Stepping Up the Game

New policies and measures to increase domestic output

The declining trend in the country’s crude oil production has continued with output falling by more than 4 per cent in 2018-19. Import dependence for crude oil to meet the rising energy needs increased to a high of 83.7 per cent in 2018-19 as compared to 82.9 per cent in 2017-18. The increase in natural gas production has also been marginal and liquefied natural gas is imported to bridge the gap in domestic gas availability. The reliance on imports renders the economy vulnerable to global adversities that impact energy markets.

In the past few years, various policy reforms such as the introduction of the Hydrocarbons Exploration Licensing Policy/the Open Acreage Licensing Policy (OALP), the Discovered Small Fields [DSF] Policy, market and pricing freedom for coal bed methane (CBM) exploration, etc., have been introduced to enhance domestic production and drive investments in the exploration and production (E&P) segment. However, it will take time for the policy measures to deliver results and domestic production to witness an improvement.

Indian Infrastructure examines the domestic production and supply of crude oil, natural gas and other petroleum products…

Crude oil

During 2018-19, the country’s crude oil production fell to 34.2 million tonnes (mt) as compared to 35.68 mt produced in the previous fiscal year. The oil output was 7.59 per cent lower than the target production. During the first two months (April-May) of the current fiscal year (2019-20), oil production was 5.51 mt, which is 1.92 per cent lower than the target for the period and 6.82 per cent lower than the production during April-May 2018. Considering the overall trend of the past five years (2014-15 to 2018-19), crude oil output registered a decline of 2.28 per cent.

In 2018-19, the share of offshore production was about 49.31 per cent. The remaining crude oil production came from six states –Andhra Pradesh (0.87 per cent), Arunachal Pradesh (0.12 per cent), Assam (12.6 per cent), Gujarat (13.54 per cent), Rajasthan (22.41 per cent) and Tamil Nadu (1.15 per cent).

Looking at a company-wise scenario, the largest crude oil producer, the Oil and Natural Gas Corporation (ONGC) produced 21.04 mt, which is 8.67 per cent lower than the target for the period and 5.42 per cent lower than the production during 2017-18. The major reasons for the shortfall were an electric submersible pump problem in some wells of the NBP field, loss from the WO-16 fields in the absence of mobile offshore production unit Sagar Samrat, subsea leakage in some well fluid lines of the Mumbai High, Neelam and Heera assets leading to flow restrictions.

The other major oil producer, Oil India Limited (OIL) also witnessed a decline in production. It produced 3.29 mt of crude oil in 2018-19, 11.9 per cent lower than the target for the period and 2.46 per cent lower than the production in 2017-18. The shortfall was due to losses resulting from miscreant activities in operational areas and less-than-planned contribution from workover wells and drilling wells.

Private and joint venture (JV) companies such as Cairn India, Reliance Industries Limited (RIL) and the Gujarat State Petroleum Corporation together produced 9.86 mt in 2018-19, 3.57 per cent lower than the target for the year and 1.9 per cent lower than the production in 2017-18. The key reasons for the decline in production are loss from Cairn India’s Mangala field due to delays in the upgrade of the Mangala processing terminal (MPT), closure of Cairn India’s 100 oil wells due to liquid handling constraints at the MPT plant, pump failure, surface facility limitation, etc.

Natural gas

Natural gas production during the past year was 32,873 million metric standard cubic metres (mmscm), which is 0.69 per cent higher than the production in 2017-18. However, the 2018-19 production was 7.66 per cent lower than the target set for the period. During the five-year period 2014-15 to 2018-19, natural gas production declined by 0.58 per cent. For the first two months of the current financial year (April-May), natural gas production was 5,394 mmscm, marginally higher by 0.07 per cent over the production during April-May 2018 but 4.56 per cent lower than the target.

The net natural gas production (gross gas production minus flare and loss) for 2018-19 was 32,056 mmscm, an increase of about 1.02 per cent over the previous year. From 2014-15 to 2018-19, net gas production declined at a compound annual growth rate (CAGR) of 0.49 per cent.

