India: Hydrocarbon Exploration And Licensing Policy (“HELP”)

HELP – the Hydrocarbon Exploration and Licensing Policy, was approved by the Union Cabinet, Government of India on March 10, 2016. HELP replaces NELP – the New Exploration Licensing Policy (for exploration and production of oil & natural gas but excluding coal bed methane), and the Coal Bed Methane (“CBM“) Policy, both of which were formulated by the Government of India sometime in 1997-98.

NELP had undergone 9 rounds of international competitive bidding since 1999 with a total of 254 blocks awarded, of which, according to a 2014 Directorate General of Hydrocarbon (“DGH“) report, 148 are currently operational and 106 relinquished. There has been a total of 128 hydrocarbon discoveries (46 oil and 82 gas) made in 42 NELP blocks, of which commercial production could only commence in 6 blocks, viz. (i) Reliance-operated KG-DWN-98/3 (3 discoveries: 1 oil and 2 gas), (ii) NIKO-operated CB-ONN-2000/2 (2 gas discoveries), (iii) GSPCL-operated CB-ONN-2000/1 (1 oil discovery), and (iv) ONGC operated CB-ONN-2004/1, CB-ONN-2004/2 and CB-ONN-2002/1 (3 oil discoveries). Separately, under the CBM Policy, 30 blocks were awarded. Out of this, 14 blocks have been relinquished/under relinquishment and 16 blocks are in different stages of exploration and production (“E&P“) operations.

On the whole, while E&P activities have been significantly boosted by NELP and the CBM Policy and opened up the sector to private investment, and 100% foreign investment, the attractiveness of NELP increasingly waned with time for several reasons, resulting in challenges in increasing domestic production to meet the sky rocketing demands of India’s 21st century growth story. So far as commercial discoveries and commercial production goes, NELP has had limited success, hence HELP.

