The year 2011 was about Oil Politics! It was about Government versus some of the big corporate houses – Reliance Industries, Vedanta Resources.
Questions on sanctity of the production-sharing contracts (PSCs) – signed between the Government and the contractors to explore and develop oil and gas acreages in the country – and the role of Directorate General of Hydrocarbons came into public glare.
The immediate challenges before the Government in 2012, therefore, would be to ensure greater transparency in implementation of the PSC, reduce time lag in decision making, performance audit of the companies, and giving upstream technical arm – the Directorate General of Hydrocarbons – more mandate.
An example of politics involved in the sector was the Ministry of Petroleum & Natural Gas approaching the Cabinet Committee on Economic Affairs for taking decision on the subjects that were well within the ambit of the Ministry.
Production-Sharing Contract
The drop in output from the country's largest gas fields in the East Coast – Reliance Industries-operated D6 block – saw the Directorate General of Hydrocarbons and the operator on two parallel tracks.
Besides, this also brought out grey areas in the PSC. The PSC has no specific penalty stipulations in case of shortfall in achieving the production targets envisaged in either the approved field development plan or annual work programme and budget.
To check the falling output, Reliance Industries roped in British firm, BP Plc, to utilise the latter's deepwater technology. The $7.2-billion Reliance Industries -BP Plc deal was taken to the Cabinet Committee on Economic Affairs (CCEA), which allowed the British firm to acquire 30 per cent participating interest in 21 oil and gas blocks of RIL, including the premium KG D6 gas fields, one of the biggest foreign investment transactions in the sector.
Though 100 per cent foreign direct investment is permitted in the oil and gas exploration and production sector under the automatic route, the Ministry decided to go to Cabinet for the deal approval. Reliance agreed to sell 30 per cent stake in 23 blocks won under various licensing rounds in part to benefit from BP's deepwater exploration expertise. While the nod for 21 blocks was given for two blocks — in Assam (on-land block AS-ONN-2000/1) and in North East Basin (NEC-DWN-2002/1) — it is still pending resolution of the difference between the Directorate General of Hydrocarbons and the operator.
The two have been holding divergent views on the exploration phase of these non-producing blocks. A constant complaint of the industry has been time lag in decision making by the relevant authorities, which results in companies losing out on exploration period.
Arm Twisting
A deal which was announced 2010 summer, Cairn Energy to sell majority stake in its Indian arm – Cairn India – to Vedanta Resources, took over a year to get officially sealed.
Mines and metals entrepreneur Mr Anil Agarwal's Vedanta Group has acquired a 58.5 per cent stake in Cairn India for $8.67 billion. The deal saw some arm-twisting by the Government wherein Cairn had to agree to the pre-conditions set for the deal approval. It also brought to forefront the issue of cess and royalty.
Audit
Performance audit of the companies in the business is a challenge with the Ministry/Directorate General of Hydrocarbons will need to resolve as more and more licensing blocks go into production.
The Comptroller & Auditor General of India has taken the Government to task in the much-awaited Performance Audit Report on Hydrocarbon Production Sharing Contracts. The report has found deficiencies in compliance with PSC provisions by the Ministry and the Directorate General of Hydrocarbons with regard to irregular declaration of entire contract area.
Conclusion
To meet the growing energy demand of the country the Government has been offering oil and gas blocks through international competitive bidding under equal terms and conditions to private, foreign, and national oil companies. Eight rounds of New Exploration Licensing Policy have been concluded so far and 100 blocks have been awarded. Results of the Ninth round are still awaited.
The politics in exploration and production activities had hurt the investor sentiments. To attract investments, the Government needs to resolve the issues concerning the sector.