Recent Developments: Policy measures, capacity expansion and key project updates

Policy measures, capacity expansion and key project updates

Over the past year, India’s oil and gas sector witnessed a number of noteworthy developments, setting the tone for the sector’s progress in the next three-four years. These include award of fresh oil and gas blocks under the Open Acreage Licensing Policy (OALP) and Discovered Small Fields [DSF] Policy bidding rounds, introduction of policy measures to facilitate exploration in unexplored/unallocated areas, and award of new licences for development of city gas distribution (CGD) networks. Apart from policy developments, there was much activity in refining, pipeline network development, as well as setting up of liquefied natural gas (LNG) infrastructure. Besides, works have also been taken up for development in various geographical areas (GAs) for setting up CGD networks.

Indian Infrastructure tracks recent key developments in the sector…

  • In July 2019, the Ministry of Petroleum and Natural Gas (MoPNG) signed contracts for 32 blocks awarded under OALP Rounds II and III. Both the rounds were launched in January-February 2019, and ran simultaneously to close on May 15, 2019. Under the second round, 14 blocks covering a total area of about 30,000 square km were put on offer while in the third round, 23 blocks (including 5 coal bed methane blocks) spread across an area of 32,000 square km were on offer. Subsequent to evaluation of bids in May, a total of 32 blocks were awarded to six companies. While public sector entities secured 21 blocks, the remaining 11 blocks were awarded to private entities. With the award of these blocks, the country’s exploration acreage has reached 210,000 square km, from about 90,000 square km in 2017. For the fourth round, the process of submitting expressions of interest (EoIs) closed on May 15, 2019 and at present, EoIs can be submitted till November 15, 2019 for the fifth round. Meanwhile, contracts for the first round of the OALP were signed in October 2018. The round received an overwhelming response from the industry and all 55 blocks on offer received bids and were subsequently awarded.
  •  In March 2019, the Empowered Committee of Secretaries and the Group of Ministers approved the award of 23 contract areas to the winning entities under the second round of DSF bidding. The bidding under this round started in August 2018 and ended in January 2019. There were 25 contract areas on offer, covering 59 discovered oil and gas fields, spread over 3,000 square km, with a prospective resource base of over 190 million tonnes of oil and oil equivalent gas. Winners include the Oil and Natural Gas Corporation (five contract areas), Oil India Limited (two contract areas), Hindustan Oil Exploration Company in collaboration with Indian Oil Corporation Limited (one contract area), and various private companies.
  • In February 2019, the government introduced a slew of measures to increase exploration activities in unexplored/unallocated areas, following the limited success of the Hydrocarbon Exploration Licensing Policy in attracting anticipated interest from private/ foreign players. The policy changes will be applicable from OALP IV onwards. The measures include:
  •  In Category II and III basins in which no commercial production is taking place presently, exploration blocks will be bid out exclusively on the basis of the exploration work programme without any revenue or production share to the government. Royalty and statutory levies, however, will be paid by the contractor.
  • The government will not charge any share of profit on hydrocarbons produced from less explored areas. The new policy provides for different rules for areas that already have producing fields and ones where commercial production of oil and gas is yet to be established.
  • Irrespective of the basins, producers will get complete marketing and pricing freedom for oil and gas in future bid rounds. Oil and gas blocks in all future bid rounds will be awarded primarily on the basis of exploration work commitment.
  • While companies will have to pay a share of revenue from the oil and gas produced in Category I sedimentary basins such as Krishna-Godavari, Mumbai Offshore, Rajasthan and Assam where commercial production has already been established, they will be charged only prevalent royalty rates on oil and natural gas in the less explored Category II and III basins.
  • The contractor will have full marketing and pricing freedom to sell on an arm’s length basis. Price discovery will be on the basis of transparent and competitive bidding and no exports will be permitted. The contractor will also have the freedom to transfer/exit the block provided the work programme has been adhered to.
