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Upstream Sector

Introduction

The Ministry of Petroleum & Natural Gas (MoPNG) is concerned with exploration andproduction of oil and natural gas, refining, distribution and marketing, export and

conservation of petroleum products. MoPNG gets its authority under item no. 53, ListI, VIIth Schedule of Article 246 of the Constitution of India.

Before 1970s, Oil exploration fell within the domain of the National Oil Companies(NOCs) i.e. Oil and Natural Gas Commission (ONGC) and Oil India Ltd (OIL). There wasno major oil field discovery after Bombay High and level of domestic crudeproduction was stagnating. A major departure was made between July 1994 andMarch 1995 when Government of India offered blocks to Joint Ventures (JVs)(NOCs/Private Companies) for exploration till IXth round of Pre-New ExplorationLicensing Policy (NELP) in 1995. The Government in order to accelerate thedevelopment of the country's oil field also offered discovered fields in two rounds to

JVs where NOCs had already made discovery of oil/gas. In 1997, the government de-regulated the sector partially and also announced the New Exploration Licencing

Policy (NELP) under which all Explorations and Production (E&P) companies includingthe NOCs were allowed international price parity in respect of crude oil extractedfrom new wells.

The Government of India under Oil Fields (Regulation and Development) (ORD) Act,1948 framed P&NG Rules 1959, for the conservation and development of mineral oilswhich includes collection of royalty, levy and collection of fees or taxes in respect ofmineral oils mined, quarried, excavated or collected. In addition, share of profitpetroleum is worked out as per the provisions of the Production Sharing Contracts.

Non-Tax Receipts from offshore fields are received by the Central Governmentwhereas in case of on-shore fields these receipts are to be collected by the

respective state governments except profit petroleum, which is the receipt of theCentral Government.

Changes in policy from pre NELP (1992-95) to NELP (1997)

Major changes made by the Government from pre NELP to NELP are as under:-

Pre NELP NELP

1.

NOCs to take participating interestupto 40%, then forming a Joint Venturewith parties.

NOCs had an option of takingparticipating interest upto 30%,however under 1st round of bidding,NOCs had to take participating interestbetween 25-40% from the explorationstage.

NOCs to compete with the private sectorfor obtaining petroleum exploration licenseinstead of getting them on a nominationbasis.

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2.

Royalty and cess on the oil and gas isto be borne by NOCs on behalf ofcompanies.

Royalty payment for crude oil to be on ad-valorem basis for the on land area at 12.5%and for off shore area at 10%. The royaltypayment for natural gas to be @ 10% forboth on shore and off shore areas. Paymentof cess on crude oil and natural gas

produced from blocks under NELP has beenabolished.

3.

Biddable sharing of profit petroleumbased on post-tax investment multiple(IM) achieved by the contractor or posttax rate of return.

Sharing of profit petroleum based on pretax investment multiple (IM) achieved andis biddable.

4.

After the close of the date of receipt,the bids were evaluated in ExplorationContract Management (EXCOM) wingof ONGC/ DGH, on behalf of MoPNG.Bid evaluation report were thenexamined in MoPNG and the blocks

were awarded.

Evaluation of bids will be carried out onweightage assigned on a scale of 100points, under the following four maincriteria i.e.

a. Technical capability

b. Financial strengthc. Work programme

d. Fiscal package.

In addition, the following points were added during NELP:

NOCs were allowed given international price of crude for production fromareas under NELP, giving them a level playing field.

No minimum expenditure commitment during the exploration period.

Option to amortize exploration and drilling expenditure over a period of 10

years from the date of commercial production. 7-year tax holiday from commencement of production.

* There was, however no significant policy change during 1st to 4th rounds of NELP.

Process of entering into agreement/ contract

For exploration blocks/fields, the parties are invited to bid under terms and conditionsof pre NELP and NELP. where they are mainly to bid for:

Work programme commitment.

Profit petroleum share expected by the contractor at various levels of pre- tax

level of multiple achieved.

Percentage of annual production sought to be allocated towards cost recovery

After the receipt of bids, these are evaluated in Exploration Contract Management(EXCOM) wing of ONGC/ DGH, on behalf of Ministry of P&NG. Evaluation reports arethen examined and based on the decision taken in the Ministry, blocks are awardedafter taking the approval of the Cabinet Committee on Economic Affairs (CCEA).

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Contract Signed

The statement below indicate the number of blocks/fields offered, awarded for whichcontracts were signed during pre-NELP and NELP.

Sr.

No.

