NELP VIII Fails to Entice Oil Companies Into India's E&P Sector

Damp Squib

The eighth round of India's New Exploration & Licensing Policy (NELP), under which 70 oil and gas blocks were open for competitive tender, has failed to attract a positive response from investors. India received 76 bids for 36 out of the 70 oil and gas blocks on offer. Of the 36 blocks to be awarded eight are deepwater blocks, 13 are shallow-water blocks, and 15 are onshore blocks. For the 10 coalbed methane (CBM) blocks offered under CBM IV the response was more positive and India received 26 bids for eight blocks. Single bids were received for 20 blocks under NELP VIII and for one block under CBM IV. India's Directorate General of Hydrocarbons (DGH), V.K Sibal, said "nobody will be happy with this result", adding that potential investors had been given the wrong signals by bad publicity and misinformation.

As in previous licensing rounds in India, state-backed companies played a domineering role in NELP VIII. India's ONGC played the leading role in bidding for and winning blocks. The company bid for 25 of the 36 blocks that saw investor interest and won stakes in 17 of these blocks. To improve its bidding strength ONGC chose to partner with a host of Indian state-backed companies including Gujarat State Petroleum Corp. (GSPC), Oil India Ltd. (OIL), Gas Authority of India Ltd. (GAIL), and state electricity company National Thermal Power Corp. (NTPC). The joint bidding approach by these companies put them in a strong position in relation to smaller investors that did not have the same financial strength and, in some cases, technical expertise. NELP VIII saw the entrance of a new state-backed player. Andhra Pradesh Gas Infrastructure Corp. which was formed out of a joint venture (JV) between AP Industrial Infrastructure Corp. and AP Genco. The company participated as part of an ONGC-led consortium to acquire stakes in four blocks in the Krishna-Godavari Basin, which has proved highly prospective for natural gas. The formation of Andhra Pradesh Gas Infrastructure Corp. reflected an attempt by the state of Andhra Pradesh to locate new gas reserves in the KG Basin that can be used to improve supply security and boost revenues. This mirrors to some extent the strategy of GSPC, which was also formed to give the state government a stake in oil and gas reserves in Gujarat. However, in contrast to GSPC, which tended to work independently on new blocks, Andhra Pradesh Gas Infrastructure Corp. has expanded its portfolio through a consortium approach to prevent wasting financial resources and to help develop its technical expertise.

Besides the state-backed companies were a number of private players, many of whom were familiar faces. Cairn India took the MB-DWN-2009/1 Block in Mumbai and a block in the KG Basin, while BG Group also entered into a consortium with ONGC at KG-DWN-2009/1. Acting on a recently ramped up exploration spending budget, mining giant BHP Billiton also scooped up three blocks in NELP VIII. However, India's largest private oil and gas company Reliance Industries (RIL), which is usually a leading bidder in India's NELP licensing rounds, only put in a bid for one block as the company had reportedly reined in expenditure given that the ongoing litigation process with Reliance Natural Resources Ltd. (RNRL) over gas prices and allocation from its KG-D6 Block has increased financial uncertainty for the company (see India: 20 July 2009: Indian Government Wades Into RIL-RNRL Gas Dispute as Tensions Mount). Other minnows like Jubilant Energy and Deep Energy were also active, although with the exception of BG Group, NELP VIII again failed to attract the interest of major IOCs.

There are a number of reasons for the lack of foreign investor interest in NELP VIII. First, despite the DGH's estimate that India's prognosticated resources of oil and gas are 205 billion boe and despite the country’s low drilling density (particularly in deepwater areas) many investors did not appear to believe the blocks on offer were particularly prospective. Indeed, media reports suggest that an estimated 40% of the blocks on offer were recycled from previous licensing rounds while others had been relinquished by previous investors. In many cases, exploration risks in the blocks were also high, which could complicate efforts by smaller investors to attain funds from banks in the current financial climate. Second, although the government reiterated at the London (U.K.) road-show that it would ensure the contractor received profit shares as stipulated under the model production sharing contract (PSC), the government has reiterated its right to allocate gas and approve pricing as per the gas utilisation policy, which raises some doubts over freedom of marketing rights for contractors (see India: 9 September 2009: Indian Government Launches Roadshow for NELP VIII/CBM IV in London). Indeed, a number of foreign exploration companies have written letters of protest to the government over the lack of clarity over gas pricing and marketing freedom issues. Third, RNRL's smear campaign against the Pet