Make-In-India’s Oil & Gas Journey
India is poised to translate the ‘make in India’ vision into a reality. The initiative has the potential to boost India’s oil and gas sector significantly, more so because growth in this sector will accelerate overall economic growth of the country. Also, where Indian economy stands today, supply of oil and gas is not just the only thing we ought to care about. Keeping trade implications constant, playing a greater role in the processes preceding final supply offers tremendous prospects. Of course, more foreign investment, resulting in increased rate of E&P and refining activities also count significantly. Overall, I will attempt to portray the oil & gas industry on the ‘Make in India’ canvas. In this article I will also discuss potential challenges and areas where we need to work to sustain the growth.
First thing, then, is to note where the sector is headed in terms of major goalposts to further establish relevance of the force which ‘Make in India’ campaign can impart. India aims to reduce crude import by 10% by 2022 to achieve self-sufficiency by enhancing indigenous production of petroleum products. Crude oil import currently accounts for 70-75% of India’s total crude oil consumption. India's Refining capacity is set to reach 256.55 MMTPA by 2019-20 after completion of all projects which are currently under various stages of implementation. The government’s plan switch to BS-VI auto fuels throughout the country is also going to rope in major investments for refinery upgradation. The mega project of adding another 15,000 km of gas pipeline to the national gas grid is underway.
These are only a few examples pointing towards the fact that the lion is hungry and indeed on the move. Clearly, demand for hydrocarbons in India is on the rise as the country strives to achieve higher degree of development. In order that oil and gas sector experiences a sustained high growth and the aforementioned goals are reached, I see there are three critical areas where serious work will take us a long way – investment, policy and indigenization.
By investments, I essentially mean foreign direct investment (FDI) to finance the ever increasing scale of activities in the sector. We have already made a promising start in this area. 100% FDI is allowed through automatic route for exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, petroleum products’ pipelines, natural gas pipelines, LNG re-gasification infrastructure etc. FDI up to 49% is permitted through automatic route for Petroleum refining by PSUs, without any disinvestment or dilution of domestic equity in the existing PSUs. In fact, FDI inflows during April 2014-March 2016 increased by 267% (3.7 times) to $1.2 billion from $327 million during the same period in 2012-14.
The second critical area pertains to a healthy ecosystem of relevant and specific policies to provide channel and framework for the inflowing investment. It is worth highlighting that Hydrocarbon and Exploration Licensing Policy (HELP), notified in March 2016, is a concrete step in the right direction. Under HELP, a series of reforms were undertaken in a bid to establish a less complex system of conducting hydrocarbon business. I am enlisting a examples of a few of these reforms below:
♦ Uniform Licensing System: Covers all hydrocarbons, i.e. oil, gas, coal bed methane etc. under a single license and policy framework.
♦ Revenue Sharing Model: Contracts will be based on biddable revenue sharing and not the current cost recovery model.
♦ Open Acreage Licensing Policy: Oil and gas acreages will be available round the year instead of cyclic bidding rounds as in New Exploration Licensing Policy (NELP).
♦ Concessional Royalty Regime: Deep water and ultra-deep water areas shall not have any royalty for the first seven years, and thereafter shall have a concessional royalty of 5% (in deep water areas) and 2% (in ultra-deep water areas).
♦ Marketing & Pricing Freedom: Explorers to sell gas produced from geologically difficult, high risk / high cost areas with a ceiling price.
♦ Discovered Small Field (Marginal Field) Policy: Aimed to reduce dependency on import of hydrocarbons, the policy provides for a single uniform license for producing all kinds of hydrocarbons. Also, no cess on oil production, moderate royalty structure, customs duty exemptions on import of goods and services for petroleum operations, complete marketing and pricing freedom for the sale of produced crude oil and natural gas, upto 100% FDI participation by foreign companies, joint ventures and no restriction on exploration activity during contract period are other elements of the policy.
♦ Policy on Testing Requirements for discoveries in NELP blocks:This policy will help in the monetization of 10 discoveries in 5 NELP blocks by resolving long pending disputes associated with testing requirements.
♦ Policy framework for Relaxations, Extensions and Clarifications at the Development and Production stage under PSC regime: Aimed at early monetization of hydrocarbon discoveries and approved by the Government on November 20, 2014, this policy addresses the rigidities in the timelines of the PSC allowing contractors to start production at the earliest.
Finally, the third critical area where the most attention is required is ‘indigenization’. An interesting initiation has already be need in this regard. The government has already mandated that every tender will specify the share of procurement where local manufacturer will be given preference. For example, tenders for procuring various kinds of pipes, will have 50% reserved for local manufacturers who are within 10% of the lowest bid price.
