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Context

• The Minister of State for Petroleum and Natural Gas, informed the Lok Sabha that the Government notified Hydrocarbon Exploration and Licensing Policy (HELP) in 2016, wherein the contractual regime changed to Revenue Sharing Contract (RSC) from Production Sharing Contract (PSC).
• PSC was prevalent under New Exploration Licensing Policy (NELP).

 

New Exploration Licensing Policy (NELP)

• New Exploration Licensing Policy (NELP) was conceptualised by the Government of India, during 1997-98.
• The aim was to provide an equal platform to both Public and Private sector companies in exploration and production of hydrocarbons.
• Directorate General of Hydrocarbons (DGH) was the nodal agency for its implementation.
• It was introduced to boost the production of oil and natural gas and providing level playing field for both public and private players.
• The private sector companies would exercise control on oil production, with government giving them licenses through an auction process. The companies would bring in new technologies, along with heavy Capex investment.

 

Features of NELP · 100% Foreign Direct Investment (FDI) is allowed under NELP. · No mandatory state participation through ONGC/OIL or any carried interest of the Government. · Blocks to be awarded through open international competitive bidding. · ONGC and OIL to compete for obtaining the petroleum exploration licenses (PEL) on a competitive basis instead of the existing system of granting them PELs on nomination basis. · ONGC and OIL to get the same fiscal and contract terms as private companies. · Freedom to the contractors for marketing of crude oil and gas in the domestic market. · Royalty at the rate of 12.5% for the onland areas and 10% for offshore areas. · Royalty to be charged at half the prevailing rate for deep water areas beyond 400 m bathymetry for the first 7 years after commencement of commercial production. · Cess to be exempted for production from blocks offered under NELP. · Companies to be exempted from payments of import duty on goods imported for petroleum operations. · No signature, discovery or production bonuses. · Agreement between government and contractor is governed by a Production Sharing Contract. A Model Production Sharing Contract is created which is reviewed for every NELP round. · Contracts to be governed in accordance with applicable Indian Laws.

 

Issues with NELP

• Despite an optimistic policy NELP, had certain drawbacks.
• Firstly, natural gas and other by products were a plausible find along with petroleum. To use this natural gas, the company would have to acquire a second license.
• Secondly, the company would have to share a certain percentage of the profit with the government. The companies in turn started manipulating profits which would lead to corruption.
• There had been a consistent decline in the number of production-sharing contracts (PSCs) signed as industry’s interest waned.
• While NELP was expected to ramp up India’s domestic hydrocarbon exploration and production, the policy failed to achieve its objectives. The share of imports in domestic crude supply only grew.
• There were issues such as faulty contracts, poor quality of geological data, and delayed clearances.
• There has been no investment on actual development. Policy, regulatory and fiscal regimes have often been blamed for lack of success of the Nelp allocations going into production in India.
• To overcome these bottlenecks, government brought about HELP (Hydrocarbon Exploration Licensing Policy) in 2016.

India imports 80% of its crude requirements, making the energy economy heavily dependent on foreign sources of supply. This implies, India is subjected to global price swings of crude oil. To reduce this dependency on external sources, Government launched Hydrocarbon Exploration License Policy (HELP) in 2016, in replacement of New Exploration Licensing Policy (NELP) of 1997-1998.

 

HELP as a reform

• In the line with the vision of reducing hydrocarbon import dependency by 10% by 2022, Hydrocarbon Exploration and Licensing Policy (HELP) was launched in 2016 with the clear objective of boosting the production of oil & gas in the Indian sedimentary basin.
• As per the new policy, the companies will not have to wait for a notification of the government. In turn, the companies will find the oil fields and inform the government of their agenda to conduct oil drilling.
• The government will send experts to verify the claims and grant licenses to the companies. This system is known as Open Acreage Licensing Policy (OALP).
• To solve the earlier problem of misreporting profit, the company now has to report their total earnings and thus share that with the government.
• In addition, the government has allowed 100% FDI in oil and gas sector to promote a healthy competition between public and private sector. This will further bring investment in oil and gas.
• Today, out of all import expenses, 22% is spent on crude oil. Therefore, we have a new policy named HELP (Hydrocarbon Exploration Licensing Policy). Oil exploration has eventually become a forte of the private sector.

 

Objectives of HELP

The major Guiding Principles behind HELP are to:

• enhance domestic oil and gas production
• bring substantial investment
• generate sizable employment
• enhance transparency and
• reduce administrative discretion

 

The primary objective of the HELP is ease of doing business and operational freedom to Operators, so that the existing Hydrocarbon Resources are explored more effectively, leading to a reduction in import dependence and consequently savings.

