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In the story of India’s phenomenal economic expansion in the 21st century, the issue of energy and hydrocarbon security has become something of a sticking point. Energy consumption growth is already shifting away from established markets and towards rapidly developing nations like India and China; energy consumption in non-OECD countries is set to increase by 68% up to 2030, representing 93% of global growth.
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In the context of this explosion in demand, India’s nascent oil and gas industry has found itself unable to keep up. As production has remained fairly static while demand has skyrocketed over the last decade, the country relies heavily on imported oil and gas, buying in around three quarters of its demand, including more than 80% of its oil.
This energy insecurity is a weight around the shoulders of Indian economic growth, with oil imports accounting for $109bn of the country’s £191bn trade deficit for the 2012-13 financial year. And as things stand today, oil imports are likely to increase to around 90% of the country’s total usage by 2031, with India set to become the world’s largest single source of oil demand growth after 2020, according to the International Energy Agency.
As such, the government has made it a national priority to expand and diversify India’s sources of oil and gas, both in its own waters and by participating in exploration and production projects all over the world.
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The oil & gas industry is circling back to take another look offshore South Africa amid a broad surge of activity around the African continent.
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By GlobalData"India needs to increase its energy supply by three to four times over the next two decades," said Prime Minister Manmohan Singh at the recent Petrotech 2014 conference. "Adequate supply of energy at affordable prices is critical to our economic growth…With this in mind, we are encouraging domestic and global companies to explore potentially hydrocarbon-rich areas in the framework of a stable and enabling policy environment."
NELP: encouraging oil and gas exploration
The challenge of boosting domestic oil and gas production is not a new one, and India made a vital step in encouraging exploration back in the late 90s. The New Exploration Licensing Policy (NELP) was established in 1998 to incentivise onshore and offshore hydrocarbon exploration in India.
The new framework was intended to liberalise the country’s E&P sector, with 100% foreign direct investment permitted in an attempt to bring more private oil and gas companies into the market, which is dominated by publicly-owned national oil companies (NOCs) like the Oil and Natural Gas Corporation (ONGC) and Oil India.
The NELP framework also established a production-sharing contract (PSC) model for oil and gas E&P projects, which allows companies to use the proceeds from initial produced oil to recover the capital expenditure from developing a field, after which the ‘profit oil’ is shared between the operators and the host country. Under NELP, regular bidding rounds take place for new exploration licences, with priority going to companies that are willing to offer the largest share of eventual oil and gas output to the government.
The policy has certainly helped to kick-start exploration in the region; exploration of India’s sedimentary area of approximately 3.14 million km² stood at just 11% prior to the introduction of NELP, but has since risen to more than 20%. In terms of increasing private participation in India’s domestic exploration, however, NELP has found less success, with ONGC and Oil India together still accounting for 70% of the market.
NELP-X and the revenue-sharing debate
The tenth round of bidding for exploration licences, NELP-X, is due to take place later in 2014, and the Indian government has already unveiled 46 blocks that are planned to be auctioned. More could be opened to bidders before the NELP-X is finally launched, according to India’s Minister of Petroleum and Natural Gas Veerappa Moily. "We are today profiling 46 blocks but eventually 60-65 blocks will be offered after clearances are obtained," he said in January 2014.
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Although the NELP-X auctions were expected to take place by 15 February 2014, various controversies have delayed the process and government sources are now hinting that the licensing round will not take place until after India’s general election around mid-April. The state government of Gujarat has thrown a spanner in the works by withdrawing approval for the sale of nine onshore exploration blocks in the Cambay Basin while it seeks a better share of the revenue from central government.
The main issue holding up NELP-X is a wider debate over whether to stick with the PSC system for E&P contracts or move to revenue-sharing (also known as production-linked) contracts that are common in developed oil and gas regions like the UK, Norway and the US. India’s Planning Commission and Ministry of Finance have both requested a delay in the process to properly consider the proposed switch.
Revenue-sharing contracts would jettison contractors’ right to recover costs before sharing revenues with the government, instead sharing revenues from the outset, with the split based on a pre-determined formula.
Proponents of the change argue that the revenue-sharing system would better serve India’s financial interests and improve transparency, as under the old system contractors have been incentivised to increase their capital expenditure to delay the need to share with the government. PSC’s defenders, meanwhile, maintain that the old system is still preferable because of the need to acknowledge the risks of exploring India’s unproven frontier acreage – a large proportion of which is located in technically challenging deepwater zones – and attract private investment.
India’s participation in foreign projects
Even with the expansion of exploration and production activities offshore India, the country’s energy deficit is so vast that the government and NOCs must look beyond its borders to secure new oil and gas supplies. Indeed, in recent years Indian NOCs have made concerted efforts to get involved with promising offshore projects around the world.
Russia has proved to be a valuable offshore partner. In 2001, ONGC’s international division ONGC Videsh (OVL) secured a 20% stake in the Sakhalin-1 project in Russia’s Okhotsk Sea, a prudent investment that seems to have spurred Indian NOCs’ interest in a range of other international ventures. Since 2001, OVL alone has bought exploration licences and project shares in Vietnam, Brazil, Colombia, Venezuela and the Caspian Sea, among others.
But Russian-Indian oil and gas exploration didn’t end with Sakhalin-1. More recently, Prime Minister Singh and Russian President Vladimir Putin held discussions on the possibility of partnering to develop offshore oil and gas projects in Russia’s Arctic waters, while earlier this month Russian state-owned company offered OVL stakes in 10 offshore blocks in the Barents and Black seas.
Elsewhere, Oil India has increased the country’s presence in Africa’s burgeoning offshore sector, purchasing a stake in the highly promising Rovuma Area 1 Offshore Block in Mozambique from Videocon Mauritius Energy. According to Oil India, the project is "strategically located to competitively supply LNG to India, and OIL’s and OVL’s participation in the project will facilitate access to the growing Indian gas market which will supplement the country’s energy security endeavour".
India certainly has a mountain to climb to secure the hydrocarbons it will need to fuel growth in the coming decades. The government has made sensible, proactive steps to encourage domestic exploration and liberalise the oil and gas sector. But the market remains somewhat chaotic and foreign majors have been relatively slow to make serious moves in the waters around India’s shores, so even with its growing presence in international projects, it remains to be seen if the country’s offshore sector can expand at the necessary pace.
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