E&P projects are safe for now

Price volatility fails to affect onshore, offshore projects

Oil price fluctuations have failed to affect the exploration and production (E&P) projects in India, both onshore and offshore. Drop in project costs by about 30 per cent is the main factor lending support to oil companies as well as contractors — making projects viable even when crude oil prices are low.

"The trend of awarding E&P service and material contracts of the state-run companies to private firms continues. The government is encouraging such providers to invest in India through the local content policy. The domestic private players, too, have started to look at the much larger business for private sub-contractors through integrated contracts. Awarding a long value-chain contract helps companies obtain better prices and run a lean organisation. Performance-linked contracts are not uncommon," said Deepak Mahurkar, leader, PwC India.

Crude oil producing companies do not have control over prices, as they are sold at rates linked to the global benchmark for that variety of the oil. Thus, the industry is now focusing on reducing the

costs, and hence has brought about a change in the model, said industry experts. Earlier, the entire integrated package was awarded at one go. Now, part of it is outsourced, which helps reduce production cost, they said.

Recently, global crude oil prices toppled from $86 a barrel in October to around $60. Given the fact that E&P is a long gestation business, shortterm rally or dip in oil prices has limited influence on projects. In addition, for state-run player Oil and Natural Gas Corporation (ONGC) and Oil India, the absence of a fuel subsidy burden allows them more room to continue with development projects, irrespective of the oil price-level.

"After the 2014-15 oil price crash, the industry reviewed the costs and ways to reduce it. It found that project prices were high, and not sustainable for the long term. Since then, the industry has taken steps to reduce project costs. Recently, projects in India have been awarded at about 30 per cent below budget," said Bhaskar Patel, managing director of TechnipFMC (India).

TechnipFMC is into subsea, onshore and offshore E&P contracts, along with surface technologies business in India. The company's year-todate order book stands at ~60 billion as against ~17 billion for the entire 2017. “The cost reduction model is sustainable. Projects that were not viable at $80-$90 a barrel are now viable at $40-$50 a barrel. Projects that were not viable at $50-$60 are now viable at much lower per barrel costs,” said Patel.

However, oil companies are chalking out different models in an attempt to lower their project costs. Ruiaowned Essar Oil, for instance, has been trying to do most of its development works through its in-house companies. "For us, outside service provider is only involved in fracking. In the long term, we hope we should have our own set-up," said Vilas Tawde, managing director and chief executive officer of Essar Oil & Gas Exploration and Production (EOGEPL). Fracking is a method of getting oil or gas from rock by forcing liquid and sand into the rock.

For other E&P players, better costs have come through integrated bids. "In order to execute these projects on time and within budget, an 'integrated project development' strategy, with an inbuilt risk and reward mechanism, has been adopted. This new strategy is being delivered in partnership with leading global oilfield service companies," said Vedanta in its earnings release.

More oil projects are likely to be on offer in the country. Around 55 blocks, spread across 10 sedimentary basins, under maiden bid round of Open Acreage Licensing Policy (OALP) were recently awarded after a gap of six years.

Under the Discovered Small Fields Policy (DSF II), the government expects investments in 60 discoveries with an estimated in-place reserve of over 195 Million Metric Tons of Oil and Oil Equivalent Gas. In addition, 14 blocks with a total area of 29,233 square kilometer will be launched for bidding under the second round of OALP Bid Round II.