Oil Production in India – Explained, pointwise

Introduction

India’s domestic crude oil production has been on a consistent decline. In FY2021-22, it slipped to 28.4 million metric tonnes (MMT). This is the lowest domestic oil production in over two decades. India is the third-largest consumer of oil in the world. Low domestic oil production forces India to meet 85% of its needs through imports. The fall in production has been attributed to the ageing wells. Despite several initiatives by the Government, the oil exploration and production activities have not picked up in India. The persistent uncertainties due to Russia-US tensions amid Ukraine war, clubbed with possibility of recession and falling exports have made it all the more important to boost domestic production in India. The Government recently offered 26 blocks (areas) for finding oil and gas through international competitive bidding under the Hydrocarbon Exploration and Licensing Policy (HELP).

What is the policy framework for Oil Exploration and Production in India?

The Hydrocarbon Exploration and Licensing Policy (HELP) was passed in March 2016. It replaced the earlier New Exploration Licensing Policy (NELP).

For a long period since the Independence, oil exploration and production was the exclusive domain of the Government. The Government began to liberalize the sector in 1991. In 1997, the New Exploration Licensing Policy (NELP) was launched, which tried to attract oil explorers through competitive bidding process.

Source: Directorate General of Hydrocarbon

HELP was launched with the expectation of reducing India’s dependence on imports by increasing the domestic production of oil and gas and thereby generating employment. HELP unifies the authority to grant licenses for exploration and production (E&P) of conventional and unconventional oil and gas resources, including oil, gas, coal bed methane, shale gas/oil, tight gas, and gas hydrates.

Under NELP, the oil production companies had to wait for the Government to invite bidding for oil blocks. The exploration and production was restricted to areas (blocks) opened by the Government. HELP introduced an Open Acreage Licensing Policy (OALP) that will allow companies to approach the government at any time and seek permission to explore any block. It also gives companies access to the National Data Repository (NDR) maintained by the government, to consult these maps and data to help inform them about which areas to bid on.

What are the benefits of HELP?

First, The Profit Sharing contract has been replaced with Revenue Sharing contract. It will encourage cost efficiency. The Government will also not be concerned about the costs incurred by the explorer and need not scrutinize the costs. The explorers will be incentivised to start production as soon as possible. In the profit sharing contract (under NELP), the explorer was allowed to recover costs incurred in exploration activities (like drilling wells, creating infrastructure) before sharing the profits with the Government.

Second, There is a single uniform licence for all forms of unconventional hydrocarbons like shale oil, Coal Bed Methane (CBM) etc.

Third, Prices have been freed of Government regulation. The oil production companies will be able to charge a competitive market price subject to a ceiling. This ceiling is the landed price of alternative fuels.

Fourth, under NELP, bids could be placed only for the blocks which were put on auction by the Government. Under HELP, open acreage policy will prompt the oil exploration and production companies to study NDR data and bid for any area they feel has high potential oil reserves.

Fifth, Lower royalty for explorers drilling in offshore areas to compensate the companies for the risks involved as costs incurred in these areas is

What are the reasons for falling Oil Production in India?

The domestic oil production in India has witnessed a consistent fall.

Source: The Hindu. The domestic oil production has been falling consistently since 2015-16. The production was 35.9 MMT in 2014-15. It has fallen to 28.4 MMT in 2021-22.

Ageing wells: Most of India’s crude oil production comes from ageing wells that have become less productive over time. A lack of new oil discoveries in India coupled with a long lead time to begin production from discovered wells has led to a steady decline in India’s crude oil production. The output of these ageing wells is declining faster than new wells can come up.

Dominance of State-owned Companies: Crude oil production in India is dominated by two major state-owned exploration and production companies, ONGC and Oil India. These companies are the key bidders for crude oil block auctions and end up acquiring most of the blocks that are put up for auction. Critics argue that over the years, ONGC has become a less efficient explorer. Rather, the focus has been more on acquisitions, not all of which make economic sense. ONGC has failed to strike a major oil reserve since the discovery of Bombay High.

