Green energy’s moment under the sun

Although India is far from achieving its target of 175 gigawatts (GW) of renewable power by 2022, a series of steps taken by the National Democratic Alliance (NDA) government in the past year has set India on the path to a green economy in the next few years.

India started moving towards green power when the Union cabinet in June 2015 scaled up the country’s targeted solar power capacity under the National Solar Mission fivefold to 100,000 megawatts (MW) 2022 from the earlier 20,000MW.

Later, in the run-up to the 2015 Paris Climate Agreement in December, India announced its Intended Nationally Determined Contributions (INDCs) to combat climate change , where it promised to achieve 175GW of renewable power—100GW from solar, 60GW from wind, 10GW from bio-power and 5GW from small hydropower—by 2022.

The huge target has attracted attention the world over. Piyush Goyal, minister for new and renewable energy, also made his intentions clear, saying that India will lead the world in clean energy rather than follow it.

“With 21GW of grid-connected new solar projects out in the market, India has signalled to the world that we’re ready to lead,” Goyal said.

Experts, too, commend the government for huge strides it has made—even if some of them are just in the policy stage right now.

“Definitely, the Indian government has taken some steps to move towards a greener economy including the enhanced solar mission, energy efficiency programmes and move to advance Bharat Stage VI emission norms (for vehicles) to April 2020 among others. They have also improved emission standards for coal-based power plants,” said Rakesh Kamal, senior programme manager, climate change at the Centre for Science and Environment, a Delhi-based environmental think tank.

“The seeds for these steps were planted in previous governments. But the present regime deserves credit for enhancing it many times… There is no doubt about that,” Kamal added.

As of 30 April, India’s total installed renewable capacity is 42.8GW, of which wind power is 26.8GW, followed by solar with 6.7GW, biomass power with 4.9GW and small hydro projects with 4.2GW.

Finance minister Arun Jaitley’s decision to increase the “Clean Energy Cess” levied on coal, lignite and peat fromRs.200 per tonne to Rs.400 per tonne was another such step. The cess was renamed “Clean Environment Cess”.

Though solar power has been one of the main focus areas of the government, it has not entirely ignored other renewable power sources.

For instance, the cabinet in September 2015 cleared the National Offshore Wind Energy Policy, aiming to harness wind power along India’s 7,500km coastline .

India is an important player in wind power and has a huge potential. For instance, as per government estimates, India has the potential to generate 302GW of onshore wind power, compared to the 27GW it currently generates.

Though offshore wind is still a few years away—at present, costs are too high and it is difficult to maintain—it too has a huge potential. According to government estimates, the Gujarat coast alone has the potential to generate around 106GW of offshore wind energy, while Tamil Nadu can generate another 60GW.

“Transition of energy sector is going to take much longer than five years. But what this government has done is to dream big and set ambitious targets. They certainly deserve credit for that. We should grant that they have taken the right step for renewable energy,” said Karthik Ganesan, who is a senior research associate at the Council on Energy, Environment and Water (CEEW), a Delhi-based policy research institute.

Ganesan, however, cautioned that setting big targets isn’t enough—they need to be backed by proper mechanisms.

The push for achieving 40% installed power capacity from renewable energy by 2030 has also led to positive developments, like the central government encouraging the manufacturing of solar panels in India. The solar sector alone requires an investment of around Rs.6.5 trillion to achieve the 100GW target for 2022.

However, the government’s efforts to move towards a green economy are not limited to renewable power alone. The ministry of new and renewable energy under Goyal has been successfully running a scheme to promote LED bulbs across India in a bid to improve energy efficiency.

Under its UJALA (Unnat Jyoti by Affordable LEDs for All) scheme, the ministry is aiming to replace 770 million incandescent lamps with LED bulbs across the country by March 2019. The lifespan of LED bulbs is estimated to be almost 50 times that of ordinary bulbs and 8-10 times that of compact fluorescent lamps (CFLs). Besides energy savings, LEDs also help reduce thousands of tonnes of carbon emissions per day.

The government has also recently launched a national energy efficient fan programme under which five-star rated ceiling fans will be sold to consumers; each fan could reduce a consumer’s electricity bill by about Rs.700-730 per year. The fans will be sold for Rs.1,250 (or Rs.60 a month for two years, as part of the electricity bill).

