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Interview

with D.N. Narasimha Raju, Joint Secretary, Ministry of Petroleum & Natural Gas of India

20.12.2010 / Energyboardroom

During the launch 9th round of the NELP, the Indian Press seemed especially interested on the changes in the Tax breaks of existing and upcoming assets in India. Your answers were quite clear: From now on no tax breaks, hence no ambiguity. But what happened with the reasons for the Indian government to give tax breaks in the first place?

The basic concept of incentives is proposed to be changed in the Direct Taxes Code (DTC) bill where incentives are based on the investments made in the country instead of profit linked tax incentives. This is perceived to be a better way of providing incentive. The proposed DTC has several features applicable for E&P industry and from the provisions made therein, it can be inferred that the incentive structure would continue for E&P investments in India, though in a different form.

An interesting feature of the NELP is the continuation of S-Blocks, now with 8 S-type blocks. However we have heard critics saying that the lack of technical requirements and relative small fines are disincentives for the exploration of these blocks. What’s your assessment of the matter?

In Ninth round of New Exploration Licensing Policy (NELP), Government has offered 34 exploration blocks comprising of 8 deepwater blocks, 7 shallow water blocks, 11 onland blocks and 8 small size onland blocks having area less than 200 sq. km. (referred as S-type blocks). The Government of India has provided opportunity for the investors, namely medium sized companies having oil and gas exploration experience, new enterprise having sufficient financial strength, and big companies having operations in deepwater areas. The award of exploration licenses by the Government of India is through international competitive bidding system where all the bid evaluation parameters are transparent and quantified. Companies offering higher profit petroleum to the Government and commitment of more exploration work in the block are awarded the exploration blocks under NELP.

The medium sized companies having experience in oil and gas can bid for onland and shallow water exploration blocks as well as S-type blocks. For deepwater, big sized companies with experience in deepwater have an edge over other medium or small sized companies. While in S-type blocks, new enterprises with sound financial strengths have the opportunity to enter in oil and gas sector in the country, however, there are no requirements of technical capacity for bidders for S-type blocks by medium or big sized company.

In today’s competitive market, technology and expertise can be acquired. Therefore, awarding of S-type block to new entrepreneur is not disadvantageous to the country but, on the other hand, it would facilitate non-E&P companies with adequate financial resources to enter E&P business.

Have you considered providing financial, technical and/or tax incentives for smaller, but technologically adept, players?

Small players with no experience in oil and gas sector but having good financial standing have the opportunity for acquisition of exploration blocks in the Ninth round of NELP. As far as tax incentives are concerned, it is uniform for all the investors either big or small. Under NELP, there are other attractive provisions like duty free import of equipment for operation in the country.

Alternative fuel sources such as CBM and shale gas are gaining traction around the world. Is the government considering special incentives to encourage their production in India?

Coal Bed Methane (CBM) Policy is similar to NELP Policy. However, under CBM, production linked payment is payable instead of profit petroleum applicable to NELP. As far as tax incentives are concerned, it is uniform for all the investors whether big or small. Under CBM also, there are attractive provisions like duty free import of equipment for operation in the country and proposals of 100% deductibility of expenditure on exploration, development and production operations. Regarding Shale Gas, the policy for exploration is yet to be finalized.

The government, as a chief shareholder in India’s major E&P companies, has a big stake in Production Sharing Contracts with other private players. How are you securing national interests (meaning, adequate resources and revenues for the state), while providing the necessary incentives to your private partners?

In order to enhance energy security for the country, the first and foremost objective is to enhance exploration and production activities in the country. It is very important for us to produce crude oil and natural gas in the country rather than focusing on profitability of national oil companies alone. Under NELP, no special preference is given to any company either national oil company or private/foreign companies.

Therefore, India is a place for investment in E&P sector where level playing field for all the stakeholders companies is prevailing.

