For those of you seeking a career in the oil and gas business, last week brought good news. The government announced a new policy HELP (Hydrocarbon Exploration Licensing Policy) to encourage domestic oil and gas production in the country. It also extended several production contracts. This should see demand for both skilled and unskilled workers in the sector increase in the coming years.
Big regime change
The government’s move to revamp the hydrocarbons exploration regime is welcome. The current NELP (New Exploration Licensing Policy) has not yielded the desired results. Despite nine rounds of NELP auctions so far since 1999, about 75 per cent of the country’s sedimentary basin is not fully explored yet.
Tough terrain, complicated rules and procedures, and pricing disputes are among the factors contributing to the lack of investor interest, and fall in domestic oil and gas output over the past few years. Meanwhile, demand has been on the rise. Today, more than three-fourths of our crude oil needs and about a third of the gas requirement are imported.
The HELP seeks to address the key pain points that inhibited exploration and production in the country. So, contracts under the HELP will be based on ‘revenue sharing’ instead of the ‘profit-sharing’ model under NELP. Under profit sharing, the contractor first recovered, through a complex investment-multiple based formula, costs incurred in exploration and production; the resultant profit was shared with the government. But this gave rise to long-running disputes between the government and the contractor, most famously in the KG-D6 block operated by Reliance Industries, about various aspects of the cost, including its necessity and genuineness.
Revenue sharing
Under ‘revenue sharing’ in the HELP, the contractor will share a portion of the revenue itself with the government, thus doing away with the complicated cost-recovery calculations. This makes it operationally easier for both contractors and the government. On the other hand, as contractors will now bear higher risk, it needs to be seen whether they will be game for profit sharing, especially in high-risk deepwater blocks.
Other big changes in the HELP include unified licensing, open acreage licensing, pricing and marketing freedom for gas produced in difficult terrains, and a concessional royalty regime for such blocks. HELP allows exploration and production of all hydrocarbons such as oil, gas, coal-bed methane and shale oil and gas in a block under a unified licence. This is an improvement over the separate licensing requirement for different hydrocarbons in the same block under NELP. Besides, under the Open Acreage Licensing in HELP, contractors can request bidding for any block on-tap. Under NELP, they could only bid for blocks auctioned by the government; the auctions used to happen after long intervals.
While the pricing and marketing freedom for domestic gas is a major step forward, the government has not gone the whole hog. The freedom is only for new gas production from deepwater, ultra deepwater, and high-pressure, high-temperature areas. Also, the pricing is not fully market-linked — it is capped based on a formula involving the import price of alternative fuels such as fuel oil, coal, naphtha and liquefied natural gas (LNG).
Even so, the proposed price (about $7 a unit at present) will be higher than producers of domestic gas currently get ($3.82 a unit) as per the formula prescribed for them in late 2014. Besides, in case of discoveries in which there is pending arbitration or litigation, the proposed pricing will apply only on conclusion or withdrawal of such proceedings. So, while ONGC’s yet-to-be-developed KG-DWN-98/2 block will benefit from the new pricing regime, RIL’s KG-D6 block may not. Matters relating to the KG-D6 block are part of the contractor’s ongoing disputes with the government, and some fields are already producing.
Contract extension
The government has also extended the production sharing contracts for 28 small and medium sized discovered oil and gas fields. The extension is for 10 years or the economic life of the field, whichever is earlier. This will remove uncertainty and help contractors plan their investments in these blocks.
The extension, however, does not apply to the contract for the Rajasthan block operated by Cairn India; the company seeking contract extension had in December gone to court against the government.
Job creation
The new policy and changes may not be perfect but they mark a significant shift in the country’s oil and gas exploration regime. Importantly, they are expected to create and sustain many jobs in the sector.
The pricing and marketing freedom for gas produced from difficult terrains, the government expects, will lead to monetisation of reserves of 6.75 tcf (trillion cubic feet) valued at $28.35 billion (about ₹1,80,000 crore). Several jobs are expected to be created during the development and production phase of these reserves. For instance, ONGC expects to deploy 3,850 direct skilled workers in the development of discoveries in its offshore block KG-DWN-98/2, located in the Bay of Bengal. In addition, ONGC would need 20,000 persons across functions such as fabrication workshops, civil works of onshore terminals and marine crew in barges.
This extension of the production sharing contracts, the government hopes, will lead to monetisation of 15.7 million tonnes (mt) of oil and 20.6 mt of oil equivalent of gas — the reserves together worth $8.25 billion (about ₹53,000 crore). An investment of $3-4 billion is expected to monetise these reserves. The benefits in terms of job generation are expected in two ways. One, the contract extensions will sustain current employment levels in the fields — about 300 personnel for operations in a medium-sized field and 40-60 personnel for a small field. Next, investments in the fields for construction of facilities would need several workers, both skilled and unskilled.
All said, oil and gas exploration is a high-risk business with no guarantee of success. So, whether the new policy and relaxed rules will translate into the anticipated new jobs over the coming years remains to be seen. But they do set the ground for more positive changes and job creation in the coming years.