Energy Efficiency Services Ltd (EESL), a joint venture of public sector undertakings under the ministry of power, has already distributed over 100 million LED bulbs. Interestingly, in 2014-15, the total number of LED bulbs that were distributed was only 3 million, but 2015-16 saw a huge jump with distribution of over 90 million LED bulbs under the UJALA scheme. The government has targeted distribution of an additional 200 million LED bulbs this year.

The scheme has also resulted in a massive drop in prices of LED bulbs from Rs.310 in February 2014 to Rs.55 apiece in March 2016. Goyal said in November 2015 that LEDs bulbs will soon reach Rs.44 apiece .

Source: Mint; 23 May 2016

URL: http://www.livemint.com/Politics/FJzJLa7lu40XrLyzpz6K1M/Green-energys-moment-under-the-sun.html

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Tata Power renewables unit wins two 50 MW projects in Karnataka

Mumbai: Tata Power Co. Ltd on Thursday said its unit Tata Power Renewable Energy Ltd (TPREL) has won two solar projects of 50 megawatt (MW) capacity each in Karnataka under the Jawaharlal Nehru National Solar Mission (JNNSM) at a tariff of Rs.4.79 per kilowatt-hour (kWh).

The company has received a letter of intent to develop the two solar grid connected photovoltaic projects in Pavagada Solar Park in Tumkur district, Tata Power said in a BSE filing. The company will sell power from the projects to state-run NTPC Ltd’s unit NTPC Vidyut Vyapar Nigam Ltd under a 25-year power purchase agreement, it said.

The company is aiming to get more than its earlier stated 20-25% of total capacity from renewable energy, Mintreported in March, citing chief financial officer Ramesh Subramanyam.

Subramanyam said the company will not bid for solar projects at aggressive or low tariffs. Indian and foreign firms have been quoting tariffs below Rs.5 per kWh in government auctions to win solar projects in India, in part helped by lower cost of solar panels and government-provided solar parks.

In a reverse auction, the role of the buyer and seller is reversed and a business bid is won by quoting prices downwards. Solar tariffs first fell to a record low of Rs.4.63 per unit with SunEdison Inc.’s bid in November and fell to Rs.4.34 at a January e-auction conducted by NTPC. Indian banks are cautious about funding projects which offer low returns or look unviable, Mint reported on 15 April.

India launched the Jawaharlal Nehru National Solar Mission (JNNSM) in 2010 with the aim of adding 20,000MW or 20 gigawatt (GW) of grid-connected solar power to India’s energy mix by 2022 in three phases. That target was raised to 100 GW by 2022 by the National Democratic Alliance government in 2015.

Under JNNSM, the government-provided solar parks offer project developers ready-to-use infrastructure, such as land and transmission facilities, leading to low project risk and lower costs.

Source: Mint; 19 May 2016

URL: http://www.livemint.com/Companies/ry8OaAkW6HVuPF0Pleii8N/Tata-Power-renewables-unit-wins-two-50-MW-projects-in-Karnat.html

Goldman Sachs surprised by sudden oil-market turn as glut vanishes

Singapore: The global oil market has flipped to a deficit sooner than Goldman Sachs Group Inc. had expected.

A decline in production driven by unexpected supply disruptions as well as sustained demand have led to a “sudden halt” to the market surplus, Goldman analysts including Damien Courvalin and Jeffrey Currie wrote in a report dated 15 May. That’s prompted the bank to raise its US crude price forecast to $50 a barrel for the second half of 2016 from a $45 estimate in March.

The unexpected outages caused by everything from wildfires in Canada and pipeline attacks in Nigeria will keep the market in deficit through the second half of this year, according to Goldman. Still, the return of some of the output and higher-than-expected US, North Sea, Iraq and Iran production means the bank predicts the shortfall will be at 400,000 barrels a day versus the 900,000 previously expected. A shift back to a surplus is seen in early 2017, it said.

“The physical rebalancing of the oil market has finally started,” the Goldman analysts wrote. The changes to forecasts “reflects our long-held view that expectation for long-term surpluses can create near-term shortages and leaves us cyclically bullish but long-term bearish.”

Oil demand

Goldman cut its crude price forecast for the first quarter of 2017 to $45 a barrel from $55 previously, but sees oil rising to $60 by the end of that year. The bank expects global oil demand to grow by 1.4 million barrels a day in 2016, versus 1.2 million predicted earlier.

