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Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Attracting the oil explorers

The quality of participants involved in auctions for gas and oil blocks needs to be improved

The Union government’s recent efforts to woo investors, especially the foreign ones, appear to be permeating the oil and gas exploration sector as well. Petroleum minister Jaipal Reddy recently said that the forthcoming auctions of oil and gas blocks in the 10th round of the New Exploration Licensing Policy (NELP) will offer generous terms for investors both in terms of the investment regime as well as pricing of gas.

This realization that inducements need to be offered to encourage quality investments comes a little late—it has been a decade since a large gas discovery has been reported. And during this time, the policy regime has witnessed flip-flops and regression towards a restrictive pricing system that does not allow explorers to realize market price. This, even as imported gas is sold at market prices.

It is not as if the blocks are not picked up during the auctions and hefty investment commitments are not made. However, the quality of participants in the sector needs to be improved. Major global companies have stayed away from the auctions and want to try tested options.

As much as the government needs to get out of the gas price approval process, it should audit outcomes of exploration investments made by state-owned exploration companies such as ONGC and Oil India Ltd which corner a major share of the blocks but haven’t been able to translate those into positive results. It needs to ascertain whether there is a case of over-the-top bidding by these companies that crowds out others whose track records are satisfactory. If so, suitable checks need to be introduced.

Meanwhile, the recent views of the oil and gas regulator, the head of the Directorate General of Hydrocarbons (DGH), leans towards lighter regulation of exploration activity in the sector. It has been suggested that the present system of allowing explorers to recover costs before sharing profits with the government needs to be replaced with a production-linked payment system where costs are not monitored. However, lower government intervention does not necessarily improve investments in the sector, where risks are high, especially in the deep water areas. In such cases, the DGH should improve its ability to audit costs rather than shirk responsibility.

While the petroleum ministry is awaiting the C. Rangarajan committee report on the hydrocarbon exploration sector to finalize the policy for the forthcoming NELP auctions, policy shifts alone are not a panacea. What is equally essential is that explorers have the comfort of a stable regime over the life of the exploration block lease.

What should India do to attract hydrocarbon explorers with proven abilities to its shores? Tell us at views@livemint.com

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