2009: A mixed year for India's upstream oil and gas sector

by Richa Mishra

It was a clear case of "you win some, you lose some" for the oil and gas exploration and production activities in the country. In 2009, the segment experienced its moment of glory with the gas flowing from what is tipped as world's largest discovery of 2002 in the East Coast, and crude oil production from the tough terrain of Barmer fields, Rajasthan.
But, this really did not result in attracting the investors to bid for the latest and most ambitious oil and gas auction round (NELP VIII). The auctions evoked a lukewarm response with only 36 of the 70 blocks offered receiving bids.

The subdued participation was attributed to the ongoing gas dispute between the Ambani brothers that has questioned the sanctity of the production sharing contract (PSC), coupled with the impact of the economic slowdown. The Government received 76 bids for 36 blocks out of 70 put on offer under NELP-VIII and 26 bids for 8 blocks out of the 10 offered under the fourth round of Coal-Bed Methane (CBM-IV). For 16 deepwater blocks, 15 shallow water blocks and three on-land blocks, no bids were received. However, the Petroleum Ministry maintained that the successful completion of the bids in the face of global recession was in itself a major achievement.
"The response of bidders when compared to similar offers elsewhere in the world was one of the best during the year," the Ministry argued.

In the upstream exploration and production activities, production has been nearly stagnant for over a decade. During the current financial year (2009-10), the production is expected to increase significantly, oil by 11 % (mainly due to production from Rajasthan and the Krishna-Godavari Basin deepwater block) and gas by 53 % (due to natural gas production from the KG Basin deepwater block) over the previous year.
Reliance Industries Ltd (RIL) operated Krishna Godavari Basin D6 block was put on production from April 1. This is expected to nearly double the supply of natural gas from the domestic sources, which excluding D6 production is close to 70 mm cmpd (ONGC fields and joint venture fields) currently. At present, the gas production from D6 is 52 mm cmpd, which is expected to touch 70 mm cmpd in January, reach 82 mm cmpd in March and maintain the natural gas production in the range of 82-89 mm cmpd up to March 2012.

Imports
Today, the country's dependence on imports of meeting its crude oil requirements is more than 70 %. There has been a constant rise in import of crude oil during the last five years from 95.9 mm tons in 2004-05 to 132.8 mm tons (provisional) for 2008-09. Cairn India's Barmer fields, Rajasthan, which commenced production from August 29, 2009, is projected to produce 2.2 mm tons of crude during the current financial year.
At peak production, it is expected to produce 8.9 mm tpy of crude oil during 2011-12, which will account for about 25 % of the total domestic crude oil production, and reduce the country's crude oil import bill by about 8 %, at current crude prices. Besides, carving out more areas for exploration for offer under various rounds of NELP and CBM, several measures have been taken by companies such as ONGC to accelerate hydrocarbon exploration and production. This is a continuous process, and not just restricted to 2009.

Tax holiday
Oil India Ltd (OIL) made a successful listing at domestic equity browses. But, on the policy front, the sector was still left with lot of questions unanswered. Though for NELP VIII and CBM IV the Government clarified on the issue of seven year tax holiday for commercial production of gas, it has not indicated anything for the future rounds. In fact, the delay in providing clarity on tax holiday did have an impact on investors' sentiments in NELP VIII and could do so in future rounds.
The issue of gas pricing continued to haunt the Government in 2009 as well. With an intention of bringing more transparency in the existing gas pricing regime, it is examining a uniform domestic price for natural gas, which is now sold at rates ranging from $ 1 to $ 6/mm Btu, depending on the source. The Government has asked GAIL (India) to undertake a study on pooling of prices of natural gas in the country. GAIL has engaged Mercados EMI undertake the study.

The end of 2009 saw the Government beginning hunt for a new Director General for the Directorate General of Hydrocarbons after the unceremonious exit of Mr V.K. Sibal.
On October 31, it appointed Mr S.K. Srivastava as the interim head of DGH after Mr Sibal was denied extension.