Name of the round Year of

offer

No. of

fields/blocksoffered

No. of

fields/blocks

awarded

No. of

blocks/fields wherePSCs signed

Pre NELP

1. 1st round to 2ndround (discoveredfields)

August 1992& October

1993

84 (20medium &64 small)

30 (5medium & 25

small)

29 (5 medium& 24 small)

2. Round IV to Round IX(exploration blocks)

September1991 to

March 1995

270 35 28

NELP

3. 1st Round 2000 48 24 24

4. 2nd Round 2001 25 23 23

5. 3rd Round 2003 27 23 23

6. 4th Round 2004 24 20 20

Total 478 155 147

Out of total 147 PSCs signed during the last 12-13 years, the production has started

in respect of 5 mid sized fields (Panna &Mukta, Ravva, MS Tapti and Kharsang) and in10 out of 24 small sized discovered fields. In the remaining 13 small sized discoveredfields, the production has yet to start. Out of the remaining PSCs for NELP and preNELP exploration blocks, discovery has been made in 9 blocks.

Production of crude oil and Natural Gas

The details of production of oil and gas, on-shore/off-shore wise and NOCs/ JV wise forthe period 2C00-01 to 2004-05 have been indicated below:

Production 2000-01 2001-02 2002-03 2003-04 2004-05*

Crude Oil (tmt)

On shore-NOCs

On shore-JVs

11714

77

11818

71

11396

75

11382

74

11517

74

Off shore-NOCs

Off shore-JVs

16629

4006

16074

4069

17560

4013

17677

4240

18164

4226

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32426 32032 33044 33373 33981

Natural Gas (mcm)

On shore-NOCsOn shore-JVs

7416309

7343624

76151111

76661307

75511426

Off shore-NOCs

Off shore-JVs

18465

3287

18317

3430

18367

4296

17805

5184

17444

5356

29477 29714 31389 31962 31777

* provisional figures

From the table given above it may be seen that from the year 2000-01 to 2004-05,the production of crude oil and Natural Gas has increased only by 4.8 per cent and

7.8 percent respectively, which is not significant. Thus the policy of the Governmentto accelerate the development of the country's Oil field by offering discovered field to

JV/private companies has not yielded desired result so far.

Background

The domestic demand for petroleum in India is growing at a very rapid rate. Theenergy consumption has over the years grown at a rate of 6-7 per cent per annumagainst a world average of 1.5 per cent per annum. The Oil & Gas sector plays a keyrole in Energy sector as it accounts for about 40 per cent of India's commercialenergy consumption. The average per capita consumption of petroleum is stillabysmally low against a world average of 927 kg it is only 113 kg in India.

On a conservative basis, petroleum products consumption in India is expected togrow to about 180 MMT in 2006-07 to around 370 MMT by 2024-25. Similarly thedemand for Natural gas was 110 Million Standard Cubic Meters Per Day (MMSCMD) in1999-2000 and is expected to reach 230 MMSCMD by 2006-07 and further to about390 MMSCMD by 2024-25. However, the current level of domestic production ofcrude oil is around 32 Million Tonnes per year and that of Natural Gas around 78MMSCMD. Over the last three years, i.e from 1999 to 2002, 300 million tonnes of oilplus oil equivalent gas reserves have been discovered in the country

India is endowed with 26 sedimentary basins along with deep-water sedimentaryareas. India's prognosticated reserves are mostly distributed in 12 basins. The totalsedimentary area works out to 3.14 million sq. km. India has a huge hydrocarbon

resource base of around 28 billion tonnes with in-place geological reserves of 6.85billion tonnes. The domestic crude oil production was 31.93 MMT and gas productionwas 28.47 Billion Cubic Meters in 1999-2000. The domestic availability of crude ismainly distributed in three regions: Mumbai Offshore accounting for about 59 percent of the availability, Gujarat accounting for about 18 per cent and Assamaccounting for about 16 per cent. The balance crude production comes from bothonshore and offshore areas of Andhra Pradesh and Tamil Nadu and from the onshorearea of Arunachal Pradesh.

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Given the increasing demand for petroleum products, it is difficult to envisage self-sufficiency in crude oil in the near future. However to impart greater thrust toexploration and production of oil & gas in the country, the Government formulatedNew Exploration Licensing Policy (NELP) under which 70 exploration blocks fromonland, offshore and deepwater areas have been awarded in three rounds. It hassigned Production Sharing Contracts (PSCs) with various companies/consortia for 24,

23 and 23 blocks under the first, second and third round of NELP. The fourth round isunder way and 24 blocks have been offered under this round.

As much as $23.56 billion have been invested in the upstream sector ever since Indiaopened its doors to foreign firms in 1994, but a lions share about $14.14 billion has been spent in development and production of discovered blocks. As regardsexploration efforts in the blocks offered under the New Exploration Licensing Policy(NELP), the investment has been $4.16 billion until September 2002.

