Views of Dr M.M. Kutty: “The DSF policy is a step towards bridging the demand-supply gap”

“The DSF policy is a step towards bridging the demand-supply gap”

Dr M.M. Kutty Secretary, MoPNG

In the past year or so, the Ministry of Petroleum and Natural Gas (MoPNG) has introduced a number of policies and reforms aimed at increasing domestic output. Approved by the government in September 2015, the Discovered Small Fields (DSF) Policy, 2015, is one among the slew of policies that are expected to help reduce the country’s dependence on oil and gas imports. The response for the first bidding round, which took place between May 25, 2016 and November 21, 2016, was overwhelming. About 134 e-bids were received for 34 contract areas from a total of 42 companies. At the event to launch the second round of DSF bidding in August 2018, Dr M.M. Kutty, Secretary, MoPNG, shared the experience of the first bidding round. Excerpts…

The government’s vision for the energy sector rests on ensuring energy access, efficiency, sustainability and security for the millions of Indians residing in the rural and urban areas. To achieve this vision, various initiatives have been adopted in the hydrocarbon sector. Some of them are the Hydrocarbon Exploration Licensing Policy (HELP), DSF Policy, National Data Repository, exploration and exploitation of coal bed methane (CBM) from areas under coal mining reefs; setting up of the National Gas Grid; initiatives in the city gas distribution sector; pricing reforms; augmentation of refining capacity; Pradhan Mantra Ujjwala Yojana; expansion of the liquefied petroleum gas distribution network; Pratyaksh Hanstantrit Labh  scheme;  cleaner auto fuels; National Policy on Biofuels; Ethanol Blended Petrol Programme; streamlining production sharing contracts into pre-New Exploration Licensing Policy (NELP) and NELP blocks; permitting exploration and exploitation of unconventional hydrocarbons under pre-NELP, NELP, CBM and nomination blocks; and amendment to the definition of petroleum. Under the first award of the Open Acreage Licensing Policy, 60,000 square km of area would be given out for exploration and production in land basin and shallow and deep water basin. This will account for 35 per cent of the total area that has been awarded under exploration and production in the country. Further, a total area of 172,000 square km has been made available for exploration and mining in the oil and gas sector. As oil and gas projects have longer gestation periods, these measures are of key importance in reducing India’s import dependence in the medium to long term while raising the domestic oil and gas production.

Investors and stakeholders around the globe have shown keen interest in DSFs in India. The Marginal Field’s Policy, which was first notified in 2015, aimed at monetising the marginal oil and natural gas fields of ONGC and Oil India Limited. It was framed with the primary objective of making these smaller fields viable for production. Subsequently, it was renamed as the DSF Policy. The first round of DSF was conducted in 2016, and completed within a period of 10 months. The policy marked a paradigm shift from production sharing contracts to revenue sharing contracts. Revenue sharing contracts were adopted by the government after extensive consultation with domestic and international investors and stakeholders.

Previously, production sharing contracts were the dominant mode of hydrocarbon administration in the country. The regulatory load has been reduced to a significant extent in revenue sharing contracts, which is the government’s way to ensure ease-of-doing business. The government recognises the risk inherent in the upstream oil and gas sector. Hydrocarbon exploration, in general, is a difficult task due to geological and logistical complexities in many offshore and onshore areas. At most times, the project cycle is long and adverse.

Despite the fact that many blocks in frontier basins were awarded under NELP, frontier basins in the country have remained relatively unexplored. Maximum exploratory activities in India have been in Category-I basins, that is, basins with commercial production. Category I basins have received the highest focus and maximum industry interest with increasing exploration and drilling density. The small-sized hydrocarbon discoveries are not monetised by exploration and production (E&P) companies, especially the large and medium companies, due to many reasons.

The government has made the right policy intervention by catering to the investment needs of a spectrum of investors. There was an imperative need for an E&P policy to allow the development of small and marginal fields in Category I and Category II basins. All the fields offered under the DSF Policy are in Category I and Category II basins such as Cambay, Mumbai Offshore, Rajasthan, Assam, and Krishna Godavari (both onshore and offshore). In fields where Category I basins have the country’s most developed hydrocarbon E&P infrastructure, hydrocarbon production has been taking place for almost 50 years now.

With an estimated 200 million metric tonnes of hydrocarbon reserves in place and readily available infrastructure, the fields are likely to be a sure-shot success. This explains the success of DSF Round 1, under which 134 bids were received for 34 contract areas. Of the 30 awarded contract areas, 23 onshore contracts and seven offshore contracts were awarded, and 20 E&P companies signed the contract including 15 private companies and a foreign company. Also, there are 13 new entrants in the Indian E&P industry.

Out of the 30 awarded contract areas, 21 petroleum mining leases have been granted. Nine field development plans have already been submitted and production is anticipated by 2020-21. Production from some of these fields may even happen earlier. The DSF policy has now been extended so as to include the unmonetised discoveries by the national oil companies for the nominated regime. A total of 15 end discoveries have been identified for the current round of DSF details, which would be available in the notice inviting offer. Further, changes have been made in the revenue sharing contracts for further benefit of E&P investors as compared to the first round of DSF. The royalty rates for discoveries offered under this round have been made similar to the royalties stipulated under HELP. The royalty rates for shallow water contract areas for the second round of DSF have been reduced to 7.5 per cent from the earlier 10 per cent, in respect of both crude and natural gas.

Another striking feature of the DSF contracts is that they offer a unified licence for the exploration and exploitation of all forms of hydrocarbons. This is a big step towards bridging the demand-supply gap for oil and gas in the country and reducing import dependence. Besides, for the present round of DSF, some prominent features have been carried forward from the last round and some new ones have been incorporated. This will enable E&P companies — large, medium or small, domestic or foreign, or those looking for conventional or unconventional hydrocarbons — to take advantage of the dynamism in the upstream E&P sector in India and to become an integral part of our effort towards becoming a nation where import dependence in oil and gas is very low.