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Published:Monday, March 11, 2019 7:38 PM

Current Scenario in Upstream Oil and Gas Sector in India

Current Scenario in Upstream Oil and Gas Sector in India

Currently, India as a country is the sixth largest, one of the fastest growing economies, and witnessing high growth in the energy sector in the world since the last four years. As of now, India is the third largest consumer of crude oil, after the USA and China. The role of the oil and gas industry is very important for the overall development of the energy infrastructure of the country. The petroleum industry is listed among the eight core industries and contributes over 15% of GDP in the country. In order to meet the requirement of energy needs such as cooking fuel, transportation fuel and plastics & polymers, oil and gas industry is mostly dependent on imports. To cater growing population, India would need more focus on refinery expansion, development of exploration and production activities along with increase LNG terminal capacity, city gas distribution, domestic crude oil and gas production and pipeline networks.
As per industry perspective, the oil & gas industry is divided into three categories such as upstream, downstream and midstream sector. The upstream sector is engaged in exploration, development and production activities of crude oil & gas. State-owned companies such as Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) have the largest market share of around 87% in exportation and production fields. Other private players such as Reliance, Cairn Energy, Focus Energy and Vedanta Group account around 13% market share in exploration and production operation.
Petroleum Geology: Currently, India has 26 sedimentary basins with a range of 3.14 million square meter. It is divided into four parts based on hydrocarbon perspectivity. As of now, the production of crude and natural gas has been started from Category-I basin under deepwater areas. In Category-II basin, Oil companies have discovered the oil and gas wells but not for commercial production yet. Under Category-III and IV, are considered only geology perspectivity and uncertain potential of hydrocarbon reserves.
Petroleum reserves are estimates based on commercially viable and availability of hydrocarbons. There are two types of reserves including proven reserve and unproven reserve. Under proven reserve (1p) refers as have at least 90% probability of being produced. Unproven reserve (2p- only 50% certainty of being produced) and (3p- 10% certainty of being produced).
Exploration and Production: Most of the current crude oil and natural gas production is from domestic companies including ONGC and OIL. During exploration and production activities, there were drilled 144 exploratory wells and 445 development wells in the year 2017-18. Crude oil production in the country is 35.68 MMT and natural gas production is 32.65 BCM as of FY 2017-18. Total 18 hydrocarbon discoveries have been made. Presently, E& P companies have total 59 oversea assets in 28 countries of which 23 are producing, 7 are developmental blocks, 25 are exploratory and 4 are pipeline projects. Till now, India has signed 15 MOU with various countries for cooperation in the oil and gas sector.
Policy and Regulations: The government of India has taken several initiatives and launched various schemes in the oil and gas industry. Aiming to reduce the import dependency, enhance transparency and reduce the administrative discretion, the government has introduced various policy such as OALP (Open acreage licensing policy), HELP (Hydrocarbon licensing policy), and CBM (Coal Bed Methane), Discovered Small Field (DSF) policy, gas pricing reforms with premium for difficult areas, grant of marketing freedom for gas produced from difficult areas to encourage investments and increase crude oil and gas production. Oil and Gas companies have been promoting and incentivizing enhanced recovery methods to improve recovery factor of existing hydrocarbons reserves for augmenting domestic production of oil and gas and permitting exploration and exploitation of unconventional hydrocarbons such as shale gas, and CBM.
 
1) HELP Policy: In 2016, the Prime minister of India along with oil and gas minister has launched new Hydrocarbon Exploration and Licensing Policy, which is replaced the earlier New Exploration Licensing Policy (NELP) that has been applicable since 1997-98. This policy has also replaced to production sharing contract model with revenue sharing model between exploration and production players and government. Revenue sharing model is most popular in developed countries such as the USA and Russia. The main aim of HELP policy are as follows:
·         Uniform license policy for exploration and production activities
·         To boost the indigenous crude oil and gas production
·         Marketing and pricing freedom for crude oil and natural gas produced.
·         Increase investment in the oil and gas sector
 
 2) OALP Rounds: In March 2017, Government of India has launched OALP Bid Round-I and offered 55 blocks covering an area of 60,000 square kilometer under examined HELP policy. After completion of this round, India has received 60,000 Crore of an investment through successful bidders for 55 blocks in September 2018. In January 2019, Oil and gas minster has launched OALP Bid round -II AND offered 14E&P blocks with an approximate area 30,000 square meter. The OALP Bid round-II will be closed with block awarded on 12th March 2019. During Petro Tech 2019, Oil and gas minster has launched OALP bid round III and offered 23 oil and gas and CBM blocks with an approximate area of 31,000 square kilometer. The last date for bidding will be 23rd April 2019. After successful completion of all bid rounds, India will have more than 1.2 lakh square meter for exploration and production activities in next few years.
 
Rounds
Year of Launch
Year of Signing
Blocks Offered
Onshore
Offshore
Blocks Awarded
OALP I
March, 2017
September, 2018
55
46
9
55
OALP II*
January, 2019
Yet to Sign
14
8
6
-
OALP III*
February, 2019
Yet to Sign
23
19
4
-
*OALP II Bid Closing Date: 12th March 2019
*OALP III Bid Closing Date: April 2019
 
3) DSF Rounds: Under the DSF Policy, only those hydrocarbon discoveries of state-owned companies which could not be monetized for a long period of time are offered for bidding. During DSF Bid Round-I, there are only awarded 30 contract areas out of 46 offered area with gross estimated revenue INR 9,000 Crore. About DSF Bid round-II, there is offered 25 contract areas with 3,000 square Km and is anticipated to get around gross estimated revenue of INR 45,000 Crore. The bid submission process was successfully completed in January 2019. Oil & Gas Ministries has awarded 23contract areas as part of DSF Bid round-II in March 2019. A total of number 46 companies (40 Indian and 6 Foreign Players) have participated in the DSF Bid round II.
 
