What Will it Take for Operators to Invest in India?
India has always offered an interesting dichotomy for the upstream business. The country is full of potential with significant oil and gas fields, yet only has around a third of proven oil reserves online and less than 25 percent of the sedimentary basins currently being explored. India also has a huge and growing domestic energy requirement, yet is a substantial importer of energy despite potential access to significant oil and gas resources. This is an interesting juxtaposition, which many have speculated over the years would be balanced out through an increase in investment, but this is yet to come to fruition. However, the scene is more than set for this imbalance to be reset and India to take full advantage of its oil and gas resources. Against a backdrop of low oil prices and industry investment, the fact remains that India is one of the world’s fastest-growing economies and its escalating energy needs will need to be met.
Sea of Opportunity
Challenges in this relatively untapped region still remain, particularly because many of India’s resources are in deepwater or High Pressure-High Temperature (HPHT) fields which, combined with the historically-low natural gas prices, have previously made those resources uneconomic. Which goes some way to explain why although the country had proven reserves at the end of 2015 of 5.7 billion barrels of oil (source: EIA Country Analysis Brief, June 2016) less than a quarter of India’s sedimentary basins have been explored and offshore areas are particularly underexplored. Geoscientific data on nearly half of the more than three million square kilometers (1.16 million square miles) of its 26 sedimentary basins is either scarce or unavailable (source:The Oil and Gas Year 2015). In addition, only one of the country’s 83 deepwater blocks has been developed (source: Quartz).
And despite the potential for commercial discoveries, the government’s new exploration licensing policy, set 15 years ago to establish auction frameworks to award license, did little to incite interest in the region. This framework, called ‘NELP’ (New Exploration Licensing Policy) restricted investment because of overregulation of the gas price by the government. It was overcomplicated and controversial too, with separate licenses needed for various projects and a profit-sharing element that led to disputes between the government and developers.
To address these issues, the government has now approved ‘HELP’ (hydrocarbon exploration and licensing policy), which provides a uniform licensing system to explore and produce all hydrocarbons under a single licensing framework. There is the option to select the exploration blocks without waiting for formal bid round as well as other incentives such as reduced royalty rates for offshore blocks, marketing and pricing freedom and an easy-to-administer revenue-sharing model. This new framework is simpler, more transparent and more flexible, giving the industry a shot in the arm to attract and work for investors.
Currently ONGC and Reliance are the two biggest operators involved in India, with participation by international players low: only 12 percent of the total acreage and about 7 percent of total contracts have been awarded to foreign players to date (source: E&P Magazine). This is likely due to the type of challenges such as comparison with prospects in other countries; perception of slow and bureaucratic decision-making; and disputes arising between the government and operating companies on matters of cost recovery and obtaining environmental and land clearances from various government departments.
It is also important to note that, alongside this lack of investment from outside, Indian companies themselves have been active in exploring internationally, despite the significant assets on their doorstep. We have seen this most recently in Russia where, due to Russia’s reliance on oil income, the need to dilute its wholesale interest many of its own fields meant that international operators, including Indian, were prompted to jump in and buy assets, either to deliver home or to then trade further abroad. These deals in Russia have nearly reached $5 billion. This underlines the fact that the bureaucracy and framework of the industry back in India were not encouraging even Indian companies, let along foreign players, to invest, and in fact many found it easier to invest abroad than back at home.
The drop in crude oil prices has further slowed investment from the private sector; however, with the government announcing marketing and pricing freedom for new gas production from deep water, ultra-deepwater and HPHT areas (subject to certain conditions), increasing gas prices the scene is set for investment to flourish (source: Press Information Bureau, India).
This pricing freedom was announced in March, when the government announced plans to raise the natural gas price by about 60 percent for undeveloped gas discoveries in difficult areas in order to ensure that operators will get more return for their discoveries. With much of India’s resources in deep-water or HPHT fields, and the bulk being gas, these have until now been uneconomic due to the gas pricing structure.
The new Indian government is aware of the challenges for its upstream sector and has taken positive steps to encourage both domestic and foreign investments by enacting significant changes, including a new market-linked gas pricing formula, a new revenue-sharing model for upstream projects, the creation of the National Data Repository for all upstream blocks and recent bidding rounds for marginal fields and E&P blocks. However, these bidding auctions, the first in over four years, are looking like their deadline will be extended after a lack of interest.
Opening the Gates
Through these schemes and programs like HELP and the marketing and pricing freedom for new gas production, Prime Minister Narender Modhi is hoping to shed the reputation of an overly-bureaucratic and internally-focused country, and open the door to economic realization of India’s huge natural resources. The government is actively prospecting for new technologies and ways of working to come in and make the most of the assets available. Without the constraints of existing deals and partnerships, there is huge opportunity for new ways of working in the region, coupled with the large amount of unexplored assets.
A Fresh Investment
On top of this, India aims to attract $25 billion of investment in natural gas and crude oil in the next few years (source: FT) with the help of sweeping reforms to its exploration and production rules announced in the last month. Minister of State for Petroleum and Natural Gas, Dharmendra Pradhan, said the new hydrocarbon exploration and licensing policy and a liberalized gas price regime would help reduce India's heavy dependence on imported energy over the next 10 to 15 years. At present, India is the world's fourth-biggest oil and gas consumer yet imports nearly three-quarters of its energy requirements: Prime Minister Modi has set a target of cutting that fuel import dependency to two-thirds by 2022 and to half by 2030. On top of internal production, the scene is set for investment to flourish and Prime Minister Modhi’s government is clearly being proactive to attract investment from foreign companies. In the first 17 months of his appointment, Modhi visited 27 countries, including Saudi Arabia and Iran, underlying his commitment to giving the economy a boost from foreign players.
With a solid commitment from the authorities to jumpstart domestic oil and gas exploration, improve midstream distribution networks and gain efficiencies in energy production, there are significant opportunities to take advantage of the myriad opportunities arising in the Indian oil and gas sector. Issues with bureaucracy still remain for many international operators but consultancies can provide the knowledge and speed that will make any exploration worth exploring. Companies need to approach these opportunities with a fresh mind-set in order to maximize the potential of this relatively unexplored region.
For operators in India to achieve success, new ways of working that embrace a holistic approach for the integrated development solutions of deep-water and HPHT fields will be crucial, as well as application of technologies to explore and assess potential development of shale gas and oil resources. It’s also critical to realize that deep-water and HPHT experience will be needed to help local operators exploit India’s assets, which necessarily requires involvement from the majors. India’s door is open; who is ready to enter?
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