Note4Students:

The NDA government has announced a radical overhaul of the oil and gas exploration policy. It has launched Hydrocarbon exploration and licensing policy to replace the existing NELP which was introduced in 1999.

Hydrocarbon Exploration and Licensing Policy (HELP) is a policy adopted by Government of India on 10.03.2016 indicating the new contractual and fiscal model for award of hydrocarbon acreages towards exploration and production (E&P). HELP is applicable for all future contracts to be awarded.

Background

1. India’s offer of oil and gas exploration blocks under NELP since 1999 had limited success in terms of commercial discoveries and their monetisation. Of the 254 blocks auctioned in the nine NELP rounds, commercial production started in three blocks with total output of 0.4 million tonnes of crude oil and 26.11 million standard cubic metres of gas per day.
2. The present New Exploration Licensing Policy (NELP) has are separate policies and licenses for different hydrocarbons.  Unconventional hydrocarbons (shale gas and shale oil) were unknown when NELP was framed 18 years ago. This fragmented policy framework is leading to inefficiencies in exploiting natural resources. For example, while exploring for one type of hydrocarbon, if a different one is found, it will need separate licensing, adding to cost.
3. The NELP mechanism of profit-sharing where explorers first recovered their costs and then shared profits with the government was severely criticized by the CAG during an audit of KG-D6 block operated by Reliance Industries. The CAG alleged that RIL is exaggerating the costs to lower the government’s profit share.

Key Features of HELP

1. A Single License: A single license for exploration and production of all forms of hydrocarbons in blocks to firms offering the maximum revenue to the government would be given.
2. Open acreage policy: Blocks would be allocated under the ‘open acreage policy’, wherein companies can submit bids for areas of their choice.under open acreage policy companies can choose blocks from the designated area round the year without waiting for roadshows and auctions like in NELP.
3. Revenue Sharing model: production-sharing contract between government and contractors would henceforth be governed by a revenue-sharing model instead of a profit-sharing one
4. It provides for a common license for all hydrocarbons, including shale gas and coal bed methane, and does away with computing complex investment multiples and scrutinizing cost recoveries
5. It also provides marketing and pricing freedom for the crude oil and natural gas produced.
6. On the lines of NELP, cess and import duty will not be applicable on blocks awarded under the new policy.

Benefits of HELP

1. Will promote ease of doing business: In the NELP, contractors gold-plated their costs to artificially depress profits. This not only led to disputes and litigation but also caused project delays as government pored over each decision by the contractor to check for possible fraud. Such problems are less likely to occur under revenue-sharing. Under the new regime, the Government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc. This is in tune with Government’s policy of “Ease of Doing Business”.
2. Will allow producers to charge a competitive market price : One of the reasons why domestic oil and gas exploration has suffered over the years despite the fact that India has a huge import dependence as over three-fourths of the domestic crude oil demand and about a third of the domestic demand for gas are met by imports — is the inability of companies to price the output in a profitable manner. Now, instead of pricing being determined by a formula set by a committee, Help will allow producers to charge a competitive market price for new production, subject to a ceiling determined by the landed price of alternative fuels, such as fuel oil, liquefied natural gas and naphtha. It would boost investment in the sector.
3. Help’ will also allow energy companies to produce whatever form of hydrocarbon is available from a licensed block—coal bed methane, shale gas/oil, tight gas and gas hydrates—without seeking separate permission for producing each of the fuels.
4. Promote investment: Under the new regime, there will not be yearly auction of a cluster of identified blocks. Instead, investors can access data about all the blocks available and would be encouraged to bid at any time of their choice under the open acreage principle.
5. Recognising the higher risks and costs involved in exploration and production from offshore areas, lower royalty rates for such areas have been provided as compared to NELP royalty rates to encourage exploration and production.  A graded system of royalty rates have been introduced, in which royalty rates decreases from shallow water to deepwater and ultra-deep water.
6. Increase Transparency: It would increase transparency and would reduce government intervention in the sector since government would not face the burden of scrutinizing the cost of the firms involved in the sector. This is in tune with the government motto of minimum government maximum governance/

Concerns Raised

1. The costs involved in exploration is very high and it is also marked by uncertainty. The shift to revenue-sharing could prove to be a disincentive as the investment recovery period for producers gets prolonged since he has to share the revenue with the government from day 1.
2. Blocks already under production aren’t covered
3. Banks may not give credit easily to such projects given their high gestation periods and the rising NPAs
4. Since royalty rates over land is uniform, regions like NE may be ignored by companies
5. If the gas prices are set too high, sectors like power, fertilizers etc. may be affected

HELP VS NELP

Conclusion

1. Overall, the policy is a step in the right direction. It will not only bring transparency in the energy sector but would also attract much needed investment in the sector; It should be tweaked in the future to ensure better implementation. If followed in its letter and spirit, the policy can help India achieve energy security in the long run.

Source:

http://www.arthapedia.in/index.php?title=Hydrocarbon_Exploration_and_Licensing_Policy_(HELP)

http://pib.nic.in/newsite/PrintRelease.aspx?relid=137638

Questions:

Q.1) Examine how would the new Hydrocarbon Exploration Licensing Policy (Help) affect interests of consumers and producers.

Q.2) The new Hydrocarbon Exploration Licensing Policy, or HELP, is said to signal one of the most important market-oriented sectoral reforms of the past two decades. Examine why.