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The measures were long overdue and will help revive the sagging investor morale in the sector, which was bogged down by several issues

The Government of India (GoI) announced a slew of measures on February 19 & 20, 2019 to enhance domestic exploration and production of oil & gas. Broadly, they focus on increasing exploration activities in category II and III basins, which are relatively less prospective and no production exists, increasing exploration in unexplored areas of category I basins, where potential is established and production is taking place, enhancing gas production through incentives and promoting the ease of doing business through simplification of statutory approval processes.

The author of this article believes that the measures are long overdue and will help revive the sagging investor morale in the sector, which was bogged down by several issues – notably, pricing restrictions on gas, mandated allocation of gas to a few sectors, long delays in approval processes for Field Development Plan (FDP) and other exploration activities, several arbitration cases surrounding the administration of production-sharing contracts (PSCs) and ambiguities in the tax regime for the players.

While India indeed tried to make amends by making several policy changes such as announcement of the Hydrocarbon Exploration Policy (HELP), following which few rounds of auctions for discovered small fields and fields under open acreage licensing policy (OALP) took place, India has nonetheless been perceived as a region with an unfriendly regulatory regime, causing global E&P behemoths to avoid it. Furthermore, Indian prospects are relatively less appealing than what is available to the global players in regions such as the Middle East, Africa, the US and a few South East Asian nations. No wonder, despite all the reforms and our avowed aim to reduce import dependency by at least 10%, our production of oil & gas over the last five years has been mostly stagnant.

While several new discoveries have been successfully developed and brought to the market, they have barely offset the declining production from the matured fields. On the demand side, India has been one of the fastest growing markets for petroleum products with a growth of 3-4% per annum. As a result, our import dependency for crude oil has been increasing and is fast approaching 90%. In this backdrop, the new measures should rekindle the animal spirits and attract risk capital.

Taking a closer look at some of the measures, a key change has been the paradigm shift in the approach to the licensing policy. While hitherto, revenue maximisation to the GoI was a predominant motive under both the PSC and the revenue-sharing contract (RSC) regimes, wherein maximum weightage was given on the production share or revenue share to the GoI in the selection criteria, in the new regime, the approach shifts to production maximisation.

As a part of this approach, for category II and III basins, revenue-sharing has been dispensed with and allotment of basins is solely based on the exploration work programme. On successful discovery, the full revenues will accrue to the operator, which should reduce the payback period associated with the development projects and improve the IRR of those fields. For category I basins, the weightage on revenue-share has been reduced from 50% to 30%. Moreover, to maximise the production from the existing fields of national oil companies (NOCs), 66 fields are being offered to the private operators, wherein a part of the upside will be shared with the NOCs. These changes clearly define the thought process behind the policy, wherein the effort would be to send a clear message to various stakeholders of an all-out effort to increase the production of oil & gas in the country.

The reform measures should also lead to a healthy rise in domestic gas production, as marketing and pricing freedom are being granted for new discoveries whose FDP is yet to be approved. Moreover, fiscal incentives are available on additional gas production and private sector participation in NOCs projects is allowed. With an unremunerative pricing regime and want of commercial viability, many of the discovered fields have not been developed by the NOCs, which should receive a fillip in the new regime.

On the ease of doing business, measures are supposed to be initiated for co-ordination mechanism and simplification of the approval process of the DGH and alternate dispute-resolution mechanism.

Overall, while granular details of the policy are awaited, the policy blueprint seems lucrative enough to attract risk capital from both foreign majors and Indian companies. However, caution may be in order, as policy consistency has to be demonstrated over a longer period before India becomes a haven for global E&P players.

DISCLAIMER: The views expressed are solely of the author and does not necessarily subscribe to it. m shall not be responsible for any damage caused to any person/organisation directly or indirectly.

K Ravichandran is SVP & Group Head, Corporate Ratings at ICRA, a Moodys Investors Service company. He has been in ICRAs Ratings Division for 20 years and heads a team of credit analysts involved in the ratings of over 1,500 clients across Energy, Transportation, Chemicals and Fertilisers sub-sectors. Ravichandran holds a B.Tech and an MBA apart from a Financial Risk Manager charter awarded by the Global Association of Risk Professionals (GARP), USA.

K Ravichandran is SVP & Group Head, Corporate Ratings at ICRA, a Moodys Investors Service company. He has been in ICRAs Ratings Division for 20 years and heads a team of creditShow more..analysts involved in the ratings of over 1,500 clients across Energy, Transportation, Chemicals and Fertilisers sub-sectors. Ravichandran holds a B.Tech and an MBA apart from a Financial Risk Manager charter awarded by the Global Association of Risk Professionals (GARP), USA.

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