India - Time to question policy ?

Vandana Gombar

A spoonful of “first oil” pumped out from the Krishna-Godavari basin was elegantly packaged and presented to Petroleum Secretary R S Pandey by Mukesh Ambani when he visited Delhi last week. It was the result of an auction of oil blocks undertaken about a decade ago by the government under a new policy.

At that time, the perception of India in the world of oil exploration was very different from what it is today. The only significant discovery worth showcasing then was Bombay High, and it was over two decades old.
Today, the probability of finding oil or gas in the country is seen as much higher than it was a decade ago. There are a string of discoveries to boast — the two most prominent ones in the Krishna-Godavari basin (on the east coast) and in Rajasthan (at Barmer). There is a “brand India” that has been created in the field of exploration and production, says V K Sibal, the director general of the Directorate General of Hydrocarbons (DGH).
Yet, there has been little change in the fundamental terms of the auctions that we are conducting. Is it time to consider a change in the terms? Should there be an attempt to capture more of this perception dividend? Is the family silver being sold cheap?
I threw these questions to a host of energy officials most of whom agree that India is placed much higher on the oil and gas exploration map today than it was a few years ago. The upstream sector is characterised by two kinds of risk — the underground risk (geological) and the above-ground risk (policy). The underground risks in India are reducing as discoveries are announced and much more data becomes available though some of this gets shadowed by the increasing above-ground risks like the end of tax holiday for gas production or the government’s attempts to control pricing.
The net impact, however, still remains positive and one of the indicators of that is the rising number of bids received per block. In the first round of auction under the New Exploration Licensing Policy (NELP), the bids received per block were less than one, with almost half the 48 blocks on offer receiving no bids at all. On the other hand, in the last couple of rounds, over three bids per block have been submitted even as the number of blocks on offer has steadily gone up.
There are two opposing points of view on what should be done with this better grading of the country on the oil map. One view is that since we are a highly under-explored country — requiring huge investments in exploration — we should ensure that investors commit money to drill the maximum number of wells in search of oil and gas so that we have more discoveries, and more domestic production.
The other view is that we should ensure that the government gets a higher share of any oil and gas that is found since investment would flow in anyway. After all, that is what countries around the world, from Venezuela to Russia, are doing. Countries are bagging a signature bonus (it is a biddable item in some states), a discovery bonus and even a production bonus, while India advertises the fact that none of these bonuses are payable in the country.
Should there be a higher share for the government? Should this higher share be in cash or kind? Should it be worked through a windfall tax or some other mechanism? Should the government mandate walk-in rights for the national oil company in a field where oil or gas is found? If it is the country’s policy and priority to acquire oil and gas assets abroad through its (read government) companies — and this involves government-to-government intervention many times — should there be an assured stake back home too in discovered fields? Should walk-in rights coexist with production sharing contracts? Should there be a designated national oil company or should all companies (government-owned, private and international) be treated at par? Or, is it that the present system is working fine? There is a strong case for looking at these questions afresh.
These fundamental questions need to be re-asked, and re-answered, so that the wider policy can be re-decided, and this should ideally precede the next (eighth) round of auction slated for 2009.
Petroleum secretary Pandey did talk about looking at “getting more for the sovereign” through these auctions when we met him, but it seems that the options being considered are limited to slight policy tweaking when what is needed is a fresh look at the policy with an eye on where we want to be in 2020 or 2030.
An attitude of “we shall cross the bridge when we come to it” is not good enough. We should be strategising to see which bridge we want to cross a decade or two down the line. And we need not make an either-or choice too. It can be a combination of policies — one for the more promising areas with tougher terms, and another for less exciting areas with softer terms. The key issue then simply boils down to asking the right, and the fundamental, questions!