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Thursday, 22 May 2014 02:38
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Why allow firms to explore, if they can’t extract oil?

Coming as it does on the eve of the Narendra Modi government assuming office, the Directorate General of Hydrocarbons turning down Cairn India’s request for a 10-year extension request of its Rajasthan oil block is unfortunate. India has a poor track record in attracting top-notch global energy majors—the numbers have been falling in each successive oil auction—but one of the foreign firms that has done well in India is Cairn. After drilling 13 dry holes in Rajasthan in the area it bought from Shell, Cairn never looked back, and produced around 1.25 lakh barrels a day a few years ago; its current production is around 2.25 lakh barrels a day. After investing $3 billion over the next 3 years, the company hopes to increase this to 3 lakh barrels—to put this in perspective, India’s largest producer ONGC’s output is around 4.6 lakh barrels a day.

For years, companies such as Cairn had been asking the government to allow some more flexibility in the contracts, to allow continuous exploration, as is the international practice—right now, companies are allowed to explore for oil for just the first 7 years of the contract and the remaining 18 in extracting the oil from these areas. In other words, India loses out on the chances of companies finding more oil/gas because of this restriction. A year ago, oil minister Veerappa Moily saw sense in the proposal and allowed it. Including Cairn’s, a total of 8 discoveries were made by various companies. Cairn then argued that it would not be possible for it to extract the extra oil/gas it had found till 2020 when its current concession expired, and asked for an extension of 10 years. The DGH has pointed out that the current law allows for a 10-year extension only in the case of a gas field, but only 5 in the case of oil fields. Why this distinction should be there in the contracts is not clear, but surely some flexibility has to be shown if India’s oil/gas reserves/production are to grow?

Nor is it anyone’s case that the government will not benefit from Cairn’s extra production, and the benefit is not just restricted to a sharp reduction in the total oil imports. If all goes to plan, Cairn’s studies suggest the government could earn as much as $15 billion more in net present value terms—that’s $9.5 billion more for the central government, $4 billion more for the Rajasthan government and $1.5 billion more for ONGC in terms of its share of the profits from the venture in which it is a 40% partner. Once the current concession runs out, all that Cairn—and others—are asking for is that it be extended on the same terms. For most oil producers, that means around 80% of the extra production will accrue to the government. In other words, it’s pretty much win-win for everyone. Yet, due to the bureaucratic indecision, the proposal has been turned down. The new dispensation at the oil ministry needs to keep the larger national interest while looking at such proposals.

 

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