By Owen Jollie
India’s economic growth depends on its ability to develop and maintain access to reliable energy. India has begun augmenting its domestic energy production by investing heavily in wind and solar energy, opening the coal sector, continuing development of hydro-electricity, and planning to expand its use of civilian nuclear power. The one possible leg of India’s energy mix that remains a laggard is the oil and gas sector. The right mix of growth-oriented policies is key to determining the potential of this sector.
Historically India has had to acquire most of its hydrocarbons from abroad due to very low domestic production. Despite the need for growth in domestic oil and gas production, interest among private developers, particularly foreign firms, has remained low. This is due in large part to the unattractive regulatory environment.
In 1997, India’s government conceptualized the New Exploration Licensing Policy (NELP), which was intended to spur growth in the sector and attract foreign investment. According to the U.S. Energy Information Administration, domestic production of oil in India has grown from 780,000 barrels per day in 1997 to 978,000 barrels per day in 2014. During the same time period, consumption has increased from 1,835,000 barrels per day to 3,660,000 barrels per day. The meager increase in production since NELP has been vastly outpaced by growth of consumption needs, and illustrates the failure of NELP.
The chart included below details the stages of oil and gas production from sedimentary basin acquisition through final sale, with the goal of identifying contributing factors to low investor confidence. The gaps exist mainly in the regulatory framework governing oil and gas production.
|Action/ Phase||Yes or No||Analysis|
|Generating seismic data||Yes||Government has seismic data for most of the country.|
|Allow open access to lands potentially containing oil or gas||No||Currently the NELP rounds are focused on a small number of blocks up for auction in each round. An Open Acreage Licensing Policy (OALP) has been discussed, but is far from implementation.|
|Enact an open and transparent bidding process (NELP)||Yes and No||Bidding has been open and transparent, but bidding is not regularized and uncertainty over auction timings persist|
|Combine the bidding process with appropriate permits to explore tracts||No||Licensing process is tedious and uncertain, bidder should have licenses prior to bidding on blocks to remove delays|
|Create model production contracts that balance government/ developer needs||Yes and No||Debate over model contracts is ongoing, but consensus is for a revised version of the existing production sharing contract, not revenue sharing contract.|
|Establish system for “deemed approvals” and review for development costs||No||Prior approval process for cost recovery too tedious, approvals should be simplified and altered to post development cost audit to set recovery baseline.|
|Create a robust pipeline transportation network||Mostly||Pipeline infrastructure exists in major oil and gas rich regions, though must be expanded to consumption areas.|
|Create a robust road/ rail infrastructure network||No||Road transportation to end user remains an issue due to road infrastructure deficit.|
|Establish significant refining capacity||Yes||Indian refineries total capacity is roughly 215 million tons; current consumption is 175 million tons; excess is re-exported.|
|Relax controls on pricing of downstream oil and gas products||Yes and No||Diesel and Petrol pricing has been deregulated, gas pricing is still government controlled.|
In reviewing the most important gaps in this value chain, three policy changes hold great promise for unlocking investment in the oil and gas sector:
- Approval of exploration licenses for NELP blocks prior to NELP bidding rounds.
- Elimination of prior approval process for production spending.
- Deregulation of natural gas pricing.
A major obstacle to oil and gas companies is the process of obtaining exploration licenses after they have bid on and won a block through NELP. This process is long and tedious and aims to ensure the companies are in compliance with strict environmental protocols. This process could be simplified by pre-approving exploration licenses before the bidding rounds. This would ensure companies are not delayed in developing blocks once they have secured them, and would increase interest in bidding.
The process of getting prior approvals for recovery costs is another major obstacle. Current contracts allow for full cost recovery of development expenses before profit oil or gas is shared between the company and the Government of India. This model allows developers to take on more risk since they will be able to recuperate costs before sharing production. However, the government also has a stake in ensuring that costs are not inflated, and has implemented expense prior approvals to ensure expenses are being efficiently appropriated. This is a major impediment to developers and causes significant delays in the exploration phase. This process should be revised to a system of expense reporting and auditing of expenses to determine the recoverable amount.
Finally, the regulatory framework for pricing of oil and gas could be further amended. Since the deregulation of pricing control of petrol in 2010 and diesel in 2014, confidence in oil production has increased. However, exploration companies will not know if the block they are exploring will have oil or gas until they drill test wells. The regulation of natural gas pricing remains a concern for investment across the sector, since developers would have to hedge against the possibility of discovering gas, the sale of which would be subject to government pricing.
Growth in the domestic oil and gas sector in India remains shrouded behind major obstacles. The regulatory framework is cumbersome and needs revision. In addition, awareness of the effects of global climate change is growing worldwide. While increased production of domestic oil and gas in India would likely displace use of foreign fossil fuels and not increase net carbon emissions, pressure to transition to clean and renewable energy sources is strong. But there are also major opportunities, oil and gas is one of the few sectors which allows full foreign investment, and is also a relatively under-explored area. India is also embarking on a potentially significant growth period, and one that will see a huge jump in energy demand. For an already energy deprived country, expanding the domestic production of fuel sources will be vital, and the opportunities in India to do so are clear.
Mr. Owen Jollie is a researcher with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. The author would like to thank Tarun Lakhotia of Kotak Securities Limited for his insights and suggestions during the preparation of this article.