Oil block auction faces uphill battle

The new hydrocarbon policy has ironed out most of the glitches in oil and gas production, but questions over viability of blocks remain

After a six- year hiatus, India is holding an auction for its oil and gas fields. The last round of auction under the New Exploration and Licensing Policy was held in October 2010, when crude oil price, benchmarked to the Indian basket, was hovering above $80 a barrel. Five years later, the price is averaging just over $ 40, putting a big question mark over the economic viability of developing new fields at a lower price.

Officials, however, are confident that the auction will be a success. “Industry has accepted that oil price will operate in the $ 45- 70 price band. Unless there is a big shift in technology like shale or a commodity supercycle like the one fuelled by China, global price will remain within this band,” says a senior official. “Besides, the cost of development has come down 30- 52 per cent, so bidders will make their calculations accordingly,” he adds.

The slide in crude oil prices though is not the only consideration for bidders. This is the first time the government has put up oil and gas fields on auction under the new hydrocarbon policy announced in September last year. The 47 contract areas carved out of 67 oil and gas fields on auction are discovered small fields, or DSF, taken out of the kitty of state- owned Oil and Natural Gas Corporation (ONGC) and Oil India. Obviously, this has caused protests over privatisation of oil assets, especially in Assam where eight blocks will go on auction.

Protesters are asking why private companies should develop those blocks and not state- owned ONGC and Oil India. Globally, big oil companies do not chase or operate small fields. It is the smaller companies that put their bets on unexplored and even depleting acreages. It makes sense for them. Through use of technology and juggling seismic data, they can even turnaround such assets and their own fortunes.

An oft- cited example of such a block is the oil field in Barmer in Rajasthan. It was discarded by ONGC as unviable, but Edinburgh based Cairn managed to turn it around completely by applying new technology. While ONGC still holds 30 per cent stake in Barmer, the field changed Cairn’s fortunes in India. Cairn listed its India assets on the strength of Barmer in 2008, and finally exited the country after selling its stake in Cairn India to Vedanta Resources in 2011. Neither Barmer nor Cairn India is now counted as marginal players.

A safe bet

Atanu Chakraborty, director general of hydrocarbons, says the fields on offer this time are already discovered, and, therefore, carry less risk.

“Further, the contractor will have the rights for exploration throughout the contract period, which may lead to upsides. Thus, under the new liberalised policy framework, development of these discoveries can be feasible,” he added. Interestingly, the response to these new contract terms have been positive so far. Not only have Niko Resources and Hindustan Oil Exploration Company shown interest in the auction, but ONGC also is looking to jump into the fray.

“We will bid for our own blocks because of the new fiscal regime, which is more attractive,” says Ved Prakash Mahawar, director (onshore), ONGC. He says the blocks have become attractive because of relaxed terms being offered by the government. “ Besides, through application of better technology, new sands can be found in the development phase,” he adds.

The government, however, is more keen on drawing interest from smaller companies; its goal is to double the number of small oil and gas companies in India to 55 from about 25 now.

The success of the auction is crucial to ensuring India’s energy security, besides unlocking its oil and gas resources which are currently lying untapped because of their small size. “We require seven million tonnes of crude oil for processing in refineries in our own state, but we have to import because of shortage” Assam Chief Minister Sarbananda Sonowal said recently.

ONGC keen to bid

Although the two state- owned companies, ONGC and Oil India, have relinquished their rights over the fields on offer, petroleum mining leases are still being held by them. Once the bidding process is complete, the leases will be passed on to the new operators. Oil India and ONGC, however, will not get anything in return since they have already accounted for zero value for these blocks on their books.

Under the New Exploration Licensing Policy ( NELP), bidders were primarily judged on the minimum work programme ( MWP) that outlined a schedule for the wells to be drilled over the contract period. It carried 50- 60 per cent weightage. The remaining weightage was for the government share in profit petroleum ( value of output after costs have been recovered).

Now, the DSF round will give 80 per cent weightage to revenue sharing and 20 per cent to MWP. Further, companies will be liable to start production within three years of getting the contract. They will have to relinquish the area if there is any discontinuation of production for more than a year.

Though processes and contract terms have been simplified in the new hydrocarbon policy, the success of DSF will also depend on whether investors— private equity and venture funds— are willingly to bet on small companies investing under the new policy regime. Policy flip flops and the government not sticking to contract terms have made oil investments a risky bet in India.

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