Source: The Hindu. The oil production by ONGC has been declining consistently since 2012-13 (23.7 MMT). ONGC produced 19.5 MMT in 2021-22.

Policy Issues and Lack of Private Participation: There are very few private players in the oil exploration sector. This is because of long delays in the operationalisation of production even after an oil block is allotted due to delays in approvals. Moreover, the Cairn Energy fiasco has acted as deterrent for foreign investors. The Government had made a retrospective tax demand from Cairn. Cairn won an international arbitration award against the Government, The matter was finally settled with payment of compensation by Government to Cairn Energy. The whole episode has deterred foreign companies from investing in India, despite very favourable terms under HELP.

High Royalty: Some experts say the high royalties make it unviable for the oil companies to invest in further exploration and production.

Why is boosting Oil Production crucial for India?

High Import Bill: Over time, India’s crude consumption has soared. This has led to higher reliance on imports. In FY2021-22, India’s crude oil import bill has risen to  US$ 120.4 billion as the crude prices surged. A higher import bill is detrimental to the macroeconomic situation as it widens the trade deficit and put pressure on Government finances and forex reserves.

Source: The Hindu. India’s highest oil imports were in 2012-13 (US$ 144.3 billion). The fall in global crude oil prices reduced the imports in the following years. However, imports are rising again due to rising demand and prices.

Energy Security: India’s economic growth is closely related to its energy demand, therefore, the need for oil and gas is projected to grow more. Although, the Government has aggressively pushed renewable energy (especially in the electricity mix), the demand for oil and gas is expected to remain high for transportation and fertilizer sectors. According to the International Energy Agency (IEA), consumption of natural gas in India is expected to grow by 25 BCM, registering an average annual growth of 9% until 2024.

Inflationary Pressures: High oil prices contribute to higher domestic inflation, including high food prices. This impacts the poor the most.

What steps can be taken to enhance Oil Production in India?

According to a former Secretary with the Govt and oil and gas expert, following steps can be taken to boost domestic production:

First, The Government should incentivize the domestic producers to increase production. This can enable production of additional 18 MMT of oil in the country, saving ~US$ 10 billion per annum over the current import bill (~6-7% reduction).

Second, alternative measures should be explored to reduce dependence on imports e.g., producing syngas from coal.

Third, some provisions of the Mining Act can be changed by adopting the model of Long-Term Production Sharing Contract (PSC) Extension of Oil Blocks for 50 years. This will enable better management in terms of planning and reservoir management.

Fourth, the Government need to lower the effective levies (including royalties, cess etc.) from 67% to 40% for pre-NELP blocks. However, this should be conditional upon investment of surplus revenues to boost oil production through deployment of enhanced recovery technologies.

Fifth, the Government should bring import parity in the oil & gas value chain by imposing customs duty on crude, on a par with domestic sales tax. This will ensure a level playing field for domestic crude apart from bringing in additional revenue of ~US$ 7 billion.

Sixth, new fields have long gestation periods. To bring down the cost, the Government should rework the tax for the pre-NELP blocks that constitute the bulk of domestic production today. This should be supplemented with reduction in royalty.

Seventh, The Chinese government offered a floor price to oil producers, insulating them to an extent from any sharp falls in international crude prices. This strategy can be adopted by the Indian Government as well.

Conclusion

The demand for oil will continue to remain high despite the expected green energy transition. The Government has taken proactive steps like improved exploration policy, building strategic oil reserves and acquisition of overseas oil assets by ONGC. Now the Government should focus on boosting domestic oil production which can be the most potent step in enhancing India’s energy security.

Source: DGH

Syllabus: GS I, Distribution of key natural resources across the world;  GS III, Infrastructure: Energy.

Source: The Hindu, Indian Express, Mint, Financial Express, DGH