 

Merits of HELP

• Uniform License: It provides for a uniform licensing system to cover all hydrocarbons such as oil, gas, coal bed methane etc. under a single licensing framework, instead of the present system of issuing separate licenses for each kind of hydrocarbons.
• Open Acreages: It gives the option to a hydrocarbon company to select the exploration blocks throughout the year without waiting for the formal bid round from the Government.

 

Open Acreage Licensing Policy-OALP · OALP is a critical part of the Hydrocarbon Exploration and Licensing Policy. · Provides uniform licences for exploration and production of all forms of hydrocarbons, enabling contractors to explore conventional as well as unconventional oil and gas resources. · Fields are offered under a revenue-sharing model and throw up marketing and pricing freedom for crude oil and natural gas produced. · Under OALP, companies are allowed to carve out areas they want to explore oil and gas in. Once an explorer selects areas after evaluating the National Data Repository (NDR) and submits the expression of Interest, it is put up for competitive bidding.   About National Data Repository: NDR is a government-sponsored E&P data bank with state-of-the-art facilities and infrastructure for preservation, upkeep and dissemination of data to enable its systematic use for future exploration and development.

 

• Revenue Sharing Model: The earlier contracts were based on the concept of profit sharing where profits are shared between Government and the contractor after recovery of cost. Under the profit sharing methodology, it became necessary for the Government to scrutinize cost details of private participants and this led to many delays and disputes. Under HELP, the Government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc. Bidders will be required to quote revenue share in their bids and this will be a key parameter for selecting the winning bid.  They will quote a different share at two levels of revenue called “lower revenue point” and “higher revenue point”.  Revenue share for intermediate points will be calculated by linear interpolation.  The bidder giving the highest net present value of revenue share to the Government, as per transparent methodology, will get the maximum marks under this parameter.
• Along with uniform licensing policy, open acreage and revenue sharing model with the government, there are other merits as well.
• The companies will carry forth marketing and sale to domestic users as per their convenience.
• The companies will have freedom to use their technology while conducting deep-water drilling, and areas of high pressure and temperature, all of which requires high degree of expertise.
• Further, the companies will be spared from unnecessary audits, which was an issue between CAG and Reliance India. All these measures will serve as an incentive.

 

Concerns with HELP

• Firstly, the complete risk of exploration is on the part of the investors.
• The entire initiative will be borne by them, and they will have to wait a substantial amount of time before they can generate revenue.
• The buffer time period would serve as a disincentive to companies and may even prompt them to withdraw investments.
• Secondly, given that private sector will fix the domestic sale price, the industries downstream could take a hit due to higher costs. Thirdly, there are oil blocks already under exploration. The new policy will not apply to them.
• It is noteworthy that there is a shift from production sharing contract to a revenue sharing contract. This shows lack of faith on part of the government on the investors. Similarly, the banks may have reservations in giving loans, given the long gestation period and ever mounting NPAs (Non- Performing Assets).
• Geographically, the North East (NE) would be left out. Since royalty rates on the land are uniform throughout, there is little incentive for companies to explore given the difficult terrain in the states on NE.
• Also, liberal market-based pricing can get too costly at times and will in turn affect industries such as fertilisers which uses natural gas as a raw material.
• Further, the government has to be paid royalty at all cost, even if the company is running into a loss.

 

Discovered small oil field policy

• Discovered small oil field policy is based on Hydrocarbon exploration and licensing policy (HELP).
• The Government approved the Discovered Small Field policy in 2015.
• Objective: The main objective was to bring Discovered Small Fields to production at the earliest so as to enhance the domestic production. There areas has been discovered long back but these reserve could not be put into production due to various reasons such as Isolated locations of oil field; Small size of hydrocarbon reserve; high development costs and constraint in technology etc. These small fields have been discovered by National Oil Companies i.e. Oil & Natural Gas Corporation Ltd (ONGC) and Oil India Ltd (OIL).
• In the bidding of discovered small field both oil and non-oil companies participate. The biggest pulling factor was the prospect of owning an oilfield without having to invest in discovery. This has provided many companies an opportunity to invest in the lucrative business of hydrocarbons.

 

Final Thoughts

• Oil and gas sector is among the eight core industries in India and plays a major role in influencing decision making for all the other important sections of the economy.
• India’s economic growth is closely related to its energy demand, therefore, it’s important to make the sector conducive for investment by addressing the concerns.

https://pib.gov.in/PressReleasePage.aspx?PRID=1811908