 contract areas from a total of 42 companies. Of the companies that participated in the bidding, five each were public sector undertakings (PSUs) (or their subsidiaries) and foreign private companies. The remaining 32 were domestic private companies. The evaluation of bids was conducted and the Cabinet Committee on Economic Affairs (CCEA) approved the award of 31 contract areas in February 2017. Contracts for these were signed on March 27, 2017. Most of the contracts were awarded to private players followed by PSUs.

As per the latest updates from the DGH, contracted firms have already begun acquiring mining licences. Total revenue generation of about Rs 464 billion is expected from these contract areas and the government’s revenue share is expected to be to the tune of Rs 93 billion. Besides, government royalties on the expected output, which is around 2 per cent of India’s current oil and gas production, would be about Rs 50 billion. The first oil output from the DSF-I blocks is expected in 2020-21.

Update on DSF-II

The Union cabinet approved the second round of the DSF bidding on February 7, 2018. Under this bidding round, 60 discovered small fields/unmonetised discoveries are being offered. Of these, 22 fields/discoveries belong to the Oil and Natural Gas Corporation, five to Oil India Limited and 12 are relinquished fields /discoveries from the New Exploration and Licensing Policy (NELP) regime. In addition, 21 fields/discoveries are the ones which were put on offer but could not be awarded due to insufficient response from investors in DSF-I.

Together, these discoveries hold estimated reserves of 194.65 million metric tonnes of oil equivalent (mmtoe). As per estimates, investments in these fields will lead to the generation of over 88,000 jobs as direct, indirect and induced employment. As of May 2018, the bid dates for DSF-II are yet to be announced. As per reports, the bidding process should start by the end of July 2018.

Update on OALP-I

The OALP was another key policy introduced for boosting domestic production. Introduced in July 2017, the OALP replaced the NELP regime which had been in existence for over 18 years. The OALP regime gives companies the freedom to select blocks or areas to explore and produce oil and gas after studying the seismic data available in the NDR. The new policy framework provides a revenue-sharing model for the oil and gas blocks. Besides, it also provides marketing and pricing freedom for the oil and gas produced.

Under the first round of the OALP, the MoPNG offered over 85 per cent (2.8 million square km) of India’s 3.14 million square km of hydrocarbon sedimentary area for auction. The DGH received 110 e-bids for the 55 blocks on offer by the deadline (May 2, 2018). Of the 110 e-bids received, 92 were received for inland blocks and 18 for offshore blocks. Nine companies, either individually or as members of a bidding consortium, participated in the bidding round. The government is planning to award the blocks under offer by end July 2018.

Other policies

The cabinet issued a notification in March 2017 that allowed marketing and pricing freedom of the CBM extracted from existing blocks. This ensures that CBM producers have the freedom to sell their produce at market-driven prices in the domestic market, independent of the marketing and pricing policy of other domestic gas. In April 2018, Coal India Limited (CIL) and its subsidiaries were allowed to explore CBM resources under their existing coal mining leases. This could act as a game-changer for the Indian gas industry as CIL along with its seven subsidiaries is the largest coal mining company in the country. CIL is planning to invest Rs 30 billion for this purpose.

The government is also considering policy initiatives to start shale gas production. It invited comments to a draft notification in May 2018 to change the definition of “petroleum” in the Petroleum and Natural Gas Rules, 1959 to include shale under “petroleum”.

The AFVP, 2025, is suggesting a roadmap for improving fuel quality in the country going forward. It has proposed that the country move to the BS-VI emission standard by 2025. The government also introduced the NPB on May 16, 2018. The policy has categorised biofuels into three categories – 1G, 2G and 3G – and is expected to promote the blending of ethanol with petrol. It will also enable farmers to get better remuneration for the biofuels produced.

The NSP and NDR were launched to better map the hydrocarbon resources in the country. The NSP was launched in Odisha on October 13, 2016, to trace hydrocarbon resources like oil and natural gas in the Mahanadi basin. The NDR was launched on June 28, 2017, along with the OALP. It broadly provides information on oil and gas assets across the country and has been a useful asset for the success of the OALP in the country.


The way forward

With the commencement of production from the oil and gas blocks being offered under the OALP and the DSF Policy, the country’s domestic production is expected to get a significant fillip in the next four to five years. This, coupled with other key policies such as freedom for pricing of CBM and for shale exploration, is likely to attract more players into the sector. Other initiatives such as the NPB, NSP and NDR will result in structured growth of the industry. These measures are expected to give a significant impetus to the domestic oil and gas sector along with a reduction in imports.