Saturday, 9 July 2011

National Exploration Licensing Policy (GoI)

New Exploration Licensing Policy (NELP)

When: 1999. Ministry of Petroleum and Natural Gas, Government of India.

Why:    To attract private investment in oil sector Government of India (GOI) has been offering exploration blocks to private companies.
To bring state-of-the-art technology in oil and gas exploration and production.

Details[i]:           1. No mandatory state participation through ONGC/OIL.
2. ONGC/OIL to compete for licenses on competitive basis and will get the same contract terms   as  available to private companies.
3. Freedom to contractors to market crude oil and gas in domestic market.
4. Some part of the royalty payment will be credited to a hydrocarbon development fund to promote exploration related activities, promote investment opportunities.
5. Incentives for exploration in deep-waters and frontier areas.
6. Goods imported for petroleum production will be exempted from customs duties.
7. Seven year tax holiday from date of commencement of commercial production.

Associated departments:        Ministry of Petroleum and Natural Gas (GOI);
 Directorate General of Hydrocarbons
Why in News:
-          July 2011: RIL-BP deal - which involves BP acquiring 30% stake in RILs 23 blocks including the KG-D6 basin. The Petroleum ministry has referred the deal to the Cabinet Committee on Economic Affairs (CCEA). Although the Home Ministry had cleared the deal it raised a query if under the NELP- (a) a sale of assets was allowed,  and (b) if BP could take oil and gas produced in the country out of the country. The NELP provides for the former but not for the latter.[ii]
-          Jun 2011: Cairn-Vedanta deal involves exploration blocks won under the NELP and pre-NELP. [The deal involves the sale of a 40% stake in Cairn India to Vedanta Resources]. Recently the CCEA consented to the deal provided Cairn and Vedanta comply with some conditions- (a) Cairn has to take a no-objection certificate from its partner (ONGC) for transferring ownership; (b) Cairn and its successor have to pay royalty on the crude oil produced @ of 20% of crude oil price (earlier ONGC was paying the entire royalty due under a ‘royalty holiday’ scheme, despite owning only 30% which made it a losing proposition for ONGC); (c) Cairn and its successor also have to pay the ‘oil cess’(@ of Rs.2500 per tonne of oil and gas); (d) Vedanta will need security clearance from MHA; (e) Vedanta to provide performance and financial guarantees[iii]  
-          Jun 2011: Ashok Chawla Committee has criticized the Production Sharing Contracts (PSC) under NELP like the one Reliance signed for KG-D6  block saying they are designed to benefit private players at government expense.  

This is because the NELP PSC structure is one which allows the private operator to substantially recover his costs before sharing of revenue. However once the costs are recovered the share of government increases substantially. This is determined by the ‘investment multiple’ (IM) which is the ratio of net cash income to exploration and development costs. The IM defines the share of profits that go to the govt. Herein the PTIM (pre-tax IM) of 2.5 points is important because the share of govt  increases to 85% from 28% upon crossing the threshold of 2.5 points of PTIM. Therefore the Chawla panel states that this system gives an incentive to the operator to increase his investments such that the PTIM stays below 2.5.
In a related development, the CAG has stated in its report that the Petroleum Ministry and the Directorate-General of Hydrocarbons (DGH) “did not pay adequate attention to protecting the government’s financial interest”. The CAG was asked to audit KG-D6 after allegations of "gold-plating", or artificially inflating costs, were levelled against Reliance, which increased the development cost of the Dhirubhai-1 and 3 gas fields in the KG-D6 block from USD 2.39 billion proposed in May, 2004, to USD 8.8 billion in 2006.
[The Comptroller and Auditor General has recommended a sliding scale of royalty payment linked to different oil and gas production quantities or values. "In our opinion, this is the best formula, given the current context, for harmonising the financial interests of both the government and private contractors."However, it said if the Oil Ministry wished to retain the current PTIM model, it should allow prospectors to bid as per a fixed profit-sharing formula with a specified band. "This will at least minimise the incentive for skewed capital expenditure resulting in very low government share of profit petroleum, although it will still require enormous efforts by the government to control cost recovery," the CAG said.[iv]      
Another view is that, “Stringent terms sought by the CAG would maximise government gains from discoveries made from risk capital provided by companies. But this would be appropriate for oil-rich countries, and may not be the best strategy for a country which has a patch exploration record and needs to woo risk capital to drill wells…This is because there is not much foreign investor interest in oil exploration as the probable size of the new finds will be of small or modest volumes”. [v]]
Jun 2011: CAG Report on oil blocks and fields-  CAG was requested by the Petroleum Ministry in 2007, to carry out an audit of some oil and gas fields and blocks operated under pre-NELP and NELP regimes. CAG Report covers the financial years 2006-07 and 2007-08.The draft report has been sent to ministry and other concerned agencies for comments and replies. The draft report of the CAG has stated that-
(a)   The Petroleum Ministry  and DGH violated rules to favour atleast 3 private companies- Reliance Industries, Cairn India and BP Group PLC.
(b)   the ministry and DGH bent rules by allowing Reliance Industries to inflate capital expenditure by 117 per cent on developing its D1 and D3 fields in the Krishna-Godavari basin off India's east coast.
(c)    The ministry and DGH are also alleged to have favoured Cairn India and a trilateral joint venture between Reliance Industries, BG Group Plc and state-owned ONGC that operates the Panna-Mukta and Tapti group of gas fields.[vi]
(d)   The PSC (production sharing contract) envisaged that if the company did not develop certain areas within the contracted area within the stipulated time, it should have been relinquished. However, the DGH, along with Ministry of Petroleum and Natural Gas, allowed the whole area to be designated as “discovery area” in violation of the contract, the CAG said. “The undue benefit granted to the contractor through this irregular and incorrect decision is huge, but cannot be quantified. If the ‘discovery area’ had been properly delineated, and the remaining portion of the contract area relinquished, the government would have had the opportunity of awarding this relinquished area through subsequent NELP bidding rounds to new contractor(s) on substantially better financial terms.[vii]

Recommended Reading: Gassing the state

-          Jun 2011: Eni SpA an Italian explorer was denied permission to drill its block in the area around the Andaman and Nicobar Islands by the Department of Space. This was due to the proximity of the block to the rocket-stage impact zone of ISRO. Such situations may affect the interest of foreign explorers in the country. [viii]
-          Mar 2011: NELP exploration blocks largely ignored by big multinational companies. This is because of  (a) quality of blocks not promising enough; (b) tendency to change rules halfway or in favour of one company; (c) problems with clearing deals like Cairn-Vedanta; (d) 2011 budget has removed the seven year tax holiday for future NELP blocks. This means that India will have to depend on domestic companies such as ONGC, OIL, Reliance and Essar. Therefore GOI must facilitate their work. [ix]
A recent report by Kotak Equities Securities shows that of the 240 production contracts signed over the last nine bidding rounds for awarding exploration licences, only three have gone into production. Sanjeev Prasad, author of the report and an energy expert, says, "There are no major players anymore"….Further the sector has suffered from the governments dual-role as both participant and regulator.[x]  
-          Oct 2010: GOI launched the Ninth Round of NELP where 34 exploration blocks were on offer.

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