Tough Times for India's Licensing Round

NEW DELHI (Dow Jones Newswires), May 18, 2009

India will find the going tough as it puts up more of its potential oil and gas reserves on the block in August, given competing exploration rounds in other countries, credit issues, low oil prices and uncertainties about future energy demand.

In seven previous rounds, India managed to attract only a small amount of international interest, with global oil majors keeping away, even when crude oil was trading above $100 a barrel and they were flush with cash.

Now with funds tight and Western economies in a tailspin, the big foreign companies are more risk averse and are likely to continue to turn their backs on the sub-continent and the 70 blocks now on offer, and place their bets on more promising assets.

The response to the round will be "lukewarm" because of the global financial woes, said Ajay Arora with advisory firm Ernst & Young.

The competition is huge. More than a dozen countries are or will offer exploration acreage in 2009 despite the economic slowdown, from so-far-barren minnow Uruguay or geographically-hostile offshore Iceland to big-ticket ones with huge proven reserves like Iraq and Venezuela.

"It's a matter of where you want to put your money. Where you have a better visibility of potential earnings," said an executive with an international oil firm.

Even big local oil firms like Oil and Natural Gas Corp. (500312.BY) and Reliance Industries Ltd. (500325.BY) are eyeing multibillion dollar overseas deals that involve much larger reserves rather than focus their sights at home.

Analysts flag concerns that government-run firms including ONGC and Oil India Ltd. could come under state pressure to bid aggressively in the round, and that many of the blocks that get awarded won't be explored for years.

"Once the new government, the new minister settles in, we'll know what kind of strategy we'll have, both in the country as well as internationally," said R.S. Sharma, chairman of ONGC, India's largest oil producer.

India's ruling coalition is likely to form the new government soon after a month-long elections, and once that is done, a shakeup in ministerial portfolios is inevitable.

Asia's third largest economy is desperate to raise local energy output faced as it is with mounting import bills as prices creep up from lows seen early this year, albeit crude is still some $80 a barrel below its peak in July 2008.

India's crude oil import bill rose 16.9% to $93 billion in the year ended March 31. Crude oil is India's biggest import item in money terms.

Crude imports volumes rose 5.3% last financial year to 2.6 million barrels a day. India may need to import nearly 90% of its crude needs by 2013, from nearly 80% now, Petroleum Secretary R.S. Pandey said last week.

"We want to cover 100% of India's sedimentary basin by 2025," said V.K. Sibal, head of upstream regulator Directorate General of Hydrocarbons or DGH, in comments on the need for additional rounds.

He said he was "very optimistic" about the prospects of the new licensing round. "Oil companies have made huge profits in the last few years and now they'll invest as cost of services start to come down."

"Our terms and process are better and more transparent than anywhere else in the world. We have proved our prospectivity with big oil and gas discoveries."

Big Gas Discovery

Reliance's 2002 discovery in the Krishna Godavari basin, off the country's east coast, was one of the biggest gas finds anywhere in the world that year.

About two years later, Cairn Energy Plc. (CNE.LN) struck oil in India's western desert block of RJON-90/1, the biggest oil discovery in the country since 1985, a find that pushed the U.K.-listed firm into the big league.

Cairn's success came at the cost of Royal Dutch Shell Plc (RDSA), which exited from the Rajasthan block, selling its stake to Cairn 18 months before the discovery.

While some question the timing of India's latest round, the government looks set on pushing ahead.

"We had the choice, and we debated whether to do it or not. But we thought the best antidote for the slowdown is to generate as much economic activity as possible," Pandey said.

If the response isn't good, the government may re-offer leftover blocks in a second round, according to Pandey.

The government could also consider deferring the Aug. 10 bid deadline date if companies demand this, according to an official at the upstream regulator.

In the seven licensing rounds under the New Exploration Licensing Policy held in the past decade, India has awarded more than 200 blocks, covering 50% of potential acreage, up from 11% before the auctions began a decade ago.

But the rush to offer more and larger blocks every year is creating an overhang of drilling work and companies failing to meet exploration commitments due to a shortage of manpower and equipment.

Outstanding commitments could seriously hurt Indian companies' ability to bid in the new round, Atul Chandra, Reliance Industries' head of international oil business said at a conference in March.

Companies risk losing previously allocated blocks where they haven't been able to drill due to a shortage of rigs.

Given the challenges ahead, India's new government - expected to be sworn in by June 2 - will have to move quickly to review policies that influence local exploration and production.

High on the agenda is a tax incentive for gas finds that industry players say could be key to the round's success.

Last year, the government removed important tax incentives for exploration and production of natural gas, while continuing the benefit for crude oil.

Natural gas discoveries have far exceeded oil finds in recent years.

After Reliance's first big find in Krishna Godavari, ONGC and state-run Gujarat State Petroleum Corp. have also made large discoveries in their blocks in the basin.

Reliance's production alone, at a peak rate of 80 million cubic meters a day, will double India's domestic gas output early next year.

"It's a key issue. Any company that bids for a block is taking an exploration risk, which should be equal, regardless of whether you find oil or gas," said Ernst & Young's Arora.

The oil ministry plans to seek reintroduction of the tax incentives when the new government presents its budget next month, said an oil ministry official.

"The election results are positive and we expect the government will be able to move forward with reforms and we hope the tax holiday issue will also be resolved," ONGC's Sharma said.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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