HYDROCARBON EXPLORATION & LICENSING POLICY – 2016

HYDROCARBON EXPLORATION & LICENSING POLICY – 2016

 

NELP
The New Exploration License Policy (“NELP”) was given formed by the Union Government
with Directorate General of Hydrocarbons (“DGH”) as the nodal agency to provide a level
playing field to both public and private sector companies in exploration & production (“E&P”) of
hydrocarbons. DGH has been entrusted with the responsibility of implementation of NELP.
Further, issues relating to contracts given in Oil & Natural Gas (“O&NG”) companies,
environmental clearances, pricing etc. are looked into by the DGH in consonance with the Union
Government.
Since 1999, NELP by providing a level playing field for interested parties to compete for award
of exploration has amplified the pace of petroleum and natural gas exploration activity. All
parties vying for a contract such as state owned oil companies and the private sector compete
on equal terms and conditions to secure a production and exploration license (“PEL”) through a
formal bidding process. Further, in order to encourage E&P in particular, NELP allows for
Foreign Direct Investment (“FDI”) up to 100 % in E&P activities. Over the past decade, more
than 275 blocks were allotted over nine bidding rounds, resulting in discovery of several O&NG
fields. One of the benefits of NELP was the seven year corporate tax holiday for the production
of mineral oil, exemption from custom duty on imports required for petroleum operations, and
biddable cost recovery up to 100%. However, the tax holiday is not available in respect of O&NG
blocks awarded post March 31, 2011. Although, before Finance Act 2013, there were
speculations that tax holidays will again be granted for E&P in O&NG blocks, in order to attract
further investments but nothing was done to affect any changes. The successful bidder enters
into a Production Sharing Contract (“PSC”) with the Union Government. In terms of the PSC, the
successful bidder is granted the requisite license under the Oilfield Act and Petroleum Rules for
carrying out E&P activities, as per the Model Contract provided under the policy.
Although the private foreign bids for Indian oil and gas blocks have increased significantly
through 19 years of the existence of NELP, the success in attracting foreign capital and
technology has been slower than originally anticipated. The effectiveness of NELP was
constrained due to design flaws in its bidding process which the policymakers along with
industry inputs are seeking to rectify.
NELP – CHALLENGES
Some of the challenges and concerns faced by stakeholders due to NELP are as follows:
1. Lack of distinction between contracts of varied risks- There are different kinds of blocks
in NELP i.e. offshore (Shallow; Deep Water; Ultra Deep Water; High Pressure/ Temperature
Zones) and on-land. NELP doesn’t accord a different kind of production sharing contract for
different kinds of blocks given that the risk involved in the abovementioned zones is quite
different, and all the other procedures are different for each block. Thus, these different
requirements, issues, risks cannot be addressed by a model production sharing contract with
fixed royalties. This acts as a deterrent to investors undertaking riskier ventures which may
be more profitable for the government.
2. Fiscal Model and Pricing- the NELP model which is based on sharing of profits implies that
no share accrues to the government except for royalties and cess unless there is an actual
profit that has been accrued by the contractor. Since the profit has to be measured on the
basis of accounting of costs which needs to be audited by the government, the present model
requires government approval at various stages of the production process so as to determine
the exact costs. The current mechanism of fixing prices is also done administratively at the
hands of the government. Thus, the entire process of determining costs and administratively
fixing prices leads to inordinate delays due to government accounting processes; litigation
and dispute resolution in case there is a disagreement on the correctness of the costs
between the government and the contractor.
3. Exploration Rights- NELP allows for exploration rights to the contractors to be confined
only to blocks which are put on tender by the government. This means that Oil Companies
may be aware of other blocks which may be exploited but since such blocks aren’t the subject
of a tender agreement, they can’t be brought on for bidding until a tender for them is floated
by the government which is a long and tedious process.
4. Inefficiency owing to lack of uniformity in hydrocarbon licenses- NELP envisages
separate policies and licenses for different hydrocarbons i.e. Conventional Oil & Gas; Coal
Bed Methane; Shale Oil & Gas & Gas Hydrates. There are thus separate terms of allocation of
acreages accruing out of different hydrocarbons. This leads to inefficiency as in practice,
there is a lot of overlapping of resources in contracts. Further, NELP was framed at a time
when unconventional hydrocarbons (shale gas and shale oil) were still not discovered. This
fragmented policy framework led to inefficiencies in exploiting natural resources. For
example, while exploring for one type of hydrocarbon, if a different one is found, it will need
separate licensing, adding to cost, time delay and increased procedural work.