The public sector companies alone spend ₹80-90,000 crore annually on procurement of goods and services. Various sources have estimated that there could be potential cost reduction up to 30%, which is approximately ₹25,000 crore of savings per annum. Benefits include lower transportation cost and up to 25% reduction in shipping time, resulting in faster project execution.
ONGC, India's national oil company, has revived Indigenous Development Groups (INDEG) to roll out ‘Make in India’ campaign. It is expected that ONGC will play a critical role in developing extensive local vendor qualification standards as local sourcing share increases.
Good deal of effort is being made to scale up oil and gas activities in India and increasing reliance on national capabilities. Besides the aforementioned three areas I discussed earlier, a lot more needs to be done to establish prudent practices with respect to health and safety, environment sustainability, skilling human resources and technological advancements.
These are only a few examples pointing towards the fact that the lion is hungry and indeed on the move. Clearly, demand for hydrocarbons in India is on the rise as the country strives to achieve higher degree of development. In order that oil and gas sector experiences a sustained high growth and the aforementioned goals are reached, I see there are three critical areas where serious work will take us a long way – investment, policy and indigenization.
By investments, I essentially mean foreign direct investment (FDI) to finance the ever increasing scale of activities in the sector. We have already made a promising start in this area. 100% FDI is allowed through automatic route for exploration activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and natural gas, petroleum products’ pipelines, natural gas pipelines, LNG re-gasification infrastructure etc. FDI up to 49% is permitted through automatic route for Petroleum refining by PSUs, without any disinvestment or dilution of domestic equity in the existing PSUs. In fact, FDI inflows during April 2014-March 2016 increased by 267% (3.7 times) to $1.2 billion from $327 million during the same period in 2012-14.
The second critical area pertains to a healthy ecosystem of relevant and specific policies to provide channel and framework for the inflowing investment. It is worth highlighting that Hydrocarbon and Exploration Licensing Policy (HELP), notified in March 2016, is a concrete step in the right direction. Under HELP, a series of reforms were undertaken in a bid to establish a less complex system of conducting hydrocarbon business. I am enlisting a examples of a few of these reforms below:
♦ Uniform Licensing System: Covers all hydrocarbons, i.e. oil, gas, coal bed methane etc. under a single license and policy framework.
♦ Revenue Sharing Model: Contracts will be based on biddable revenue sharing and not the current cost recovery model.
♦ Open Acreage Licensing Policy: Oil and gas acreages will be available round the year instead of cyclic bidding rounds as in New Exploration Licensing Policy (NELP).
♦ Concessional Royalty Regime: Deep water and ultra-deep water areas shall not have any royalty for the first seven years, and thereafter shall have a concessional royalty of 5% (in deep water areas) and 2% (in ultra-deep water areas).
♦ Marketing & Pricing Freedom: Explorers to sell gas produced from geologically difficult, high risk / high cost areas with a ceiling price.
♦ Discovered Small Field (Marginal Field) Policy: Aimed to reduce dependency on import of hydrocarbons, the policy provides for a single uniform license for producing all kinds of hydrocarbons. Also, no cess on oil production, moderate royalty structure, customs duty exemptions on import of goods and services for petroleum operations, complete marketing and pricing freedom for the sale of produced crude oil and natural gas, upto 100% FDI participation by foreign companies, joint ventures and no restriction on exploration activity during contract period are other elements of the policy.
♦ Policy on Testing Requirements for discoveries in NELP blocks:This policy will help in the monetization of 10 discoveries in 5 NELP blocks by resolving long pending disputes associated with testing requirements.
♦ Policy framework for Relaxations, Extensions and Clarifications at the Development and Production stage under PSC regime: Aimed at early monetization of hydrocarbon discoveries and approved by the Government on November 20, 2014, this policy addresses the rigidities in the timelines of the PSC allowing contractors to start production at the earliest.
Finally, the third critical area where the most attention is required is ‘indigenization’. An interesting initiation has already be need in this regard. The government has already mandated that every tender will specify the share of procurement where local manufacturer will be given preference. For example, tenders for procuring various kinds of pipes, will have 50% reserved for local manufacturers who are within 10% of the lowest bid price.
The public sector companies alone spend ₹80-90,000 crore annually on procurement of goods and services. Various sources have estimated that there could be potential cost reduction up to 30%, which is approximately ₹25,000 crore of savings per annum. Benefits include lower transportation cost and up to 25% reduction in shipping time, resulting in faster project execution.
ONGC, India's national oil company, has revived Indigenous Development Groups (INDEG) to roll out ‘Make in India’ campaign. It is expected that ONGC will play a critical role in developing extensive local vendor qualification standards as local sourcing share increases.
Good deal of effort is being made to scale up oil and gas activities in India and increasing reliance on national capabilities. Besides the aforementioned three areas I discussed earlier, a lot more needs to be done to establish prudent practices with respect to health and safety, environment sustainability, skilling human resources and technological advancements.