West Texas Intermediate crude, the US benchmark, rose 1.9% to $47.08 a barrel by 5:10 p.m. Singapore time on the New York Mercantile Exchange. Front-month futures are up almost 80% from a 12-year low earlier this year. Brent, the marker for more than half the world’s oil, was at $48.69 a barrel in London.

While supply disruptions over the past two weeks have reduced production by 1.5 to 2 million barrels a day, prices are up only $2 a barrel, reflecting ample inventories in the market, according to Goldman. With stockpiles at historically elevated levels in several countries, the current outages have little impact on the availability of crude barrels, it said, adding that “high product stocks would even allow for lower refinery runs if necessary.”

Inventory shifts

The pace of draws in inventories is what will drive prices, as uncertainty surrounding future supply-demand balances remains “significant,” according to the bank. “The price recovery will remain anchored by near-term inventory shifts, with the oil market less forward looking than over the past two years,” the analysts wrote.

While US stockpiles of crude shrank in the week ended 6 May for the first time in more than a month, stored supplies remained close to the highest since 1929, data from the Energy Information Administration show.

Goldman’s expectation for the market to return to a surplus in 2017 reflects the view that low-cost producers will continue to drive output growth, boosted by Saudi Arabia, Kuwait, the UAE. and Russia, the bank said.

“While the physical barrel rebalancing has started, the structural imbalance in the capital markets remains large,” the analysts wrote. “The industry still has further to adjust and our updated forecast maintains the same 2016-2017 price level that we previously believed was required to finally correct both the barrel and capital imbalances, and eventually take prices to $60 a barrel.” Bloomberg

Source: Mint; 16 May 2016

URL: https://greatlakesenergy.wordpress.com/2016/05/16/ge-power-india-to-grow-50-in-2016-steve-bolze/

GE Power India to grow 50% in 2016: Steve Bolze

Mumbai: Steve Bolze, president and chief executive officer of GE Power, believes digitization will be the biggest disrupter for the power industry in the next 10-20 years. In India to address the conference on the Future of Electricity organized by Mint and General Electric Co. last week, Bolze said India has become a real microcosm for everything going on in the global power sector. Edited excerpts from an interview:

You have met with Indian policy makers and industry officials this week. What are the key takeaways for GE Power?

The world right now has a major need for power: 50% more in the next 20 years. We are all talking about affordable, accessible, reliable and sustainable power. I would say nowhere in the world is it more visible and apparent than in India. When we talk about 50% more power in the next 20 years in the world, in India it is 100% more power in six years. It is almost four times the rate of growth than the rest of the world.

So, that drives the need for investment right now. On the power front, however, India has been a bit variable. There have been challenges not only at the policy level but fuel availability and pricing too. Power is a growth business for us and with our recent Alstom SA acquisition, we have gone up from 15% representation in India to 55%. We have also on boarded around 3,000 Alstom SA employees to go up to 18,500 employees in India. And in terms of our commitment and local presence, it has never been a more exciting time to be in India.

So how do you see your India business growing?

In the power segment, our India business would probably grow by 50% this year. In the past, we have been growing over 50%. And that is pretty good. We have 3,000 employees for the power segment in India, with over a third of these being engineers. They are not only supporting our projects in India but also some of our global work. Our team is excited because projects are happening in India and a lot of work that is being done in India is impacting some of our biggest launches such as HA gas turbines. Also, one of the biggest transformation that is happening in the industry and the company is digital. And we have a big digital and data science team in Bengaluru. We would be piloting things like Predix (GE’s Industrial Internet of Things platform), with customers like GMR in India. So, India has become a real microcosm for everything that is going on in power sector in the world.

What do you mean by digitization in the power sector? What is GE doing to get that process in place?

Digitization is the single biggest transformation going on right now in the world and will be the biggest single disrupter to the industry in the next 10-20 years. Say today you have a lot of assets that exist to generate power and they were put in place in an era where a lot of it was just physical understanding of the assets. Digitization is all about mating the physical with the digital world, monitoring all the data that comes out.

We have terabytes of data that come out of a gas turbine every year with advancement in data analytics. By hooking up physical assets with data analytics, you can unleash new areas of high performance, better emission performance, better output and better efficiency, so the assets would perform better than they do today. This is real.

