Mumbai/Delhi: India kicks off marketing on Saturday for its largest ever sale of oil and gas exploration rights, hoping signs of economic recovery and a rebound in oil prices can help it fetch at least $3 billion in commitments and improve on last year’s sluggish auction.
Bidders may, however, be put off by the possibility that government could look to take a bigger role in pricing and marketing after it stepped into a high-profile dispute between the billionaire Ambani brothers over terms of a gas supply agreement.
Asia’s third largest oil consumer, eager to develop domestic sources to power a fast-growing economy, last month extended tax breaks for gas discoveries — in line with concessions on oil finds — in an effort to interest bidders.
Last year’s auction saw limited bidding by foreign firms when tax breaks were put in place for discoveries of oil but not gas, which has been the bigger success story in recent exploration.
“Now that the ambiguity over taxation of natural gas is resolved, and the economy is moving up, we should see far greater response than what we saw at the last round,” said Vijay Iyer, partner for oil and gas at Ernst and Young.
India, which imports two-thirds of its crude oil, is offering 70 exploration blocks including 24 deepwater blocks, 28 shallow water blocks and 18 on-land blocks, covering an area of 163,535 square kilometres in its latest round.
The promotional roadshow starts in Mumbai on Saturday before traveling to Houston, Calgary, London, Perth and Brisbane over the next two months ahead of a bid closing date set for 12 October.
“On a conservative estimate we are expecting about $3-$3.5 billion dollars in the latest round for minimum work commitment,” an official at the Directorate General of Hydrocarbons said.
Previous licensing rounds have been dominated by local firms.
This time, India hopes more bidders are enticed by the start of gas output in April from the huge discovery by Reliance Industries as well as the upcoming start of oil production from Cairn India’s Rajasthan fields.
Foreign firms including Anadarko Petroleum, South Korea’s Samsung group and Noble Energy had indicated interest in the latest round of auctions, director general (hydrocarbons) V.K. Sibal told Reuters in June.
Last year, BP and BHP Billiton made successful bids but several other players with Indian interests kept to the sidelines, including BG Group, Total, Royal Dutch Shell, and Italy’s Eni.
Reliance Dispute Wieghs
The possibility that the government could step in to say who can buy gas and at what price when production begins adds further investment risk to a politically sensitive resource.
“The tussle between the Ambani brothers and the ambiguous stand taken by the government on the issue is likely to cloud the outcome of the NELP-VIII auction,” said V. K. Sharma, head of research at Anagram Stock Broking.
“This could make foreign investors skeptical about bidding for blocks at the auction,” he added.
The Economic Times, citing an unnamed petroleum ministry source, reported on Friday that new rules were being planned amid the spat involving Mukesh Ambani’s Reliance Industries and Reliance Natural Resources, controlled by his brother Anil, over terms of gas from the vast Krishna-Godavari basin.
The government was planning to give itself a say in the pricing and allocation of gas from blocks for sale in the current auction round, the report said, although a senior government official told Reuters on Friday that no such plan was in place.
“There is no thinking in the government as yet to deviate from the arm’s-length principle,” petroleum secretary R. S. Pandey said, without elaborating.
Still-fragile appetite for risk among global energy players may also temper bidding enthusiasm.
“Today, industry doesn’t have appetite for moderate to high risk exploration acreages and the recent issue, where the government intervened to decide on the gas buyers and price, has raised the political risk for investors,” said an official with an Indian exploration firm.
In the past, global oil firms like Petrobras of Brazil and Norway’s StatoilHydro ASA held off during Indian exploration auctions, only to buy into exploration blocks after preliminary drilling by the block awardees.
US oil futures traded at around $71 per barrel on Friday, about half the record level hit in July 2008, but up about 80% since the start of this year.
“The investment climate is definitely better than last year, but liquidity crunch in the global economy could be a constraint for some of the investors,” Iyer said, adding that current oil prices made exploration projects viable in the long-run.
India’s gas production is set to double by year-end as Reliance Industries’ output from its D-6 block reaches peak production of 80 million standard cubic metres a day (mmscmd).
Total investment of nearly $12 billion has been made on 203 blocks awarded under previous bidding rounds.