Main Features of HELP

  • Uniform license for exploration and production of all forms of hydrocarbons: Since unconventional hydrocarbons (shale gas/oil) were unknown when NELP was framed, there are different licensing policies for conventional oil and gas, coal-bed methane, shale oil and gas and gas hydrates, leading to inefficiencies in effectively exploiting hydrocarbon resources. For example, if while exploring for one type of hydrocarbon, another one is discovered, it will need a separate license, leading to delays. In addition, operators face delays in liaising with the several government agencies/Ministries for various permits and licenses, adding to costs, and resulting in stoppage of activities in certain cases. It is now proposed to have a uniform license to enable exploration and production of all forms of hydrocarbons including CBM, shale gas/oil, tight gas, gas hydrates, etc., covered under the Oilfields Regulation and Development (“ORD“) Act, 1948, and the Petroleum and Natural Gas (“PNG“) Rules, 1959.
  • Open acreage licensing policy (“OALP”): Under NELP, blocks were carved out and thereafter put up for auction under the international competitive bidding process. The limited choice [of blocks] offered by the Government restricted investors while identifying blocks for submitting bids. Further, investors had to wait for the next round of bidding in between blocks offered in a particular round and blocks in which they have specific interest. It is now proposed that a bidder can apply for exploration of any block/acreage (not already covered by exploration) at any time and without waiting for announcement of bids, by submitting an initial Expression of Interest (“EOI“).  The Government will examine the EOI and, if suitable, call for competitive bids after obtaining necessary environmental and other clearances. For OALP to be effective, a national data repository (“NDR“) is a pre-requisite. A NDR is a government sponsored data bank to preserve and disseminate upstream oil and gas information and data, and in terms of the PNG Amendment Rules 2006, every E&P operator in India is obliged to provide all data pertaining to the entire E&P value chain to the DGH. According to industry reports, a 6-year contract has been awarded to Halliburton Energy Services, covering one year to set up the NDR, and five years for operation. In any case, the modalities for the operationalization of OALP will be separately notified.
  • Revenue sharing model: A “revenue sharing model” post royalty payments will replace the erstwhile system based on profit sharing after cost recovery. The extent of cost recoverable by the operator from the revenue generated in the oil and gas field had become one of the most contentious issues of the production sharing contracts (“PSCs“) executed with contractors. The issue of cost recovery and its disallowance with respect to gas production from the KG-D6 block has been the subject of arbitration for the past several years between Reliance Industries Limited and the Government. Another issue is the investment multiple which determines the split of profit between the Government and the contractor. The Comptroller and Auditor General in its Performance Audit of Hydrocarbon PSCs, while critiquing the PSC structure, had pointed out possible manipulation of the IM, stating that “private contractors have inadequate incentives to reduce capital expenditure – and substantial incentive to increase capital expenditure or “front-end” capital expenditure, so as to retain the IM in the lower slabs or to delay movement to the higher slabs”. It is now proposed that the Government “will not be concerned with the cost incurred” and will receive a share of gross revenue from the sale of oil and gas. A draft Revenue Sharing Contract (“RSC“) was issued sometime in 2014 for comments. In terms of that model, the Government’s revenue share will be determined separately for crude oil and natural gas in accordance with a two dimensional production–price matrix (separate for on-land, shallow water, deep water areas and CBM), linked to the average daily production in a month and average oil and gas prices in a month, which will be as quoted and bid for by the contractor under the RSC. There is also an escrow arrangement to further safeguard the Government’s revenue share.
  • Marketing and pricing freedom for oil and gas: Currently, the producer price of gas is fixed administratively by the Government. Producers have been requesting a higher price for their gas, especially for gas produced from deep water, ultra deep water and high pressure-high temperature areas on account of higher costs and higher risks involved in exploitation of gas from such areas, without which it would be economical to produce from those areas. This has led to loss of revenue and, in certain cases, disputes with producers. Producers will now have the freedom to sell crude oil/condensates exclusively in the domestic market through a transparent bidding process on arms length basis. Gas can also be sold on arms length basis, subject to a ceiling price arrived at on the basis of landed price of alternative fuels, revised every 6 months. As the conditionality of exclusivity of sale in the domestic market has not been specified with respect to gas sales, producers may be able to export gas produced from these blocks, probably through a State canalising agency. For calculating the Government’s revenue share, the minimum price, in the case of gas, will be the price calculated as per the domestic natural gas pricing guidelines prevailing at the relevant point in time. In the case of crude oil, the minimum price will be the price of Indian basket of crude oil (currently comprising of sour grade (Oman and Dubai average) and sweet crude (dated brent) of crude oil processed in Indian refineries), as calculated by the Petroleum Planning and Analysis Cell on a monthly basis. In both cases (of crude oil and gas), if the price arrived at through bidding is more than the price of Indian basket of crude oil/gas price as per the domestic natural gas pricing guidelines, then the Government’s revenue shares will be calculated based on the actual price realized. However, marketing and pricing freedom is applicable only to future discoveries as well as existing discoveries which are yet to commence commercial production as on January 1, 2016. It will not apply to existing discoveries which are under arbitration or litigation until the conclusion of such arbitration or litigation.
  • Concessional royalty regime: HELP now distinguishes between on-land, shallow water (where costs and risks are lower), deep/ultra deep water fields (where risks and costs are much higher) so far as royalty payable to the Government go. A graded system of reduced royalty rates will now apply, as follows:
    Blocks Duration Royalty Rates
    Oil Gas
    On-land 12.5% 10%
    Shallow water 7.5% 7.5%
    Deep water First 7 years No royalty No royalty
    After 7 years 5% 5%
    Ultra deep water First 7 years No royalty No royalty
    After 7 years 2% 2%
  • Curtailed role of Management Committee (“MC”): Unlike under the PSC regime where the MC (constituted of representatives of the Government, DGH and the contractor) had more control over operational and crucial cost monitoring matters, and contractors perceived the Government to be “micro-managing” a range of E&P activities through its nominees on the MC, the role of the MC is now limited only to monitoring of the minimum work programme and technical aspects thereof. This is in line with the Government’s policy of “minimum Government – maximum Governance”.

In addition to the foregoing, there are other measures proposed by HELP including (i) an increased exploration phase: 8 years for on-land and shallow water fields and 10 years for deep/ultra deep water fields; (ii) no restriction on exploration activities during the entire contract period; and (iii) exemption from custom duty for machinery, plant, equipment, materials and supplies related to petroleum operations, and no levy of cess on crude oil.

Going forward, foreign and Indian companies can have 100% participating interest and there is no requirement for participation of Government nominee companies in any joint ventures.

In conclusion, HELP heralds significant and positive policy shifts – the most attractive being the OALP and the marketing and pricing freedom granted to producers. These policy shifts have been introduced against the back drop of declining oil prices which has taken a toll on exploration and development activities as global oil and gas producers are constrained to cut back on prohibitive finding costs in extreme environments. It just might be the time to buck the trend and leverage declining prices in building assets which can be monetized later. For those wanting to make such a strategic and calculated move, HELP is here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source: Mondaq Newsletter; 27 April 2016

URL: http://www.mondaq.com/article.asp?articleid=486160&email_access=on

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