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Interview

with Ashu Sagar, Secretary General, AOGO

01.10.2010 / Energyboardroom

The Association of Oil and Gas Operators (AOGO) was created in 2006 to facilitate changes in the industry and to encourage further exploration and production of oil and gas in India. We know that in the 5-7 years before the creation of the AOGO, major changes were taking place in the legal framework of the sector. If so, why AOGO was created only in 2006?

2006 was the right time for everything to happen. In 2002, we formed an upstream group within CII (Confedration of Indian Industries)–but there were only 8 or 10 players in the upstream sector at that time, so the mass was not big enough for that particular group to work very effectively. But by 2006, we had more than 20 members. So the number became big enough for an association to function. This was the first factor.

Secondly, 2006 was a very rough time. If you remember, oil prices were climbing and rigs were not available. India is on a PSC regime so we are very insensitive to the oil price variations as far as the exploration in this country is concerned. This is also a very interesting country for service industry— which has guaranteed business irrespective of oil price. However, because internationally the oil price matters, suddenly everybody everywhere started drilling. A lot of assets that were not previously attractive in terms of their potential volume of production, suddenly became attractive. Not only exploration, but even production drilling went up, and ergo rigs were not available.

Similarly, manpower also got sucked away. There was no trained manpower available, nor were other various services. We were facing a crisis of management, because we had contractual commitments to do a certain amount of work. I think that was a trigger that caused people to have focussed interests when discussing issues, and to form a cohesive group. It started as a kind of an informal club that met and discussed what was bothering us, and then we decided to officially form an association.

In august 2006, we decided it was the right time. And since then, we’ve been very successful. We meet once a month, and in a week we will have our 46th meeting.

What are your common interests? What are the main common demands that your members have towards policy makers?

Let’s be very clear, our objective is not only to make demands—. I see AOGO as having at least three or four different missions. One of them is: where should the industry be going? That’s a holistic issue. For example, we brought out an industry monograph on Open Acreage Licensing Policy. It was not in response to a policy problem: it was a concept that we developed, and we did a lot of work on it. We believe that we must have a lot of small players in this country; we still don’t have enough. It should be easy to get in, it should be easy to get out. There should be a market here and the churn of the market and the number of players will improve the quality of service, it’ll bring competitive prices. This again is not a demand. It is a paradigm for healthy industry.

New Exploration Licensing Policy (NELP) is known to be a very successful policy. Since 1999, more than 200 blocks have been awarded. But when we look at who got these awards, we see that the number of players is actually very limited. Why is that?

It’s certainly a weakness. And we are doing a project right now that analyzes all the companies that are here—today we have 70 companies in upstream, with about 30-odd companies that are operators, and the other 40 who are financial participants—and we are asking: when did these companies start? When did they first bid? How often have they bid in the last 8 rounds of NELP? Have they been successful or unsuccessful? Are they operators, or non-operators?

Are they mostly Indian players?

So far the proportion has been roughly half and half between Indian and Foreign players. In the newly introduced S-Blocks (small blocks) there are more local than foreign companies. Small blocks have brought a new and welcome addition to the whole system since 2007. This was actually a fruit of our work. AOGO has been working on the same objective: to increase the number of players in upstream because this is a crucial factor for the industry’s growth. Therefore, one of our suggestions has been that block sizes should be smaller. Let’s reduce the block size, enlarge the number of blocks, and have more people participate. Let’s reduce the qualification specifications for companies. Some companies, with zero experience, have done tremendous amounts of work—they have achieved more than anybody could hope for. If they can do it, why not somebody else?

India is currently resolving an issue because there are extremely well-established upstream players—the big companies of the world—that feel that they have unique technology, and therefore they should get an advantage over people who don’t have it. But we generally feel that, other than some very, very few deep-water technologies that are held in a proprietary manner, everything else should be available for people who manage their companies well and can pay for the technologies. So our emphasis, if you heard what we presented at the NELP investor’s conference, is to reorganize the blocks, and reorganize the system, in such a way that risk and reward are more apparent. And get people whose risk profile matches the risk profile of the block. Low risk can have low reward, and high risk should have high reward. These are some of the things we submitted to the NELP formulators.

Do you feel that the main policy-makers are taking your suggestions into consideration and do you see any changes coming soon, maybe already at 9th round of NELP?

I think that that timeframe is too short. Many of our proposals are too significant, or too big, for them to be completely implemented in the time available for NELP 9. We are hoping at least some of them, which are reasonably easy or quick to implement, will get implemented by then. But in our interaction at this stage we are also saying, ‘let us know what can be done in the time available to you; you know that best’. However, we want to set up a mechanism of review, which considers other proposals that we put forth and which cannot be implemented right now. We want the public decision makers to look at these proposals holistically, and decide: are they good for the industry, or are they not good? If the proposal is good, then we should have an agreement that it’s worth implementing, and let’s together find a way to implement it. Or if not, let’s add to that objective, or reject it. If we agree on a target, then we may have a way of moving forward. We want to find common ground.