Our customers and we know there are more opportunities here. Digital is a huge strategy for the company and we basically re-pivoted the whole strategy to be a digital investor. We are all focused on how to get more efficiency, output and serviceability of the existing assets. From a customer’s point of view, they would want the most return on investment on their assets. India has been quick in adopting the digital disruption.

In the Indian culture, there is always emphasis on innovation. In the power space alone, we have 15 data scientists working at our data centre in Bengaluru and we have digital solutions rolling out here. I think you will see more of that happening. That is why digital is such a big thing.

But capital expenditure by a lot of companies has been put on hold. Would companies pay for digitization?

I would say that they are clearly some short-term challenges. Companies, particularly in the energy field have to make adjustments in the timing of project closures, fuel availability and tariff. Those challenges are reality and that affects not only other players but GE, too.

But I would say that policies are now becoming clearer. The demand is clear; the diversity of technology going to be acquired even in a world that is a little uncertain is clear. There is clarity on the focus on energy efficiency. So, we have to manage these challenges through the short term for the long term. Besides, India is not unique in terms of challenges; other markets too have them. The gas market has been very slow here because of availability issues. Emission standards are there and people have to meet those standards.

So does the emission issue become an opportunity? It does add to cost…

It is a constant balance. You have to have sustainability with affordability and accessibility. There are close to 250 million people in India who don’t have access to electricity. But the approach that India is taking is one of the most progressive. Adhering to emission standards does add to cost, as there is capital investment that needs to be put in place, making it more expensive in the short term. But I would say that is when you get into the policy on diversification. You have to have a combination of cleaner coal, plus renewable, plus over time, you are going to have more gas availability and that is how you balance it all and thus, emission is an opportunity.

Source: Mint; 16 May 2016

URL: http://www.livemint.com/Companies/SKz8PIKuXGlHjfS07Hx9MO/GE-Power-India-to-grow-50-in-2016-Steve-Bolze.html

Coal imports decline 15% to 15.9 million tonnes in April: Anil Swarup

New Delhi: India’s coal imports fell by 15% to 15.9 million tonnes (mt) in April this year.

The imports stood at 18.7mt in the same month last year.

“Provisional coal import figures: Reduction from 18.7mt in April 2015 to 15.9mt in April 2016. In value terms, fromRs.8,942 crore to Rs.6,023 crore (32%),” coal secretary Anil Swarup tweeted.

He further said reduction in imports during last fiscal led to a saving of an estimated Rs.24,000 crore in foreign exchange.

The government had earlier said in view of the rising production of the dry fuel, India plans to completely stop thermal coal imports in two-three years that would result in an annual saving of Rs.40,000 crore.

However, coal and power minister Piyush Goyal is of the view that coking coal needs to be imported and his ministry was ready to tie up with shipping companies for this purpose.

Coal India Ltd (CIL) produced 37.5mt of the dry fuel in April as against the target of 37.6mt.

In 2015-16, CIL achieved a record production of 536mt, which was 42mt more than the previous fiscal. Its production grew 8.5% year-on-year. CIL was, however, eyeing a 550mt output. CIL’s output is fixed at 598mt for this fiscal.

Source: Mint; 14 May 2016

URL: http://www.livemint.com/Industry/W4eVGfm85rUIJRO33u0l0H/Coal-imports-decline-15-to-159-million-tonnes-in-April-An.html

Dirty coal chokes Delhi as cleaner power facility in Bawana idles

New Delhi: About 25 kilometers (16 miles) northwest of Prime Minister Narendra Modi’s office in New Delhi, a $780 million gas-fired electricity plant that could reduce the choking pollution in India’s capital is operating at a fraction of its potential.

The 1,500 megawatt facility in Bawana ran at about a sixth of capacity on Monday, while a much older, belching coal plant some 15 kilometers southeast of central New Delhi provided the biggest share of the city’s power generation.

The dichotomy shows India is struggling to follow the US and Europe in giving natural gas a greater role for electricity production in place of coal power, which emits more of the tiny particles that damage air quality. The nation is awash with cheap supplies of the dirtier fuel after boosting output, hurting the competitiveness of gas despite a 33% slump in the commodity’s cost in the past year.

“There’s a lot of power available at lower prices,” said Sanjay Kumar Banga, head of power management at Tata Power Delhi Distribution Ltd., which purchases and sells electricity in New Delhi. Bawana is “hard to accommodate” among the lowest cost options, he said.