E & P activities are progressing satisfactorily in the blocks which have been awarded in the Production Sharing Contracts (PSC) regime. There were problems on account of availability of suitable rigs for operations in the blocks awarded in deep water areas, up to NELP-V. However, the Government of India has addressed this issue and in July, 2010 granted a three years drilling rig moratorium in the deep water blocks, where drilling commitments were outstanding. This should considerably ease the problems faced by deep water operators due to commitments made by them in PSC of deep water blocks.

It may be noted that only successful exploration activity has the potential to lead to production of oil & gas after which the exploration of reserve and consequent profit sharing can take place. In recent rounds of NELP, the weightage assigned to sharing of profit petroleum is 50 points uniformly for all types of blocks. Depending on the nature of the blocks, the work programme and strength of the operator are assigned weightage. Further, under NELP-IX, the exploration period can end with 4 years (for Onland and Shallow water block) or 5 years period (for Deep water & Frontier area Blocks) if the operator does not wish to proceed beyond the committed Minimum Work Programme (MWP). The operator has certainty about his exposure to the block and has no surprises in terms of commitment. These features should certainly be attractive to investors.

Your job as Joint Secretary for Exploration is to provide for the Energy Security of India, and to guarantee that India fully utilizes its native resources. However, the country still has a huge gap between supply and demand. What else in your agenda can be done to fill this gap?

Today, India consumes about 4.20% of world’s primary energy and is at fourth position. The total energy consumption of India is equivalent to Japan. However, per capita consumption of the country is much lower at 397 kilogram as against average world energy consumption of 1624 kilogram. The major share of energy is consumed by USA and China having the share of 19.50% each in the world’s energy basket. The lower per capita energy consumption in India and being one of the fastest growing economies indicates that energy sector is set to grow. Today, India is import dependent in oil and gas sector. In order to enhance hydrocarbon security in India, Government has several steps which inter-alia includes: accelerating hydrocarbon exploration in the country; the acquisition of overseas oil and gas assets; the development of alternate resources such as Coal Bed Methane (CBM), Shale gas, Gas Hydrates, Underground Coal Gasification (UCG); the development of infrastructure facilities viz, increasing refining capacity, laying of pipelines for crude oil, products and natural gas transportation; the strategic storage of crude oil; the development of alternate petroleum products such as bio-diesel and ethanol blending; and the conservation of petroleum products. The above measures are being pursued with appropriate policies.

Many Indian companies are making forays into E&P overseas. How is the government supporting the international E&P expansion of Indian companies? Is this part of your agenda?

In view of unfavourable demand – supply balance of hydrocarbons in the country, acquiring equity oil and gas assets overseas is one of the important components of enhancing energy security. The Government is encouraging national oil companies to pursue equity oil and gas opportunities overseas. The production of Oil & Natural Gas Corporation Videsh Limited (OVL) was about 8.87 Million Metric Tonnes of oil and equivalent gas (MMTOE) during the year 2009-10 from its assets abroad in Sudan, Vietnam, Venezuela, Russia, Syria, Brazil and Colombia. Oil PSUs viz., OVL, IOC, OIL, BPCL, HPCL and GAIL have acquired E&P assets in more than 20 countries. The total investment made by Indian companies is of the order of US$ 12.2 billion.

At the same time, we would like other foreign companies to come to India so that experience and new geological ideas gained in similar basins elsewhere in the world can be suitably used in Indian sedimentary basins.

Mr. Mansingh of the PNGRB highlighted the fact that the process of power transfer from the Ministry to the Agencies has not always gone smoothly. At present, how independent is the DGH from the interests of the Ministry?

Under NELP, Government of India is awarding exploration blocks through the process of International competitive bidding in a transparent manner. The production sharing contracts (PSCs) are signed between the Government and awardees companies to carry out exploration and development activities in the block. India is a democratic country and having well developed legal system. The sanctity of signed production sharing contracts are maintained and honored by all the agencies including Directorate General of Hydrocarbons (DGH). The guiding principle in exploration and production for NELP blocks is the provisions of signed PSCs between the Government and companies. The role of DGH is to facilitate the investors and to look after the implementation of PSC. DGH provides the necessary technical support and assistance in the upstream sector to MOP&NG and has a firmly well-defined area of work assigned to him.

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