Hydrocarbon Exploration License Policy

With the government agenda of moving towards a self-reliant India or Atmanirbhar Bharat, discovering domestic sources of energy has become urgent and non-negotiable. Presently, India imports 80% of its crude requirements, making the energy economy heavily dependent on foreign sources of supply. This implies, India is subjected to global price swings of crude oil. To reduce this dependency on external sources, Government launched Hydrocarbon Exploration License Policy (HELP) in 2016, in replacement of New Exploration Licensing Policy (NELP) of 1997-1998.

The new policy promises simpler rules, tax breaks, marketing freedom, and is a part of government policy to double oil and gas output by 2022-23. Why did we need a new policy now? The answer is simple: due to ineffectiveness of the previous set of acts and rules. Prior to 1991, oil exploration was the forte of IOCL and ONGC only. To take forward the LPG (Liberalisation, Privatisation, and Globalisation) policy of 1991, NELP was enacted in 1997-98 to encourage oil exploration. The private sector companies would exercise control on oil production, with government giving them licenses through an auction process. The companies would bring in new technologies, along with heavy Capex investment.

Despite an optimistic policy, there were certain drawbacks. Firstly, natural gas and other by products were a plausible find along with petroleum. To use this natural gas, the company would have to acquire a second license. Secondly, the company would have to share a certain percentage of the profit with the government. The companies in turn started manipulating profits which would lead to corruption.

To overcome these bottlenecks, government brought about HELP (Hydrocarbon Exploration Licensing Policy) in 2016. As per the new policy, the companies will not have to wait for a notification of the government. In turn, the companies will find the oil fields and inform the government of their agenda to conduct oil drilling. The government will send experts to verify the claims and grant licenses to the companies. This system is known as Open Acreage Licensing Policy (OALP). To solve the earlier problem of misreporting profit, the company now has to report their total earnings and thus share that with the government. In addition, the government has allowed 100% FDI in oil and gas sector to promote a healthy competition between public and private sector. This will further bring investment in oil and gas.

Today, out of all import expenses, 22% is spent on crude oil. Therefore, we have a new policy named HELP (Hydrocarbon Exploration Licensing Policy). Oil exploration has eventually become a forte of the private sector.

This policy has multiple merits associated with it. Along with uniform licensing policy, open acreage and revenue sharing model with the government, there are other merits as well. The companies will carry forth marketing and sale to domestic users as per their convenience. The companies will have freedom to use their technology while conducting deep-water drilling, and areas of high pressure and temperature, all of which requires high degree of expertise. Further, the companies will be spared from unnecessary audits, which was an issue between CAG and Reliance India. All these measures will serve as an incentive.

New policy is in line with the government policy of “minimum government, maximum governance”.

However, HELP does not come without its sets of demerits. Firstly, the complete risk of exploration is on the part of the investors. The entire initiative will be borne by them, and they will have to wait a substantial amount of time before they can generate revenue. The buffer time period would serve as a disincentive to companies and may even prompt them to withdraw investments. Secondly, given that private sector will fix the domestic sale price, the industries downstream could take a hit due to higher costs. Thirdly, there are oil blocks already under exploration. The new policy will not apply to them.

It is noteworthy that there is a shift from production sharing contract to a revenue sharing contract. This shows lack of faith on part of the government on the investors. Similarly, the banks may have reservations in giving loans, given the long gestation period and ever mounting NPAs (Non- Performing Assets).

Geographically, the North East (NE)would be left out. Since royalty rates on the land are uniform throughout, there is little incentive for companies to explore given the difficult terrain in the states on NE. Also, liberal market-based pricing can get too costly at times and will in turn affect industries such as fertilisers which uses natural gas as a raw material. Further, the government has to be paid royalty at all cost, even if the company is running into a loss. This is a possibility given that the world is inching towards adopting renewable energy, leaving coal and oil plant owners in a fix.

Indian government is taking steps in the right direction, but a lot needs to be done in order to make the policy investor friendly.