Offshore production accounted for a 67.27 per cent share in total domestic gas production during 2018-19. Its share in total production came down from a high of 73.84 per cent in 2014-15. In terms of onshore production, Assam, Gujarat, Rajasthan, Tripura and Tamil Nadu are the key contributing states.

ONGC dominates natural gas production in the country and accounted for about 75 per cent of the total gas produced in 2018-19. The public sector company saw an increase of 5.31 per cent in total production – from 23,429 mmscm in 2017-18 to 24,675 mmscm in 2018-19. OIL, the other major public sector producer, saw a decrease of about 3.78 per cent – from 2,881 mmscm in 2017-18 to 2,772 mmscm in 2018-19. Major private sector producers include RIL (also the second largest producer of natural gas), the British Gas-RIL-ONGC JV and Cairn.

CBM, an unconventional source of natural gas, has also seen an increase in production. India has the fifth largest proven coal reserves in the world and thus holds significant prospects for E&P of CBM. The total CBM production in 2018-19 was 710 mmscm. Major states accounting for CBM production are Jharkhand, Madhya Pradesh and West Bengal.

Other petroleum products

In 2018-19, the total production of petroleum products stood at 262.4 mt, about 3.18 per cent higher than the 254.3 mt recorded in 2017-18. From 2014-15 to 2018-19, the production of petroleum products registered a CAGR of about 4.42 per cent. For 2019-20 (April and May), production of petroleum products was reported to be 43 mt, marginally higher than the 42.5 mt recorded during the corresponding period of 2018-19.

India not only imports but also exports petroleum products. The total imports of petroleum products for 2018-19 were 32.5 mt, significantly lower than the 35.5 mt registered during the preceding fiscal year. Total exports of petroleum products in 2018-19 were 61.1 mt, lower than the 66.8 mt in 2017-18.

Exploration status

The government has signed 310 production sharing contracts (PSCs) for 28 discovered fields, 28 exploration blocks (pre-New Exploration Licensing Policy [NELP] blocks) and 254 blocks under the NELP regime with national oil companies and private (both Indian and foreign)/JV companies as licensees. Of the 254 PSCs signed under the NELP, 198 blocks have been relinquished or proposed for relinquishment and 56 are operational as of April 2019.

Two bidding rounds have been completed under the DSF Policy, which is aimed at monetising small oil and gas discoveries. The first bidding round offering 67 small fields clubbed into 46 contract areas was launched in May 2016. A total of 30 contracts for 43 DSFs were signed with 20 companies in March 2017. Under Round 1, 27 blocks are operational and 3 have been relinquished. The second round with 59 discoveries clubbed into 25 new contract areas was opened for bidding in August 2018 and 14 companies were awarded 23 contract areas in March 2019.

The HELP regime, which provides a single uniform licensing system to cover all hydrocarbons and open acreage, was launched in 2017. The OALP which allows bidders to select areas for bidding was introduced under the HELP. The HELP regime was further revised in February 2019. So far, three rounds have been launched under the OALP. The changes in the policy will be applicable from the fourth round of OALP. The first round of the OALP offering 55 blocks was launched in January 2018 and contracts for all the blocks were signed with six companies in October 2018. The second round with 14 blocks and the third round with 23 blocks were conducted simultaneously. Under the second round, 14 blocks have been awarded to six companies individually or in consortium. Till now, 18 blocks have been awarded under the third round.

Measures have also been taken to unlock the potential of unconventional hydrocarbons such as CBM and shale gas in existing acreages under the PSCs and CBM contracts. The policy changes exempt CBM from the existing pricing and allocation policy and provide pricing and marketing freedom to CBM contractors. So far, 33 CBM blocks have been awarded. Also, the shale gas and oil exploration policy was ann-ounced in October 2013. ONGC has identified 50 blocks in 4 basins and OIL has identified 6 blocks in 2 basins in Phase I.

Conclusion

Increasing investments in the domestic E&P segment are crucial for reducing the country’s import dependence. The recent policy initiatives are expected to play a crucial role in reviving activity in the segment. These measures and policy reforms are expected to start yielding results in the next four to five years when domestic production from the recently awarded blocks comes online. Nevertheless, the success of these initiatives will largely depend upon the effective and timely execution of projects.

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