DGH is there to help producers, not stand in their way
Oil explorers can finally heave a sigh of relief. The petroleum ministry, as our lead story today points out, has decided to get out of their way, not completely but to a large extent. Indeed, the process has been under way for some months now. Till February, for instance, the work schedule of exploration firms was excessively compartmentalised—they could explore for oil/gas for 8 years, after which the next 17 years of the license had to be spent only ‘developing’ the fields. Oil exploration firms argued that this was ridiculous since, with the passage of time, there could be new tools developed or new insights got which could help find oil/gas in even areas where no oil/gas was found earlier. In February, the petroleum ministry finally allowed this ‘continuous exploration’, and rightly so.
Another problem, which has now been partially resolved, relates to the process of getting a ‘declaration of commerciality’ (DoC) certificate from the Directorate General of Hydrocarbons (DGH) for each discovery. If the DGH does not give a DoC, never mind how confident the oil company is of the reserves it has found, it cannot go ahead and develop the fields. That is the law. Just last month, as FE reported, the oil ministry all but asked RIL to leave the NEC 25 gas blocks off the coast of Orissa—since the DGH refused to give RIL a DoC for its discoveries here, this meant RIL had not found any gas/oil within the stipulated period, so it had to relinquish the area. Had RIL got a DoC, it would not have to relinquish the area, that’s how critical the DoC is. The DGH can refuse to give the DoC for a variety of reasons—it is not convinced of the size of the find or it thinks the find is unviable at current prices of oil/gas, among others. In even the KG D6 area, RIL has not been given a DoC for 5 new fields where it thinks there are substantial gas reserves—in the event, RIL has been asked to relinquish the fields where it believes there are 0.8 trillion cubic feet of gas, worth around $10 billion based on the prices at which the country currently imports gas. What has now been decided, as FE has reported today, is that once a major discovery has been given a DoC by the DGH, the operators don’t have to go asking for DoCs for the other discoveries they make in the area. In the case of RIL in KG D6, this means the company would not have to wait for the DoC for these 5 discoveries—D4, D7, D8, D16 and D23—and can simply go ahead and develop the fields. The move makes perfect sense since, given the costs involved in developing fields, no company is going to go on a wild goose chase looking for oil/gas unless it is very certain there is oil/gas to be found—the government does allow costs to be defrayed but if the companies spend money recklessly without finding oil/gas, they will have no revenue against which they can defray the costs. What the government now needs to do is to find ways to quicken other processes of the DGH approving costs—it is not just RIL that has a problem, even Cairn has $1 billion of unrecovered costs. Other countries have production contracts similar to India but by using international benchmarking and other standards, manage to resolve cost disputes relatively quicker.