HELP- AN INTRODUCTION
Despite India’s resource rich background, we are still very much importers of hydrocarbons and
the numbers on imports have been increasing in the wake of stagnating oil prices abroad. Given
the overall demand for hydrocarbons in India and abroad, the government decided to take steps
to improve the structure of the ailing industry by strong policy. This positive outlook gave way
to the new policy called Hydrocarbon Exploration Licensing Policy (“HELP”) which replaces
the old policy NELP. It is a step in direction of “MINIMUM GOVERNMENT, MAXIMUM
GOVERNANCE”. The policy is framed and introduced in order to attract foreign investors and
boost development of the O&G E&P sector.
The Union Cabinet under the Prime Minister Shri Narendra Modi led government approved the
HELP Policy on 10th March, 2016.
The salient features as envisaged under HELP are as follows:
1. Uniform Licensing Regime– HELP has proposed a single license regime for exploration
and production of conventional as well as non-conventional hydrocarbon resources. This
policy change is bound to correct the inefficiencies that arise in natural resource exploration
due to fragmented norms for different kinds of resources.
2. Biddable Revenue Sharing Model- contracts will now be based on “Biddable Revenue
Sharing”. Winning bids will now be decided on the basis of bidders quoting their revenue
share to the government. 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.
3. Open Acreage Policy-option to select the exploration blocks without waiting for
formal bid round- an open Acreage Licensing Policy, where bidder may apply to
government seeking exploration of any block not covered under exploration. This ensures
that an opportunity may be created to exploit a block of natural resources even if it is not up
for tender. If government agrees with expression and interest, a bid not formally up for
tender may be granted.
4. Revenue Sharing Model- the revenue sharing model under HELP will be much simpler
easy to administer than the one under its predecessor. There is no cost recovery, no micromanagement
by the Government which will ensure operational freedom to the operator.
5. Pricing and Marketing Freedom – the contractor will have freedom for pricing and
marketing of gas produced in the domestic market on arms length basis. To safeguard the
Government revenue, the Government’s share of profit will be calculated based on the
higher of prevailing international crude price or actual price. Further, in order to protect
user industries from market based imperfections, the price freedoms would come with a
market cap based on opportunity cost of fuels coming in the form of imports. This ceiling
will be revised and notified periodically by the Ministry of Petroleum and Natural Gas. This
ensures that the discretion of the government at pricing will be reduced considerably
thereby acting as a positive stimulant to investor sentiment and also safeguarding the
interest of all stakeholders concerned. The price ceiling determination will done as follows:
Ceiling Price The ceiling price shall be the, lowest of the
– Fuel oil import landed price
– Weighted average import landed price of substitute fuels (0.3 x price of
imported coal + 0.4 x price of imported fuel oil + 0.3 x price of imported
naphtha) and
– LNG import landed price.
Time Period The ceiling will be calculated once in six months. The price data used
shall be the trailing four quarters data with one quarter lag.
Applicability The policy guidelines would be applicable to future and existing
discoveries which are yet to commence commercial production as on
1.1.2016.
Existing
Discoveries
Will be applicable to existing discoveries where arbitration/ litigation
exists directly on gas price, only after conclusion/ withdrawal of such
arbitration/litigation.
6. Risk Recognition- under the previous regime, there was no recognition of the risks entailed
in exploring different kinds of blocks which added to uncertainty and lack of investor
incentive. The government under HELP has recognized these risks and distinguished
between royalty regimes for exploration in land, deep water, ultra deep water and high
pressure/ temperature zones.
7. Increase in exploration phase- exploration phase for onshore areas has been increased
from 7 years to 8 years and for offshore increased from 8 years to 10 years.
8. Minimum Regulatory Burden- no micro-management, no control over budget and
expenditure will result in ease of doing business.
9. Reduced Government Audit- the government audits will now only be limited to
production and revenue and not at different stages of production which will ensure that the
time frames for carrying out projects will be reduced considerably. The biggest decision
taken by the government has been to free the contractors from the tedious audits of the
Comptroller and Auditor General (“CAG”) in order to boost freedom and ease of doing
business.
10. Changes in royalty regime- concessional royalty regime for deep and ultra deep water
exploration are proposed under HELP. There will be no royalty for the first 7 years.
Concessional royalty 5% (deep water) & 2% (Ultra-deep water) has been reduced
significantly. For shallow water areas royalty rates will be reduced from 10% to 7.5%.