Below capacity

Gas accounts for 8% of India’s power generation capacity, versus 62% for coal. Yet gas plants used less than a quarter of their capacity of roughly 24,500 megawatts in the year ended March. That’s a sign of fizzling efforts to spur extraction of domestic gas reserves, as well as bottlenecks that inhibit imports.

Modi’s administration in March gave explorers pricing freedom for deep-sea fields. It remains to be seen whether this step will lead domestic companies such as Reliance Industries Ltd. to extract more of the fuel, or attract foreign players including Exxon Mobil Corp. and Chevron Corp.

In New Delhi, local officials have said they want to embrace gas. The challenge is getting cheap enough supplies to ensure distributors purchase the power.

India’s biggest gas transporter GAIL India Ltd. said it’s in talks with Pragati Power Corp., which operates Bawana, about supplying fuel to the facility. The plant could meet about a third of the mega-city’s power needs.

Gas price

Federal Oil Minister Dharmendra Pradhan said in April that GAIL can supply gas to Bawana at about $8 per million British thermal units. That would translate into a power tariff of roughly Rs5 per kilowatt hour — more than the average market clearing price on Tuesday of Rs2.

The annual pollution from the coal-fired plant in the capital is as great as 18 years of emissions from all the city’s vehicles, according to Pradhan.

New Delhi was the world’s most polluted city measured by airborne PM2.5, with an annual average of 153 micrograms per cubic meter, according to a 2014 World Health Organization database. The top four most polluted cities were in India. PM2.5 particles can penetrate deep into the lungs and enter the bloodstream.

Modi has targeted a record expansion of renewable electricity to curb emissions even as he prodded state-run Coal India Ltd. to mine more of the fuel to reduce blackouts. India is also in talks with liquefied natural gas supplying nations for long-term contracts.

The shift to clean power such as solar energy is a longer-term move. In the meantime, gas plants that could stabilize the electricity grid and reduce pollutants are idling.

One way to increase the role of gas is to force electricity distribution utilities to avert blackouts, and direct them to gas-fired power to achieve that goal, said Nitin Zamre, managing director of Indian operations at Fairfax, Virginia-based energy consultancy ICF International Inc.

“It’s difficult for gas to compete with coal in power generation without anyexternal push,” Zamre said.

Source: Mint; 10 May 2016

URL: https://greatlakesenergy.wordpress.com/2016/05/10/govt-to-launch-auction-of-67-small-oil-gas-fields-on-25-may/

Govt to launch auction of 67 small oil, gas fields on 25 May

New Delhi: India will launch an auction of 67 discovered small oil and gas fields on 25 May, the country’s upstream regulator Directorate General of Hydrocarbons (DGH) said on Tuesday.

As many as 67 small fields in 46 contract areas will go under the hammer, the DGH stated on its website.

These fields will be offered under a revenue-sharing model, where the contractor will share a part of the revenue with the government as soon as the production begins.

Last year, state explorers Oil and Natural Gas Corp Ltd and Oil India Ltd had surrendered 69 fields with about 89 million tonnes of hydrocarbon resources.

Source: Mint; 10 May 2016

URL: http://www.livemint.com/Industry/q4Hm1iNZgYYD2PpcvllMdK/Govt-to-launch-auction-of-67-small-oil-gas-fields-on-25-May.html

India to gradually move to gas-based economy: Dharmendra Pradhan

New Delhi: India plans to shift to a gas-based economy by boosting domestic production and buying cheap liquefied natural gas (LNG) as the world’s third-biggest oil importer seeks to curb its greenhouse emissions, oil minister Dharmendra Pradhan said.

New Delhi has promised to shave a third off its emissions rate by 2030, partly by boosting the use of cleaner burning fuels.

“Gradually we are shifting towards a sustainable gas economy,” Pradhan toldReuters in an interview.

Gas accounts for about 8% of India’s energy mix, while oil accounts for more than a quarter.

India’s gas supply deficit is expected to widen from 78 million cubic metres a day (mscmd) this fiscal year to 117 mscmd in 2021-22, according to a government estimate.

India recently negotiated better terms for a long-term LNG deal with Qatar and importer Petronet LNG is in talks with Exxon to renegotiate pricing for gas from Australia’s Gorgon project.

