Differences between NELP and HELP
Before we analyze these two policies NELP and HELP it is important to look at the background of oil and natural gas exploration in the country
NELP and HELP: Background
Licenses for domestic exploration & production of crude oil and natural gas were granted under four different regimes over a period of time:
1) Nomination Basis (Till 1991): Petroleum Exploration Licenses (PELs) were granted to National Oil Companies viz. Oil and Natural Gas Corporation Ltd (ONGC) and Oil India Ltd. (OIL)
2) Petroleum Mining Lease (PML) (1991-1993)was granted under small / medium size discovered field Production Sharing Contract (PSCs) during 1991 to 1993 where operators of blocks were private companies and ONGC/OIL has the participating interest.
3) Pre-NELP Exploration Blocks: 28 Exploration Blocks were awarded to private companies between 1990 and prior to implementation of NELP where ONGC and OIL have the rights for participation in the block after hydrocarbon discoveries.
4) New Exploration Licensing Policy (NELP) -1999 : Under NELP, exploration blocks were awarded to Indian Private and foreign companies through international competitive bidding process where National Oil Companies viz, ONGC and OIL are also competing on equal footing.
NELP and HELP: NELP
New Exploration and Licensing Policy (NELP)
New Exploration Licensing Policy (NELP) is a policy adopted by the government between 1997 and 2016 with Directorate General of Hydrocarbons (DGH) as the nodal agency, to provide a level playing field for both the public and private sector companies in exploration and production (E&P) of hydrocarbons. Since then, licenses for exploration are being awarded only through a competitive bidding system and National Oil Companies (NOCs) are required to compete on an equal footing with Indian and foreign companies to secure Petroleum Exploration Licences (PELs). The activities in E&P sector have been significantly boosted by this policy and it has opened up E&P sector to private and foreign investment with 100% Foreign Direct Investment (FDI). The main objective of NELP was to attract significant risk capital from Indian and Foreign companies, and introduce new technologies, new geological concepts and best management practices to explore oil and gas resources in the country to meet rising demands of oil and gas.
The first round of offer of blocks was launched in 1999 and most of the ninth round awards were concluded in 2012. Nine rounds of bids have so far been concluded under NELP, in which production sharing contracts for 254 exploration blocks have been signed.
The salient features of NELP are as under:
- 100% Foreign Direct Investment (FDI) is allowed under NELP
- No mandatory state participation through ONGC/OIL or any carried interest of the Government.
- Blocks to be awarded through open international competitive bidding
- ONGC and OIL to compete for obtaining the petroleum exploration licenses (PEL) on a competitive basis instead of the existing system of granting them PELs on nomination basis.
- ONGC and OIL to get the same fiscal and contract terms as private companies.
- Freedom to the contractors for marketing of crude oil and gas in the domestic market.
- Royalty at the rate of 12.5% for the onland areas and 10% for offshore areas.
- Royalty to be charged at half the prevailing rate for deep water areas beyond 400 m bathymetry for the first 7 years after commencement of commercial production.
- Cess to be exempted for production from blocks offered under NELP.
- Companies to be exempted from payments of import duty on goods imported for petroleum operations.
- No signature, discovery or production bonuses.
- Agreement between government and contractor is governed by a Production Sharing Contract. A Model Production Sharing Contract is created which is reviewed for every NELP round.
- Contracts to be governed in accordance with applicable Indian Laws
However, NELP had many problems. It had separate policies and licenses for different hydrocarbons like conventional oil and gas, coal-bed methane, shale oil and gas and gas hydrates. Different fiscal terms were also in force for allocation of acreages for exploration for different hydrocarbons. In practice, there was overlapping of resources between different contracts. Unconventional hydrocarbons (like shale gas and shale oil) were unknown when NELP was framed. This fragmented policy framework lead 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.
