In March India approved a series of key policy changes under the new Hydrocarbon Exploration and Licensing Policy (HELP). This policy is about to be tested for the first time, can it revive investment interest in the struggling upstream sector?
The story of the HELP contracts is one of give and take. The introduction of a revenue sharing contract shifts significant investment risk onto contractors, but in return for greater pricing freedom. The new contract structure aims to reduce regulatory oversight and bureaucracy, but the government will receive its revenue share from day one. New open acreage licensing has been long-advocated, but lack of data could hinder interest.
There are potential upsides and downsides, but the terms will be tested via an ongoing bidding round of discovered fields being offered with similar contracting terms. Change is well needed, as gas production has dropped and oil output is stagnant:
What projects are available for bidding?
India has placed 67 discovered oil and gas fields on offer to international and domestic companies. There are 46 contract areas that encompass the 67 fields totalling 562 million barrels of oil equivalent (mmboe) in place, with 240 mmboe recoverable. However the average project size is less than 10 mmboe of resource.
The majority of the projects are located in shallow water, with onshore fields accounting for less than a third of resource; only a fraction of fields are located in deepwater. There is a slight tendency to oil, although the bid round includes a significant offering of gas projects.
How attractive are these projects?
This is India's first licensing round in 6 years and the fiscal and contractual regime is vastly different from previous bid rounds. Under the new revenue sharing terms, the contractors bear significantly more risk, as contractors have sole responsibility for any budget overruns. This creates a clear downside for marginal fields and this bidding round contains exclusively marginal fields.
On the upside: the new fiscal terms include the aforementioned pricing freedoms, creating potential for attractive opportunities. Additionally, conventional and unconventional exploration have been combined into a single license, creating freedom to explore throughout the duration of the contract.
Companies are bidding on government share of net revenue as opposed to profits post cost recovery. This makes high cost projects especially high risk; this does not bode well for the deepwater projects.
There is a case to be made that the fiscal terms were never really the problem. New entrants have been rare and incumbents have relinquished acreage positions, with most citing regulatory hurdles as a barrier. The reduction of bureaucracy could be the crucial factor in achieving sustainable investment to drive a long-term recovery in India’s hydrocarbon industry.
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