by Indrajit Basu

18-07-08 India’s seventh round of bidding for potentially lucrative oil-exploration projects was supposed to be like none of the six before. After all, the country needed foreign players and had offered unprecedented concessions to attract them this time around. Foreign oil hunters were expected in droves, with prices hovering at record-high prices.
Yet the latest round of international bidding under a new exploration licensing policy, called NELP VII, turned out to be a damp squib as far as foreign interests were concerned. Against expectations that almost all major global oil companies would participate in the bidding -- and bring their expertise to the country’s massive oil hunt -- only three global oil giants turned up.

The Ministry of Petroleum says that foreign participation in the bidding process was “satisfactory.”
But Gaurav Semwal, principal consultant at PricewaterhouseCoopers, put it more bluntly.
“India failed to attract the major oil companies,” he said.
According to the Ministry of Petroleum and Natural Gas, with bids received for 45 oil blocks, foreign interests participated in 21, either on their own or in consortiums. The only major players, however, were Cairn Energy, British Petroleum and BHP Billiton.

Indeed, for all of India’s energy security efforts of the past decade, NELP VII has proved to be a disappointment. Six months ago the mood was completely different. During a road show in London in January, interest from foreign bidders was “huge,” according to a ministry official. As many as 96 foreign bidders attended the show, including big names like Chevron, Hardy Oil, ExxonMobil, ENI of Italy and Petrobras of Brazil.
Hopes were sky-high too.
“We project that NELP VII could attract $ 8 bn of investment (more than double all previous NELPs), half of which could come in from foreign oil companies,” said S.N. Thakur, head of NELP VII, right after the road show.

There were other reasons too for India to be optimistic. Although India always maintained that it wanted foreign participation in its oil sector, foreign oil companies had to be satisfied playing a marginal role. That was because until the mid-1990s Indian companies were given preference in the exploration of hydrocarbon blocks. That changed with the landmark National Exploration Licensing regime in 1997, which allowed foreign companies to prospect for oil and gas in India on the same terms as Indian companies.
Still, even as six previous NELPs between 1999 and 2006 offered 162 exploration blocks involving contracts with 20 foreign companies, the only significant foreign oil giants that successfully managed to bag any substantial stake in India’s oil hunt were Cairn with 15 blocks, BG with seven, Niko Resources of Canada with six, and Naftogaz of Ukraine with three blocks.

The seventeen others have an insignificant presence, admit oil industry sources, while a major chunk of the industry is controlled by just two Indian companies -- the government-owned ONGC, and privatelyowned Reliance Industries.
“There are various reasons for this,” said Thakur, “but the primary one is that oil exploration is a risky business, and since very little data was available on India’s oil reserves few foreign companies dared to commit to the risks.”
The other significant reason was that oil prices were much lower too, “and were not enough to justify the risk-reward ratio for a foreign oil company.” Even though Indian oil companies were preferred in the past, for NELP VII India was “keen on attracting foreign interests,” said Thakur.

To turn the tables in favour of foreign players, 57 oil and gas blocks were made available for their bids. But more importantly, in a deviation from past practices, a consortium clause was included that automatically gave 10 extra points to a foreign oil company forming a consortium with a local oil company.
What’s more, NELP VII retained most previous incentives, like 100 % foreign direct investment for exploration and production; freedom to market oil and gas internationally at international crude oil prices; and free market-determined prices in India. Besides, the country’s oil ministry had done its own extensive research on all 57 oil blocks -- 19 in deep water, nine in shallow water and 29 on land -- and uploaded all the geo-scientific data on the NELP VII Web site.

Still, “actual foreign participation was nowhere near expectations and their response was lukewarm,” said a former NELP VII official. Out of the 57 blocks, 12 received no bids, while 19 attracted just one. The hoped-for names -- ExxonMobil, Chevron, Total and Shell, among others -- stayed away.
“Unfortunately, the bidding pattern proves that the policy changes did not serve their purpose, although Indian companies tried their best to partner with major oil companies,” said Semwal of PricewaterhouseCoopers.

So what went wrong?
One serious issue was the sudden announcement of what industry sources call a “retrograde” tax policy. In the annual budget of 2008 -- announced one day before NELP VII opened for bidding -- the government suddenly withdrew a crucial income tax holiday on gas production.
That irked most of the private bidders, local ones included, forcing them to run to the Finance Ministry for clarification on whether the new policy was applicable to NELP VII -- since it specifically mentioned that it retained all the incentives of the earlier NELPs.

But more importantly, while the government was taking time to decide whether to include NELP VII under the new tax policy or not -- thereby pushing back the closing date three times and eventually extending it by three months to June 30 -- other countries like Malaysia and Libya opened up their oilfields and took most of the foreign players away.
“Oil exploration is an expensive and risky business,” said the ex-NELP VII official. “While India was still dithering over its tax policy, foreign players saw opportunities elsewhere and decided to bet their money and resources there instead of in India.”

Nevertheless, like all its predecessors, NELP VII was a success in terms of local participation. Out of 96 companies participating in the bidding process, 75 were local.
“The response to NELP-VII bidding has been overwhelming,” said V.K. Sibal, the head of the Directorate General of Hydrocarbons, the government agency which oversees the NELP auctions. “A record 181 bids were received for the 57 blocks on offer, which works out to a healthy four bids per block. The number of bids has been the highest and the auction has been successful.”
Moreover, even though the desired big names were missing, Sibal said there were “eight to nine first-time (foreign) bidders including BHP Billiton, which shows that India is still a good destination.”