The Production Sharing Contracts (PSCs) under NELP are based on the principle of “profit sharing”. When a contractor discovers oil or gas, he is expected to share with the Government the profit from his venture, as per the percentage given in his bid. Until a profit is made, no share is given to Government, other than royalties and cesses. Since the contract requires the profit to be measured, it becomes necessary for the cost to be accounted for and checked by the Government. To prevent loss of Government revenue, there are requirements for Government approval at various stages to prevent the contractor from exaggerating the cost. Activities cannot be commenced till the approval is given. This process of approval of activities and cost gives the Government a lot of discretion and has become a major source of delays and disputes. Many projects have been delayed for months and years due to disagreement between the Government and the contractor regarding the necessity or lack of necessity for particular items of cost, and the correctness of the cost.
Another feature of the current system is that exploration is confined to blocks which have been put on tender by the Government. There are situations where exploration companies may themselves have information or interest regarding other areas where they may like to pursue for exploration. Currently these opportunities remain untapped, until and unless Government brings them to bidding at some stage.
The pricing of gas in the current system has undergone many changes and witnessed considerable litigation. Currently, the producer price of gas is fixed administratively by the Government. This has led to loss of revenue, a large number of disputes, arbitrations and court cases.
The current policy regime, in fixing royalties, does not distinguish between shallow water fields (where costs and risks are lower) and deep/ultra-deep water fields, where risks and costs are much higher.
The country faces a situation where oil and gas constitutes a major and increasing share of total imports. Oil production has stagnated while gas production has declined. There is a need for concerted policy measures to stimulate domestic production. Keeping in view this objective, the Government enunciated a new policy regime for exploration licensing in 2016, the Hydrocarbon Exploration and Licensing Policy, HELP.
NELP and HELP: HELP
Hydrocarbon Exploration and Licensing Policy (HELP)
The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has approved the Hydrocarbon Exploration and Licensing Policy (HELP).
Four main facets of this policy are:
- uniform license for exploration and production of all forms of hydrocarbon,
- an open acreage policy,
iii. easy to administer revenue sharing model and
- marketing and pricing freedom for the crude oil and natural gas produced.
The decision will enhance domestic oil & gas production, bring substantial investment in the sector and generate sizable employment. The policy is also aimed at enhancing transparency and reducing administrative discretion.
The uniform licence will enable the contractor to explore conventional as well as unconventional oil and gas resources including CBM, shale gas/oil, tight gas and gas hydrates under a single license. The concept of Open Acreage Policy will enable E&P companies choose the blocks from the designated area.
Present fiscal system of production sharing based on Investment Multiple and cost recovery /production linked payment will be replaced by a easy to administer revenue sharing model. The earlier contracts were based on the concept of profit sharing where profits are shared between Government and the contractor after recovery of cost. Under the profit sharing methodology, it became necessary for the Government to scrutinize cost details of private participants and this led to many delays and disputes. 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”.
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. At the same time, royalty rate for onland areas have been kept intact so that revenues to the state governments are not affected. On the lines of NELP, cess and import duty will not be applicable on blocks awarded under the new policy. This policy also provides for marketing freedom for crude oil and natural gas produced from these blocks. This is in tune with Government’s policy of “Minimum Government –Maximum Governance”
Open Acreage Licensing Policy (OALP) gives an option to a company looking for exploring hydrocarbons to select the exploration blocks on its own, without waiting for the formal bid round from the Government. Under Open Acreage Licensing Policy (OALP), a bidder intending to explore hydrocarbons like oil and gas, coal bed methane, gas hydrate etc., may apply to the Government seeking exploration of any new block (not already covered by exploration). The Government will examine the Expression of Interest and justification. If it is suitable for award, Govt. will call for competitive bids after obtaining necessary environmental and other clearances.
