Foreign firms give oil blocks cold shoulder

Foreign firms give oil blocks cold shoulder

India’s ninth round of auctions of hydrocarbon exploration blocks received a muted response, with foreign investors spooked by frequent revisions in government policy.

While one block failed to elicit a bid, 33 blocks received 74 bids, the bulk of which were from state-owned oil companies. Oil and Natural Gas Corp. Ltd (ONGC) on its own, and along with its consortium partners, won five deep-water blocks, followed by Reliance Industries Ltd, or RIL, (two blocks), BG Group Plc and BHP Billiton (one block).

The final award of the rights to explore the blocks will be given within four months, by which time the oil ministry would have scrutinized the 33 winning bids.

These were part of the ninth auction under the new exploration licensing policy (Nelp), first kicked off in January 1999 to step up domestic oil and gas exploration and reduce India’s overwhelming dependence on hydrocarbon imports.

Significantly, the latest round saw the entry of four new companies even as there was unprecedented collaboration between ONGC and Oil India Ltd (OIL)—something that analysts believe will defray their exploration costs. The two accounted for the single largest chunk of winning bids.

So far, Nelp rounds have generated 87 oil and gas discoveries in 26 exploration blocks with hydrocarbon reserves of at least 642 million tonnes of crude oil equivalent.

The total committed investment in the Nelp rounds for exploration so far has been around $11.1 billion (Rs 49,728 crore today), and $14.3 billion has already been spent. Of the 235 blocks awarded till date, a majority have been won by ONGC and OIL. Nelp 8 received 76 bids for 36 of the 70 blocks on offer.

“The last decade has proved that only companies committed to deploying technological rigour can add hydrocarbon reserves. With exceptions, Nelp 9 response is not convincing as regards such companies committing to dedicate (themselves) to the objective of finding oil and gas in India. Also, it appears, committing work programme only to win is becoming a norm because of its condonable nature now," said Deepak Mahurkar, associate director (oil and gas industry practice) at audit firm PricewaterhouseCoopers.

Addressing reporters, India’s petroleum minister S. Jaipal Reddy chose to differ. “The response has been more than satisfactory. In fact, it has been encouraging... All these bids will be evaluated in a transparent process within three months with the agreements expected to be signed with the successful bidders within four months."

The 34 blocks offered include eight deep-water blocks, seven shallow-water blocks, and 19 onland blocks. Of these, 19 are new and 15 were those which had no takers in the eighth round of Nelp. The total acreage of the 34 blocks is 88,807 square metres.

Of the 74 bids placed, 33 were from state-owned firms with the balance from private sector companies. While 19 blocks received multiple bids, eight small-type blocks got 26 bids with 14 blocks receiving single bids. A shallow-water block did not receive any bids.

ONGC, on its own and as part of a consortium, bid for 28 blocks and won 12; OIL, on its own and as part of a consortium, won 10 blocks. RIL bid for six blocks and won two deep-water blocks, while Cairn India Ltd bid for two blocks, but won none.

RIL had earlier not bid in the eighth round.

Some of the new entrants included Ishar Gas Oil Pvt. Ltd, Chinar Commerce Pvt. Ltd and Sankalp Oil and Natural Resources Ltd, which won three, two and three onland blocks, respectively.

“For the first time, we have cooperated with ONGC on this scale," said N.M. Borah, chairman and managing director of OIL.

Experts blamed the poor response on fickle government policy.

“The global E&P (exploration and production) industry has been quite understandably muted in its response to Nelp 9. Exploration is a high-risk business which requires a robust and attractive enabling environment. The completion of reforms involving deregulation of the downstream industry, market freedom on gas price and sales, and tax stability is, therefore, crucial. Integrated energy companies wish to build business across the energy supply chain all the way to the retail forecourt, whilst independent explorers are keen to have a progressive framework to monetize their discoveries by farm-outs," said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors.

Farm-outs refer to a firm selling off a stake in its block.

“Half of the blocks were recycled blocks. This was expected," said a top ONGC official, who did not want to be identified.

The Union budget announced on 28 February had withdrawn the seven-year tax holiday after Nelp 9 had been announced; it was available for Nelp 8.

“The purpose of scientifically developed criteria to allocate blocks is to select companies that help capably do their best to prove if Indian basins can help service energy needs. With exceptions, the Nelp 9 response suggests a relook at the criteria and process. We all know, it takes a decade to prove if the selection of licensor was right," Mahurkar added.

Defending his government’s performance that may have led to lack of clarity before the bids, Reddy said, “We have put in place a very transparent policy. Full justice has been given to the foreign companies. They take decisions based on commercial considerations. The government has been fair to all foreign companies."

The rounds were held at a time when an acquisition in the hydrocarbons sector involving Vedanta Resources Plc is yet to receive regulatory approval. The cabinet committee on economic affairs (CCEA) will decide on Vedanta’s proposed acquisition of a majority stake in Cairn India for $9.6 billion.

“We have taken inputs from the ministries of finance, law and others, and a cabinet note has been moved. It has to be considered by the CCEA... When the note is to be placed before the CCEA is to be decided by the cabinet secretariat... We have given two options," said Reddy.

In a separate development, the minister also expressed concern on the falling production from RIL’s KG (Krishna-Godavari) D6 block, the nation’s largest gas find till date. The oil-to-yarn and retail conglomerate, which operates KG D6, has intimated the Directorate General of Hydrocarbons that gas production from the field could slump further to around 47 million standard cubic metres per day (mscmd) in 2012-13, from 51-52 mscmd at present, “unless radical changes were implemented at the block".

“We need to go back to the technical data... We need to work out if there is a need for course correction," said director general of hydrocarbons, S.K. Srivastava.

“The fall is notable...the fall in the production is not a positive development," said Reddy.

He also hinted that petrol and diesel prices may not be hiked immediately.