HELP! India needs new thinking on petroleum exploration

HELP! India needs new thinking on petroleum exploration

India unveiled its new Hydrocarbon Exploration Licensing Policy (HELP) in March 2016. There was much expectation that HELP would attract foreign investment from private oil companies with technical expertise and would be a landmark policy.  

The first phase of the auction inviting "Expression of Interest" (EOI) in 2.8 million square kilometres of sedimentary basins started under HELP from July 2017 and was closed on November 15. Not a single foreign oil company had submitted an EOI. There was interest only for 57 blocks covering 59,000 sqkm, all from domestic oil companies. After scrutiny, 55 blocks were put on auction in January. This is the first auction for oil and gas exploration in eight years.  

There were only six domestic companies participating in the first phase.  Besides ONGC and Vedanta's Cairn India bidding for 41 and 15 blocks respectively, only four smaller oil companies had submitted EOIs. It's unlikely that any foreign oil company will take part in the second phase of the bidding, either.  

What is even more surprising is that large companies like Reliance, BP, Niko and Shell, which are already active in India, did not submit EOI. By any criterion, auction under HELP is a spectacular failure. However, the government has failed to recognise such a failure.  

Undoubtedly, HELP had some attractive features. Instead of the government deciding where oil companies can explore, decision was left to them by opening the entire sedimentary basin under HELP. Oil companies are given total freedom to sell oil and gas at market price.  

A new model, based on revenue-sharing, was adapted as part of HELP. Under the old profit-sharing model, there was need for micro management by the petroleum ministry. To simplify the process, the government decided to switch to simple revenue-sharing. Under the old model, there was always the suspicion of goldplating by the companies to reduce profit to be shared with the government. In addition, determining the actual prices realised for oil and gas was a complex process.

Oil companies are interested in optimising profit, not production.  Also, they are not familiar with the new revenue-sharing model. As a result, this feature, though attractive on the surface, may not have been as enticing as expected.  

The Modi government had a goal of reducing oil imports by 10% in 2022. It was an unrealistic goal to begin with even under ideal conditions. Now, with the failed exploration policy, the petroleum ministry should go back to the drawing board to develop demand management policy to reduce oil consumption. In addition, it should also learn from other countries who have been successful in attracting capital even as international oil prices are low, and peak oil is replaced by peak demand.  

US model, Ghana model

For example, India may learn from an old oil producing country, the US, and a new oil exporting country, Ghana. In early 70s, oil production was falling in the US, as predicted by peak oil theory. However, after the shale revolution, oil production started to increase and has now doubled to more than 10 million barrels per day.

Not that the US was free from the price control that has affected India's oil sector. However, when the production started to drop, the US liberalised both the oil and gas sectors. An environment where entrepreneurs could earn huge profits, commensurate with risk, has resulted in the US shale revolution, which has benefited the world, too.  

Ghana was not considered an oil country. However, once a large oil field, Jubilee, was discovered in 2007, oil companies started to show interest. Recently, ExxonMobil was awarded a deep offshore block through direct negotiation, rather than by holding an auction. Till then, none of the majors with deep pockets had showed any interest in Ghana. There was some objection raised over the award to Exxon. However, there was general awareness that some compromise had to be made to attract investment when risks are high and that potential higher profits should not be resented.

However, in India, unfortunately it has always been a zero-sum game between oil companies and the government. The poster-child for such a zero-sum approach is the way the petroleum ministry administered the investment by Reliance and BP in the Krishna-Godavari basin gas field. It sent the wrong signals to prospective investors. Crony capitalism, lack of transparency, competitive politics and suspicion of corrupt dealings prevented the government from adapting the optimum policy to settle the pricing dispute. A wise policy should have created a win-win situation for the oil companies and the government.

In a totally changed environment, when there is even a possibility of oil reserves being stranded like coal reserves, and oil prices are unlikely to hit the peak of $150 per barrel for several years, India should seriously consider adapting the simpler bidding model of the US to meet its specific situation. The US model is easy to administer and transparent. When auction is held to award the blocks, the highest bidder is the winner. The government gets its share of oil and gas revenues from royalty and income tax only.  

The model developed by Ghana, though different from that of the US, is also simple to implement. In its case, once the oil company succeeds in its exploration efforts and develops the field, it should give a certain percentage free of cost to Ghana. In addition, the government has also the option to buy into a prior agreed percentage of the field.  

India needs to recognise that oil exploration is a gamble and investors need to earn profits commensurate with the risk. Given the fact that India is not perceived to be endowed with rich petroleum reserves, it has to adopt a far more aggressive policy than HELP to attract foreign investment.

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