Oil & Gas Industry Wants Govt to Respect Sanctity of Contracts
India’s exploration activity has crashed due to loss of focus after big discoveries, arbitrary policy changes, lack of respect for sanctity of contracts and deteriorating risk-reward ratio, but the situation can be revived with proper measures, the exploration industry has told the new government. Seismic surveys, a key activity in the hunt for hydrocarbons, plummeted 91% in the five years to 2012-13 in onshore blocks and 95% in the more challenging offshore regions, the Association of Oil and Gas Operators has estimated. Further, the number of wells drilled has dipped 22% in the country, which urgently needs to step up exploration as it imports 80% of the oil it consumes, said the industry body. “Private risk capital has dried up. Exploration activity has nosedived over the last five years,” AOGO, which represents top companies in the private and public sector including BP, ONGC, Reliance Industries, BG, Cairn India and others, said in a letter to the Cabinet secretary. The exploration industry has been mired in disputes during the UPA government. These include successful explorers such as Reliance Industries and Cairn India, which have found the biggest reserves of oil and gas since the discovery of Bombay High in the seventies. The industry body says that the government’s approach has changed drastically, and in the wrong direction. “Moved away from the main objective of NELP of “maximize exploration, production & energy security to a “notional government revenue maximiza- tion”, policies are designed with a huge trust deficit without recognising the “convergence” of interests in the PSC regime. PSC administration is being misused to settle extraneous disputes or suspected frauds,” AOGO said.
The industry feels that it is a victim of its own success. “Quick significant discoveries made us lose the perspective,” it said. The oil and gas industry is worried that India is losing lustre as an investment decision as the government has struggled in its role as contract administrator; the oil ministry failed to resolve policy conflicts in a timely manner; there has been violation of the sanctity of contracts and lack of recognition that the Indian upstream industry derives its strength from the enthusiasm of existing players. It has suggested that the country must realistically assess its geology, focus on providing geological information, improve the riskreward ratio for investors and remove, or at least minimize, unnecessary controls that do not add value.
The government’s approach towards exploration and production as well as companies involved in this activity has largely been shaped by high-profile issues relating to the KG-D6 block, which initially hoisted India to global limelight as the world’s biggest find in the year it was discovered. However, production fell sharply leading to a bitter dispute between the oil ministry, which blamed the company, and RIL that said it suffered because of complex geology in the challenging deep-sea region.
The exploration industry has been mired in disputes during the UPA govt
The dispute shaped the UPA government’s approach toward the sector, AOGO said. “The entire industry has been held captive to issue with a single block,” it said and suggested that dispute-resolution mechanisms should be faster and independent, and the production-sharing contract, the bible of oilfield administration, should not be the instrument to deal with allegations of fraud and collusion. “Government role and methodology for financial oversight of operators needs clarity and transparency. (It should) develop robust PSC-based economic model with the help of experts for understanding of overall economics by key decision makers,” it said. Top industry executives say that the oil ministry has not honoured the sanctity of contracts and interpreted it differently from time to time depending on what is expedient and convenient. This, executives say, is a huge deterrent for exploration activity. The industry body agrees. “The contract should not be tinkered, as it destroys credibility of the system and scares future participants in Indian industry.” These issues are already weighing in the minds of policy-makers. The government has not been able to invite bids for a new round of exploration blocks for more than two years. A key reason for that is that existing players in the industry are complaining that the regulatory environment is not conducive for healthy business activity. But the industry also acknowledges various positives in the Indian regime. These include transparency in the allocation system, and the recently introduced open stakeholder brain-storming and solution-hunting system.