Rounds
Year of Launch
Year of Signing
Contract Area Offered
Contract Area Awarded
DSF I
May, 2016
March, 2017
46
30
DSF II
August, 2018
March, 2019
25
23
 
Pricing of Crude Oil and Natural Gas: Pricing is the key factor for the development and production of oil and gas fields. The crude oil price fluctuation is market phenomena. The production of crude oil and price depends on demand and supply, geopolitics, and policies of crude oil producing countries. The major benchmarks of crude oil price are the WTI, Brent and the Dubai Fateh crude oil. The average price of Indian basket of crude oil for the month of January 2019 is $ 60/bbl. Recently, Government of India highlighted the issue of high crude oil prices with OPEC and OPEC member countries and has also taken steps to increase domestic oil and gas production and to reduce reliance on imports of crude oil. In India, Natural gas prices are set every six months based on the average price of an international benchmark such as Henry Hub, and national balancing point (NBP). The current range of domestic gas price is $3.36/MMBtu to $7.5/MMBtu for a period of 6 months (Oct18-Mar19) and, but the LNG import price range is around $ 10.00/MMBtu. Domestic natural gas is allocated as per the prevailing gas allocation policy depending upon the availability and balance demand is being met through the import of LNG which is imported under open general license on the terms and conditions mutually agreed upon between the buyers and sellers. In India, whenever Good and services tax will be introduced in oil and gas sectors that will help to reduce the prices of selling prices of petroleum products such as Petrol and Diesel.
 
Investment Opportunities: There are a lot of opportunities in investment in upstream oil and gas sector in India. The government has changed the policy from NELP to HELP under adopted revenue-sharing model and increased the fiscal incentives for enhanced recovery and improved recovery projects for entire commercial production. Growing economy, surplus refining capacity and pipeline network and population growth are the main drivers for increasing the exploration and production activities in India. The government has allowed 100% foreign direct investment (FDI) in exploration and production and proposed uniform licensing policy to explore all types of hydrocarbons including conventional and non-conventional resources. Within the last three years, the government has offered 92 blocks under three rounds of block bidding and awarded successfully 55 blocks to bidders. For 2019, the government has announced for fourth and fifth bidding round for offering the blocks under OALP. These initiatives will be attracted to investors to invest in the upstream sector.
 
Challenges:   Indian upstream industry has been facing some key challenges including subsidies on oil and gas, technology requirements, and development of strategic storage facilities for crude oil. Below are the few lists of challenges in the upstream sector.
Ø Sources of crude oil: India is mostly dependent on import of its crude oil requirement
Ø Lack of integration operation model: Better integration between upstream and downstream companies can balance its operation, reduce volatility, and risks.
Ø Demand and supply of crude oil: There is a strong problem of demand and supply in the upstream sector of the oil and gas industry in India. It is evident that the demand for crude oil is greater than its supply. Due to the high population and economy growth will drive the increasing demand for crude oil in India.
Ø Environmental pollution: Oil and gas exploration and production operation have the potential for a variety of impacts on the environment. These impacts depend on the stage of the process, size, and complexity of projects. In 2016, India has signed an agreement climate of Paris (COP) for dealing with green gas house emission and increase the carbon sink capacity of 2 to 3 billion tones by 2030.
Ø Fluctuation crude oil prices: The fluctuations of crude oil price are mostly affected by geopolitics, problems of various regions and economic uncertainty. Crude price moved from a high value from $150/barrel in 2010 to lower value $36/ barrel in 2016.
Ø Lack of advanced technology and skilled labor: The industry faces a shortage of skilled labor and technology for the exploration and production of unconventional assets such as shale gas and coal bed methane.
 
Upstream Economics: The Internal rate of return of oil & gas exploration projects is most important economic factor for project evaluations and understanding the feasibility of projects. Upstream operations (Exploration, Development and Production) is high risky and high investment activities. It depends upon several parameters such as reservoir size, production potential, water depth, exploitation strategy, production profile, capital expenditures and operating costs, legal frameworks and regulations involving taxes and economic factors like oil & gas prices, inflation rate, interest rate, discount rate, exchange rate, taxes and depreciation, environmental constraints etc. The range of IRR differs from country to country and project to project since geological, geographical risks and other risk of each project are different. The IRR of joint ventures and private oil and gas exploration companies in India is projected to be between 13%-15%.

Conclusions: Indian upstream sector has been moving aggressively through OALP and DSF bidding rounds for exploration, development and production of oil and gas fields with help of HELP policy.  Marketing and pricing freedom for crude oil and gas and lower royalty rates from difficult areas such as offshore, deep-water and ultra-deep-water blocks are the main features of HELP policy. Currently, contracts and agreements between companies and government are based on revenue sharing model. During this model, Government will not be concerned with the cost incurred and will receive a share of gross revenue from sale of oil and gas. Earlier it was based on production sharing contract. The new model will attract investors for investment in upstream sector and increase the foreign and private players participation in oil and gas blocks bidding rounds. Pricing of crude oil and advanced technology for exploration of unconventional resources are two key major restraints in development of upstream sector in oil and gas industry in India. 100% FDI and uniform licensing policy for exploration will drive the demand of domestic crude oil and gas production. In 2015, the government of India had set the target to reduce the dependency of crude oil import 10% by 2022. Within last three years, the quantity of crude oil imports crossed over 82%. For achieving the target, both oil & gas companies and government will have to focus on create build infrastructure such as pipeline and increasing domestic oil and gas production.

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