OALP was introduced vide a Cabinet decision of the Government dated 10.03.2016, as part of the new fiscal regime in exploration sector called HELP or Hydrocarbon Exploration and Licensing Policy, so as to enable a faster survey and coverage of the available geographical area which has potential for oil and gas discovery. (India has a sedimentary area of 3.14 million sq. km. comprising of 26 basins. At the end of 2012-13, about 48% of this sedimentary area remains unapprised. This includes, 65% of the total on-land sedimentary area, 22% of the shallow off-shore basin (bathymetry upto 400m) and around 49% of the deep off-shore (bathymetry beyond 400m) sedimentary area[1]. Further, it is estimated that India has exploited only 3% of its proven natural gas reserves[2] and around 5% of its proven oil reserves[3].)
Till 2016, exploration was confined to blocks which have been put on tender by the Government. There are situations where exploration companies may themselves have information or interest regarding other areas where they may like to pursue exploration. Currently, these opportunities remain untapped, until and unless Government brings them to bidding at some stage.
What distinguishes OALP from New Exploration and Licensing Policy (NELP) of 1997 is that under OALP, oil and gas acreages will be available round the year instead of cyclic bidding rounds as in NELP. Potential investors need not have to wait for the bidding rounds to claim acreages.
Successful implementation of OALP requires building of National Data Repository on geo-scientific data.
A comparison of both the policies – NELP and HELP is given below:
HELP and HELP: Unconventional Hydrocarbons
Coal bed Methane (CBM) is an eco-friendly natural gas, stored in coal seams, generated during the process of the coalification (the degree of change undergone by coal as it matures from peat to anthracite). CBM exploration and exploitation has an important bearing on reducing the greenhouse effect and earning carbon credit by preventing the direct emission of methane gas from operating mines to the atmosphere. Further, extraction of the CBM through degassing of the coal seams prior to mining of coal is a cost effective means of boosting coal production and maintaining safe methane level in working mines.
Gas hydrates are naturally occurring, crystalline, ice-like substances composed of gas molecules (methane, ethane, propane, etc.) held in a cage-like ice structure (clathrate). Hydrates are a concentrated form of natural gas compared with compressed gas, but less concentrated than liquefied natural gas. It is estimated that a significant part of the Earth’s fossil fuel is stored as gas hydrates, but as yet there is no agreement as to how large these reserves are. They are found abundantly worldwide in the top few hundred meters of sediment beneath continental margins at water depths between a few hundred and a few thousand feet and mainly in permafrost areas.
Oil sands or Tar Sands refers to crude trapped in sands in a semi solid form, mixed with sand and water. Tar Sands contain bitumen – a kind of heavy crude oil. They are found in Canada and Venezuela.
Shale Oil is found in shale source rock that has not been exposed to heat or pressure long enough to convert trapped hydrocarbons into crude oil. They are found in usually fine-grained sedimentary rocks containing relatively large amounts of organic matter from which significant quantities of shale oil and combustible gas can be extracted by destructive distillation. The product thus generated is known as synthetic crude or more simply, syncrude. Oil shales are not technically shales and do not really contain oil. They are relatively hard rocks called marls – composed primarily of clay and calcium carbonate- containing a waxy substance called kerogen. The trapped kerogen can be converted into crude oil using heat and pressure to simulate natural processes. Included in most definitions of oil shale, either stated or implied, is the potential for the profitable extraction of shale oil and combustible gas or for burning as a fuel.
Tight Oil: Although the terms shale oil and tight oil are often used interchangeably in public discourse, shale formations are only a subset of all low permeability tight formations, which include sandstones and carbonates, as well as shales, as sources of tight oil production. Within the United States, the oil and natural gas industry typically refers to tight oil production rather than shale oil production, because it is a more encompassing and accurate term with respect to the geologic formations producing oil at any particular well.
We believe this article was useful in understanding NELP and HELP. NELP and HELP have been in the news in the recent past and hence it becomes imperative for the candidates to focus on these two schemes as questions can be expected from them. NELP and HELP pertain to the oil and natural gas sector which is a focus area for the economy and will define policies that will shape the demand and supply dynamic of oil and gas in the country.
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