Expected Investment (Phase-I+II+III)

Total NOC Pvt./Domestic Foreign

NELP-I 1,158.84 272.27 688.37 198.21

NELP-II 775.51 670.58 71.45 33.48

Proposed Investment in NELP-III

NELP-III Total NOC Pvt./Domestic Foreign

Phase-I(Committed)

414.54 251.62 147.22 15.70

Phase-II(Expected) 335.09 120.69 193.60 20.80

Phase-III(Expected)

288.89 89.06 180.03 19.80

Total 1,039 461.37 520.85 56.3

Investment (Expenditure incurred up to September 2002)

Under 1st Phase of NELP-I & II

Total NOC Pvt./Domestic Foreign

NELP-I 338.93 113.73 111.88 113.32

NELP-II 77.08 62.19 0.36 14.53

Investment made by companies in discovered fields and in explorationblocks (As on 30th September 2002)

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Discovered fields (US $ Million)

Small sized 96.35

Medium sized 1,317.46

Pre-NELP Blocks 526.15

NELP-I 338.93

NELP-II 77.08

Grand Total 2,355.97

The blocks from the following less explored or unexplored basins can also beconsidered for inclusion in the future rounds of NELP based on minimum geo-

scientific criteria,

i. Deepwater West Coast

ii. Deepwater Southern Tip of India

iii. North East Coast

iv. West Bengal Onshore and Offshore

v. Kutch-Saurashtra Onshore and Offshore

vi. Mahanadi Basins Onshore and. Offshore

vii. Ganga Valley

viii. Himalayan Foothills

ix. Vindhyan Basin

x. Pranhita-Godavari basin

xi. Gondvana

xii. Purnia basin

xiii. Palar

Exploration blocks from the basins are carved out based on the pre-exploratorysurveys made by Oil and Natural Gas Corporation Ltd. (ONGC), Oil India Ltd. (OIL) andDirectorate General of Hydrocarbons (DGH), for which sufficient funds are available

annually. Moreover, investment in the exploration blocks awarded under NELPdepends upon the work programme bid by the awardees.

List of Foreign, Private & NOCs working in Indian E & P activities

1. Private Companies:

a. Indian Companies:

1. Videocon Petroleum Ltd.

2. Reliance Industries ltd.

3. Hindustan Oil Exploration Company

4. Selan Exploration Technologies

5. Assam Company Ltd.

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6. Tata Petrodyne Ltd.

7. Essar Oil Ltd.

8. Interlink Petroleum.

9. Jubilant Enpro Pvt. Ltd.

10. Phoenix Overseas Ltd.

11. Enpro Finance Ltd.

12. Prize Petroleum Company Ltd.

13. Hydrocarbon Resource Development Company

b. Foreign Companies

1. British Gas Exploration & Production India Ltd. (subsidiary of BG EnergyHoldings Ltd. U.K.)

2. Cairn Energy Cambay B.V. Netherlands (subsidiary of Cairn Energy Plc, UK)

3. Cairn Energy Gujarat B.V. Netherlands (subsidiary of Cairn Energy Plc. UK)

4. Cairn Energy India West B.V. Netherlands (subsidiary of Cairn Energy Plc. UK)

5. Cairn Energy India Pty. Ltd. (subsidiary of Cairn Energy Plc. UK)

6. Canoro Resources Ltd. Canada

7. Geo Global Resources Inc. Canada

8. Geo-Petrol International Inc. France

9. Hardy Exploration & Production India Inc. (subsidiary of Hardy Oil & GasLimited, U.K.)

10. Heramec Ltd. (Subsidiary of Heritage Oil Corporation, U.K.)

11. Joshi Technologies Inc. USA

12. Mosbacher India LLC, ( subsidiary of Mosbacher Energy, USA)

13. Niko Resources Limited, Canada

14. OAO, Gazprom , Russia

15. Okland International LDC, USA

16. Polish Oil & Gas Company, Poland

17. Ravva Oil (Singapore) Pte. Ltd. (subsidiary of Marubeni Corporation, Japan).

18. Tullow India Operations Ltd. (subsidiary of Tullow Oil Plc. Ireland)

19. Premier Oil North East India (subsidiary of Premier Oil, UK)

2. Public Sector Undertakings :

1. Oil India Limited

2. ONGC

3. GAIL (India) Ltd.

4. IOC

5. Gujarat State Petroleum Corporation Ltd. (Gujarat State Undertaking)

6. Hindustan Petroleum Corporation Ltd.

7. Bharat Petroleum Corporation Ltd.