What would be your advice for our readership worldwide—say, a junior player, a small Canadian company whose current investments are limited to the Northern Sea— that wants to expand worldwide and look for opportunities in India? Do you think there is room for junior players to invest in India, under the current legal framework?

Yes, I definitely think there are opportunities both in existing and new acreages. First of all, NELP currently offers some of the best possible financial terms. I presume that those coming in understand their own profile in terms of geological risks; and once they determine that there is an availability that matches their profile, they won’t get a better deal. At least in the immediate future—contracts signed in 2010, 2011, 2012—the old tax laws still apply. In 2012 the new tax laws come in, and there could be some changes.

Once we have lots more players, obviously some of the benefits may get withdrawn. But this is a good time! From whatever little I know about the world oil scenario, we have fairly basement prices right now. India and China are likely to keep growing at this rate unless something drastic happens. A 7-8% growth means at least a 2-3% growth in oil consumption.

You’ve mentioned deepwater exploration and its current importance in oil discoveries. However, this is a delicate moment for deep water explorations, as we have seen accidents offshore in what is supposedly the safest region in the world and with the highest standards. How developed is the industry in India in terms of ensuring that offshore explorations will achieve international safety standards?

I think it’s a work in progress. We have the OISD—the Oil Industry Safety Directorate, which is specifically assigned the responsibility of working with these standards. By and large, I would say we follow most internationally-accepted petroleum practices. As we see, even in one of the world’s largest countries, in one of the world’s safest environments, under one of the most strictly-controlling regimes accidents happen. The reality of life is that when people are in a commercial organization undertaking a commercial enterprise, they choose to engage in a certain amount of risk, and with this risk may come a certain amount of uncertainty, too. So the “Black Swans” do happen.

But the role of regulators is to prevent them from happening.

There isn’t any industry that is safe from accidents. Even space shuttles have crashed. There’s no use saying that accidents will never happen. I think Gulf of Mexico incident is making us all more aware, and regulations will get tighter all across the world, including India. We all must work with each other, and nobody wants an accident—least of all an operator.

According to Mr. Raina, Secretary General and CEO of Petrotech Society, most of the service providers in the Indian oil and gas industry are still foreign players. As a product of that, many local voices defend policies such as a minimum for the national contend. How developed do you feel Indian service providers are nowadays?

I don’t think that there will be any policy that will tilt the playing field in local favor, so I don’t think Indian service companies will have any specific advantage like they used to in older times. The reason the service industry in India is very limited is because, for example, ONGC, which is one of the largest companies in the country, has historically been a self-contained company. It always maximized its services in-house, and still has a huge service division. So a reasonable percentage of services are taken care of in-house, and that’s why it’s taken a longer time for the services industry to develop.

I don’t think that the Indian service industry should be asking for extra benefits in the national policy. We have been successful with policies of openness. Whatever protection or benefit is offered by the government, will be given to all people whether they are Indian or foreign. I do not see anything specifically targeted to the Indian service provider.

Back to the upstream sector. We have seen that the major Indian oil companies lead more and more international projects; with growing participation on emerging markets of Asia, Africa and Latin America. This internationalization comes in good time to secure the supply of the growing Indian market. How do you see the future of these growing Indian players?

The oil industry will go where the money is, it will go where the oil is, and we will go where we can get a good deal. When I started working in the oil industry, somebody offered me a block in the North Sea. I talked to my people, and we were interested. But we were also offered a very attractive price for what we already owned, and we were equally interested in selling what we had. The question was only price. If the price is cheap, we’ll buy it—and on the other hand, for the right price, they can buy us! There aren’t any emotional attachments with these assets. So, Reliance [Industries] will go wherever shale gas is, that seems to be the focus of their current activities. ONGC has a dual driver: as a commercial organization, they will go where they can get petroleum; but ONGC, being a PSU, also has a responsibility— and as one of the 4 or 5 exclusive PSUs that are crucial to national interests—to ensure national energy security. ONGC’s mission is not just to make money—it is to maximize the oil availability in the country. Therefore, they need to spread their basket far and wide, and they will.

As a matter of fact in the time to come we would like to see not only ONGC, but also other Indian companies go overseas to acquire equity oil. The benefit is the same. In the extreme scenario that there is a logistical problem in bringing the oil parcels to India, a suitable mechanism can be put into place. So go buy as much equity around the world as you can, why not?

What is you final message to the readers of Oil and Gas Financial Journal, who are waiting to know more about the opportunities in the Indian market?

I would say, first, that very few places in the world offer so many good and safe opportunities like India. Number two, unless you’ve worked somewhere in the developing world before, it’s good to have a local partner—because when all is said and done, systems in the developing world move at a different pace than in the developed world. So it’s good to have a local partner who understands these things, and can help in terms of re-working your timelines etcetera. Otherwise, it’s a painful learning process for many who think that they will work here, the same way as in the U.S. or Canada. Every country has its own reality. Once you have a bit of exposure to India, you’ll understand that things work very well, but the timelines are a bit longer— once you realize that, I’m sure you’ll be happy.

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