  •  Under Union Budget 2019-20, the government has proposed an expenditure of Rs 429.02 billion (budget estimate) for the MoPNG during 2019-20, an increase of Rs 118 billion from the Rs 311 billion (budget estimate) proposed for 2018-19. The revised estimate for the previous fiscal year stands at Rs 334.65 billion. The key announcements for the oil and gas industry were as follows:
  • The government has proposed the provision of 80 million free liquefied petroleum gas (LPG) connections under the Ujjwala Yojana.
  • Further, the budget proposed the imposition of additional excise duty and road cess each of Re 1 per litre on petrol and diesel.
  • Additionally, an amount of Rs 15.52 billion has been earmarked for GAIL (India) Limited’s Phulpur-Dhamra-Haldia pipeline project.
  • With regard to the development of gas pipeline infrastructure, several noteworthy events took place. GAIL successfully commissioned the 165 km Gorakhpur spur line section under the Pradhan Mantri Urja Ganga (PMUG) natural gas pipeline project, marking the completion of the entire 750 km long trunk pipeline (Section I of the PMUG) constituting 30 per cent of the sanctioned project route. In May 2019, GAIL awarded major contracts worth over Rs 105 billion for the ongoing Jagdishpur-Haldia and Bokaro-Dhamra natural gas pipeline and the Barauni-Guwahati pipeline projects, both a part of the PMUG.
  • In a separate development, GAIL revised the tariff for its Hazira-Vijaipur-Jagdishpur pipeline network by 61 per cent to Rs 41.11 per million metric British thermal units (mmBtu), effective from July 2019. The gas transport company had been charging Rs 25.46 per mmBtu to those who have been users of the pipeline since November 2008 and Rs 53.65 per mmBtu to newer consumers who became users from March 2010. Under the revised structure, the tariff will increase by 61.4 per cent for old customers, while it will come down by 23.3 per cent for new customers.
  • Meanwhile, the sector managed to attract interest from new investment sources such as InvITs. In March 2019, Canada-based Brookfield Asset Management’s infrastructure investment trust (InvIT) – the India Infrastructure Trust – announced its acquisition of the East-West Pipeline, a loss-making entity of Reliance Industries Limited (RIL), for a transaction value of Rs 130 billion.
  • On the LNG front, the country’s first terminal on the east coast – the regasification terminal at Kamarajar port in Ennore – commenced operations in March 2019. The 5 million tonne per annum (mtpa) project, entailing an investment of Rs 51 billion, took about four years to be constructed. Meanwhile, another 5 mtpa terminal at Mundra was inaugurated in October 2018. In June 2019, Petronet LNG commissioned additional capacity of 2.5 mtpa at its Dahej facility, taking the terminal’s nameplate capacity from 15 mtpa to 17.5 mtpa.
  • The refining segment too is undergoing a transition. By 2020, all the country’s refineries have been mandated to upgrade to BS-VI-compliant transport fuels (petrol and diesel). Consequently, refining companies are undertaking requisite technology upgradation works at their facilities to adhere to the new norms.
  • The mega 60 mtpa greenfield refinery that was to be built at Ratnagiri, Maharashtra, is facing land issues. Delays in acquiring land (about 10,000 acres) have pushed the project deadline from 2022 to 2025. According to the latest reports, a new project location is being sought from the Maharashtra government. However, the state could lose the project altogether if no decision regarding the new location is taken by end August 2019.
  • In a major equity reorganisation witnessed recently in the refining space, RIL announced the sale of a 20 per cent stake in its oil to chemicals business to the Saudi Arabian Oil Company. The Indian refiner has also entered into a deal with BP to offload a 49 per cent stake in its fuel marketing business in India, for a deal value of about $1 billion.
  • As far as the CGD space is concerned, work has begun in a number of GAs to establish networks. GAIL, for instance, has commenced development works in its newly acquired GAs of Giridih and Dhanbad (Jharkhand), Dakshin Kannada (Karnataka), Sundergarh, Jharsuguda, Ganjam, Nayagarh and Puri (Odisha), and Dehradun (Uttarakhand). Besides, some of the key CGD networks that have been operationalised in recent months are in GAs such as Patna, Bokaro and Rourkela.

Going forward, given the growing demand for crude oil and natural gas and its wide application in household and industrial activities, it is apparent that there will be major investments in this industry in the years to come. The government has recently revamped the policy framework in the upstream sector with a view to attract more investments, and this is also in line with the government’s objective of facilitating ease of doing business in the sector. However, many issues still remain unaddressed and certain segments have seen little action. Policymakers must think for the long term in order to create a favourable regulatory environment.