Context: India’s crude oil production fell 7.1% (in May 2020 compared to May 2019) on the back of low demand due to the Covid-19 pandemic.
More on the news:
- Domestic production of crude has been falling every year since FY 2012.
- Annual crude oil production has fallen at a compounded annual rate of 2.1% since 2012.
- The fall in the production of crude has led to a steady climb in the proportion of imports in domestic crude oil consumption.
Reason for falling production of crude:
- Aging wells: According to the experts, most of India’s crude oil production comes from aging wells that have become less productive over time.
- The output of these aging wells is declining faster than new wells can come up according to experts.
- Domestic exploration companies are attempting to extend the life of currently operational wells.
- A lack of new oil discoveries in India: This, coupled with a long lead time to begin production from discovered wells has led to a steady decline in India’s crude oil production making India increasingly dependent on imports.
Domestic Production Scenario:
- Crude oil production in India is dominated by two major state-owned exploration and production companies, ONGC and Oil India.
- According to experts, these companies are the key bidders for crude oil block auctions and end up acquiring most of the blocks that are put up for auction in India.
- Scenario related to private players:
- While there are some private players in the upstream oil sector including Cairn India and Hindustan Oil Exploration Company there has been a lack of interest in exploration and production in India from major private players due to -
- Long delays in the operationalisation: The best-case scenario from allotment to production is at least 5-7 years and in many cases it was delayed beyond this timeline particularly in the case of public sector companies.
- Large number of approvals required: Some of the key approvals which are required to begin production include environmental clearances, approval by the Directorate General of Hydrocarbons after the allottee completes a seismic survey and creates a field development plan.
Way ahead: Policy changes required
- Reduce levies of oil production:
- Existing public and private sector players have asked for reduced levies of oil production including oil cess, royalties, and profit petroleum especially when crude oil prices are below $45/barrel.
- According to the experts, the requirement to pay royalties to the government at low crude prices can make it unviable for these companies to invest in further exploration and production.
- Open Acreage Licensing Programme (OALP):
- The government introduced the OALP in 2019 to allow companies to carve out blocks that they are interested in and with lower royalties and no oil cess.
- However, existing players are calling for a relaxation of royalties and oil cess on blocks allotted under previous policies.
- Introduction of floor price:
- The Chinese government offered a floor price to oil producers insulating them somewhat from any sharp falls in international crude prices. The Indian government can provide a similar mechanism.
- This kind of policy at least allows for a company to have a fixed worst-case scenario for the sale of crude oil and incentivise more investment in exploration and production.
Open Acreage Licensing Policy (OALP)
- The OALP provides uniform licences for exploration and production of all forms of hydrocarbons, enabling contractors to explore conventional as well as unconventional oil and gas resources.
- Under the OALP, once an explorer selects areas after evaluating the National Data Repository (NDR) and submits the Expression of Interest(EoI), it is to be put up for competitive bidding and the entity offering the maximum share of oil and gas to the government is awarded the block.
- NDR has been created to provide explorers’ data on the country’s repositories, allowing them to choose fields according to their capabilities.
- Fields are offered under a revenue-sharing model and throw up marketing and pricing freedom for crude oil and natural gas produced.
The Hydrocarbon Exploration and Licensing Policy (HELP)
- The HELP replaced the erstwhile New Exploration Licensing Policy (NELP).
- Under HELP, the Open Acreage Licensing Programme (OALP) along with the National Data Repository (NDR) were launched as the key drivers to accelerate the Exploration and Production (E&P) activities in India.
- The main features of HELP are Revenue Sharing Contract, single Licence for exploration and production of conventional as well as unconventional Hydrocarbon resources, marketing & pricing freedom, etc.
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