“The price should be affordable to us. We respect long-term contracts but everybody has to appreciate the changing scenario,” said Pradhan. “In a bigger canvas … India has the potential of a huge market base”.

Pradhan last month visited Saudi Arabia, the United Arab Emirates and Iran to deepen ties with its main oil suppliers.

“We want to move beyond a buyer-seller relationship,” he said, adding that India was offering them stakes in its pipelines, petrochemical complexes and refineries.

India is also in talks with Abu Dhabi National Oil Co and Saudi Aramco to lease strategic oil storage.

Gas giant

Pradhan said Prime Minister Narendra Modi’s visit to Iran later this month would “certainly” deliver concrete results.

Iran has set aside its Farzad B gas field for development by Indian firms, a move that could result in the building of an LNG plant as India consumes or markets its production share, he said.

Over two years Asian LNG prices have slumped by three quarters to $4.65 per million British thermal units (mmBtu).

Pradhan expects hefty LNG investments worldwide to ensure affordable long-term prices, a trend that “will suit India as a consuming country.”

Gas connectivity

India is building import terminals on its eastern and western coasts and pipelines to boost industrial use of gas.

In the fiscal year to March, India’s gas production declined by about 4.2%, while imports rose around 15%.

India recently offered better gas pricing to boost domestic output, but its most recent investment in an LNG terminal in Kerala has been underutilised since it lacks pipelines to connect to demand centres after farmer opposition caused land acquisition problems.

Pradhan said the government was talking to the states and hoped obstacles to a pipeline connecting Kochi to Mangalore would be resolved after state elections in Kerala.

Source: Mint; 06 March 2016

URL: http://www.livemint.com/Industry/Vv12KMRJvQHXQp3h5WhDhM/India-to-gradually-move-to-gasbased-economy-Dharmendra-Pra.html

Compensatory tariffs continue to boost Adani Power earnings

Recognition of compensatory tariffs and the inclusion of Udupi power plant (acquisition completed in April 2015) boosted Adani Power Ltd’s performance in the March quarter. Consolidated revenue jumped 57% to Rs.7,344 crore from a year ago. Of this, Rs.1,375 crore or 18% of the revenue accrued from compensatory tariffs. During the year-ago quarter, the contribution of compensatory tariffs to total revenue was less than 9%.

These compensatory tariffs are disputed at regulatory forums. With the company standing a reasonable chance of getting favourable verdicts, it has recognized the revenue in the accounts. But the actual tariff orders can vary, upon which Adani Power will have to make adjustments to revenue again, which will further distort the numbers.

Nevertheless, the sales are better than the Street estimates. Even excluding the compensatory tariffs, revenue jumped 40% from a year ago. Five brokerage firms had forecast revenue to rise in the range of 21-34%. Earnings before interest, taxes, depreciation and amortization more than doubled and reported profit is up 64%. Sales in terms of volume are up 41%.

According to IndiaNivesh Securities Ltd, the firm’s utilization levels are likely to have expanded from 64.6% in the year-ago quarter to 78.4% now.

While the performance may likely please the Street, resolution of disputes regarding tariffs and power purchase agreements (PPAs) remain key. That will help build investors’ faith in the stock, which lost 29% in the past one year.

The current exercise of compensatory tariff recognition is driving up receivables. From Rs.3,489 crore a year ago, trade receivables at the consolidated level jumped to Rs.9,443 crore. Receivables now constitute 13.6% of the company’s assets. “Unlike Tata Power Co. Ltd, Adani Power is aggressive in recognizing compensatory tariffs, which is not healthy,” says an analyst with a domestic brokerage firm.

The worry is a portion of these receivables may have to be written off if the tariff orders fall short of the company’s estimates. Nevertheless, “with coal and gas availability problems behind, faster resolution of CT (compensatory tariffs), distribution sector reforms under UDAY (Ujwal Discom Assurance Yojna) aiding demand revival and subsequent bids for signing PPAs are some eagerly awaited developments, which should revive growth in the sector”, Edelweiss Securities Ltd said in an earnings preview note.

Source: Mint; 04 May 2016

URL: http://www.livemint.com/Money/MCfbui7bYEHY8G4M98CKsL/Compensatory-tariffs-continue-to-boost-Adani-Power-earnings.html

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