Revenue sharing for deep water and ultra deep water has been exempted in the new
scheme.
11. Exploration allowed after expiry of the contract period- the contractors at their own
risk may explore any mining lease areas after the expiry of contract. They may be eligible for
recovery of costs at a stage where they can prove commercial viability of their exploration.
This policy measure has essentially put the ball in the court of the explorer if the latter is
given the freedom to explore geographical areas for potential opportunity.
12. Policy for grant of extension to the Production Sharing Contracts for small, medium
sized and discovered fields – 28 small, medium sized fields discovered by National Oil
Companies (ONGC and OIL) were awarded to Private Joint Ventures through Production
Sharing Contract (PSC) between 1994-1998 for periods varying from 18 to 25 years. These
Contracts are effective from different points of time. The earliest of PSCs were signed in the
year 1994. Out of 28 PSCs, two fields in which the duration of the PSC had expired in 2013
had been granted extension up to 2018. The remaining PSCs would start expiring from
2018. The following process and guidelines for extension of contracts for small and medium
sized discovered fields is being put in place:
Application Contractor application for extension of Contract: at least 2 years in
advance of the expiry date, but not more than 6 years in advance.
Recommendation Director General Hydrocarbons (DGH) recommendation: within 6
months of submission of application by the contractor.
Decision Government will take a decision on the request for extension:
within 3 months of receipt of the proposal from DGH.
Revenue Sharing The Government share of Profit Petroleum during the extended
period of contract: 10% higher than the share as calculated using
the normal PSC provisions in any year during the extended period.
Royalty & Cess During the extended period of Contract, the royalty and cess shall
be payable at prevailing rates and not at concessional rates
stipulated in the contracts.
Extension The extension of these PSCs would be considered for 10 years both
for oil and gas fields or economic life of the Field, whichever is
earlier.
Terms The policy for PSC extension will lead to production of
hydrocarbons beyond the present term of PSC.
A COMPARATIVE ANALYSIS
PARAMETER HELP NELP
Fiscal Model Revenue sharing Profit sharing
Cost efficiency Encouraged Neutral
Royalty Regime Different rates depending
on the risk undertaken
Standard rate given as per
policy
Exploration
Phase
On-land and Shallow
Water- 8 years;
Deepwater- 10 years
On-land and Shallow
Water- 7 years; Deepwater
& Ultra-Deepwater – 8
years
Licensing
Regime
Allowed for all
hydrocarbons discovered in
the area with a single
license
Allowed only for
hydrocarbon for which
license has been taken
Auditing No micromanagement, no
CAG auditing, no auditing at
different stages of
production
Technical & financials
examination at different
stages of production
Sharing
agreement
On actual production and
estimated revenue basis
Calculation of estimated
revenue, calculation of
estimated cost, audit of the
cost and then sharing of the
profit calculated using the
above
Exploration after
expiry of
contracts in
Mining Lease
(ML) areas
At the contractors own risk Not allowed
Open Acreage Open for blocks which are
not on tender on the basis
of proved opportunity and
interest
Only for those blocks on
tender
Marketing and
Pricing
Contractors have freedom
to decide with minimum
interference
Decided by the government
administratively
Extension Policy Allowed on sharing 10%
more profit with
government
Not policy
CONCLUSION
The new HELP policy fits the perfectly into the Prime Minister Shri Narendra Modi’s mantra of
“MINIMUM GOVERNMENT, MAXIMUM GOVERNANCE” which the Oil Minister Shri Dharmendra
Pradhan also pointed out in his tweet on 10th March, 2016 (sic.) “Besides generating
employment, these decisions will also enhance transparency & reduce administrative discretion –
Minimum Govt, Max Governance.”
In the recently concluded Budget speech of 2016, Finance Minister Shri Arun Jaitley had pointed
to stagnating production and rising demand for petroleum products in the country and had said
the government would unveil steps to incentivise gas production. By focussing on two key
aspects in the HELP Policy, the first being, to provide calibrated marketing freedom; and second,
to do so at a pre-determined ceiling price to be discovered on the principle of landed price of
alternative fuels, the government has clearly taken up the challenge to synonymise the O&G E&P
industry with ease of doing business. Market experts have already claimed it as a path breaking
policy to market India’s so far understated Oil Industry to global players. Although there are
apprehensions given the low price environment India operates in, the HELP policy is a
substantial improvement to the earlier NELP policy both in letter and spirit. It now remains to
be seen whether this success on paper can be translated to success on the ground as well.

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