The Samudra Manthan exploration policy framework announced by India’s government offers a well-structured and realistic approach to improving the chances of finding oil and gas reserves in the country.
It comes none too early. The existing policy, which has been in force for a decade, has hardly yielded any significant commercial discoveries.
On the other hand, supply disruptions in the wake of the Gulf crisis have made it imperative to find domestic reserves. Since we import 90% of our oil and half our gas needs, the country’s risk exposure is high.
To be sure, the Centre has been tweaking its exploration policy bit by bit, be it a review of old geological data, an increase in the area on offer for exploration or moves to improve the ease of doing business.
However, outcomes fell short because the core issue had largely been left unaddressed. Past measures did not make the business attractive enough for global majors to participate.
Given their rich experience and skill in reading earthly data to drill at the right spot in a patch of several thousand square kilometres, that counts as India’s loss. They evidently see brighter prospects of oil and gas strikes in other parts of the world. Moreover, even if they do participate, such ventures require risk capital.
An explorer must spend plenty for probable access to hydrocarbons extractable at a profit. Persistence must pay off even after a few dud attempts, each of which could burn as much as $180 million or so.
The solution, hence, lies in risk sharing. Of course, this provides no certainty of success, but it shortens the odds of it considerably. A salient feature of the latest policy allows for funding of 60 wells “up to 50 per cent of the eligible drilling costs or ₹675 crore [$70 million], whichever is lower.”
Cost evaluations pose a big challenge in this sector. Indeed, that is what led to the demise of India’s New Exploration Licensing Policy (Nelp), which ran for 18 years before it was replaced in 2016 by the Hydrocarbon Exploration and Licensing Policy (Help).
From an investor perspective, this rejig did not live up to its name. Nelp had let investors recover their costs while sharing production volumes from discoveries with the government, but Help got rid of cost recovery, reducing the financial appeal of the proposition. It was akin to an infant thrown out with the bathwater. Participation and commercial discoveries both dried up.
Nelp lasted longer, but left a better track record on the whole. Now, India’s Samudra Manthan policy goes one step ahead of Nelp, under which the Centre did not take on any of the explorer’s exploration risk. For the first time, it offers to partly fund the drilling costs of private firms.
While the Semicon Mission for computer chips may seem like a parallel, this business differs in its risk-return profile. Hydrocarbon hunting also happens to be a long-gestation game, with commercial strikes typically taking a decade to reach fuel tanks. How attractive the new deal proves, however, should be clear within a year.
As we await the response of global explorers, it is tempting to recall that Guyana’s mega discovery which made waves—a surprise since it was not seen as an oil-rich region—was on the back of a policy that resembled India’s Nelp in allowing cost recovery. But what we now have is a novel form of state involvement. By stumping up money for drilling, New Delhi has decided to act in the spirit of a venture capitalist.