India must focus on domestic E&P

21 September 2015, NewsWires – India is showing renewed interest in buying oil and gas assets in other countries to help boost energy security, but the nation’s exploration and production sector is crying out for action from the government to encourage investment that would do the same job at home.

Offshore rig

Offshore rig

Petroleum Minister Dharmendra Pradhan has said India should aggressively scout for acquisitions globally, capitalising on the opportunity arising from low oil prices.

State-owned ONGC Videsh recently agreed a deal with Russia’s Rosneft to acquire a 15% stake in its oil-producing subsidiary Vankorneft for $1.25 billion, signalling a renewed interest in Russia after a lull of more than five years.

However, India’s domestic exploration sector is going through a downturn. Private sector players have either disappeared or are awaiting a policy push from the Indian government as far as gas pricing and marketing is concerned.

The new licensing round showcased last year by the previous government has been put on the back-burner and could be delayed more than two years, industry sources say.

India needs to rethink its strategy for the domestic upstream sector and increase investments if it wants to cut dependence on crude imports by 10% from 2022, as envisaged by Prime Minister Narendra Modi.

That implies a need to channel some of the funds that might be used overseas to bolster domestic exploration and set up world-class infrastructure for attracting international investors.

At a time when service costs have fallen drastically, India should aggressively acquire seismic data and significantly ramp up exploration spending by state-owned companies.

Backers of an increased emphasis on the domestic sector can point to the chequered results of previous Indian E&P investments overseas.

For example, ONGC Videsh’s $1.9 billion purchase of Russia’s Imperial Energy in 2009 was followed by production declining sharply, leading to a writedown of $400 million.

Some feel Indian companies also ended up paying too much when investing more than $5 billion in Mozambique’s nascent liquefied natural gas sector during the past few years. However, those acquisitions were made before the oil market slide and it is too early to make judgements about their ultimate success when production remains some way off.

Domestically, in addition to increasing investments in exploration, India also needs to fast-track the development of multiple gas discoveries on the east coast made by private sector players.

Investments worth more than $10 billion have been on hold by private sector players such as Reliance and BP, in the absence of a rewarding gas price regime for deep-water development.

India needs to urgently tap this multi trillion cubic feet gas potential if it aims to reduce its dependence on costlier imports.

Pradhan has been talking about increasing domestic exploration efforts, as crude prices are low, but as yet there has been little to encourage investor confidence.

On the contrary, talk of migrating to a revenue-sharing model for future licensing rounds is seen as increasing risks for the contractor.

The new marginal fields round planned by the government is a step in the right direction, even if its outcome will depend largely on the appetite among smaller investors in today’s low oil price environment.

State-owned Oil & Natural Gas Corporation has taken advantage of reduced service costs and the additional bonus it has from a lower subsidy burden caused by lower oil prices to press forward with its own domestic investments this year. To really help India’s energy security, the government needs to create a framework that will encourage other investors to do the same.

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