Hydrocarbon Exploration and Licensing Policy (HELP)

On March 10, 2016 the Hydrocarbon Exploration and Licensing Policy (HELP) was approved by the Union Cabinet. HELP aims to provide for a uniform licensing system and to provide single licensing to cover all hydrocarbons such as oil, gas, coal bed methane etc.

Objectives of HELP

• To enhance the production of domestic oil and gas
• To bring in substantial investment in to exploration and production (E&P) sector
• generate huge employment opportunities
• enhance transparency and
• Reduce administrative discretion.

Current System and Problems

New Exploration Licensing Policy (NELP) is the present policy regime for exploration and production of oil and gas which has been in existence for 18 years. The current system and various problems associated with it are as follows:

Separate policies for different hydrocarbons

At present there are separate policies and licenses for different hydrocarbons such as conventional oil and gas, coal-bed methane, shale oil and gas and gas hydrates.

In practice, the present framework leads to inefficiencies in exploiting natural resources. For example, the unconventional hydrocarbons such as shale gas and shale oil were not known at the time when NELP was framed. Further during the exploration of one type of hydrocarbons if a different one is found, then under present system a separate license will be needed for exploiting the newly found hydrocarbon which increased the cost of exploitation.

Profit sharing revenue model and delays

The present regime is based on the principle of “profit sharing” and Production Sharing Contracts (PSCs) are awarded under NELP. According to this, if a contractor discovers oil or gas, he is expected to share the profit as per the percentage given in his bid with the government. On the other hand, only royalties and cesses are paid to the government if no profit is made. With this system in place, it becomes necessary for the government to account the costs incurred by the contractor to prevent loss of government revenue. There are requirements for government approval at various stages of the process to prevent the contractor from exaggerating the cost. Need for approval before the commencement of any activity leads to unnecessary delays and disputes. Various projects have been delayed for months and years due to the disagreement between the Government and the contractor. This system was severely criticized by CAG.

Exploration confined only to some areas

Exploration currently is confined to blocks which the Government have been put on tender. It is possible that the exploration companies may have interest and information to explore other areas. These potential areas remain untapped until such areas are put on tender by the government.

Unfair pricing

The producer price of gas is currently fixed by the government. This has led to loss of revenue, considerable litigation, disputes and arbitrations. With low gas pricing, investments came to a halt when E&P companies after investing billions of dollars in survey and exploration could not recover the cost incurred by them. Also, with the introduction of 3 gas pricing formulas introduced in 7 years, the investors stayed away from investing in this sector.

Unfair royalty charges under some cases

While fixing royalties, the present system does not distinguish between shallow water fields where costs and risks are lower and deep/ultra deep water fields where risks and costs are higher.

So at a time when oil and gas imports are increasing (over 3/4^th of the domestic crude oil demand and 1/3^rd of the domestic gas demand are met through imports) there was a need for bring in new hydrocarbon exploration policy to address the above issues and problems.

Salient Features of HELP

The salient features and how HELP has addressed the issues faced under NELP regime are as follows:

Uniform license for exploration and production of all forms of hydrocarbon

HELP has a uniform licensing system which covers all hydrocarbons, i.e. oil, gas, coal bed methane etc. under a single license and policy framework.

Open acreage policy

Under this policy a bidder may seek to explore any block which is not already covered by exploration by applying to the government. The government after examining the expression of Interest and justification may call for competitive bids after obtaining environmental and other clearances. This will help in tapping unused potential blocks.

Easy to administer revenue sharing model

Easy to administer revenue sharing model will replace the profit sharing model used by earlier contracts. Earlier profits were shared between the government and the contractor after recovery of the cost. With the change, government need not be concerned with the cost incurred and instead will receive a share of the gross revenue from the sale of oil, gas etc. This change will augment the government’s policy of “Ease of Doing Business”.

For deep water and ultra deep water areas, concessional royalty regime will be implemented. There will not be any royalty for the first 7 years and a concessional royalty of 5% in deep water areas and 2% in ultra deep water areas. Further, for shallow water areas, there will be reduction in royalty rates from 10% to 7.5%

Marketing and pricing freedom for the crude oil and natural gas produced

The contractor can have free hand in pricing and marketing of gas produced in the domestic market on arms length basis (when a buyer and a seller act independently and have no relationship with each other and both parties in the deal act in their own interest. They are not subject to any pressure from the other party). The government’s profit share will be calculated depending on the higher of prevailing international crude or actual price to protect government’s revenue interests.

Significance of HELP

• It paves way for the modernization of the oil and gas exploration policy.
• It is expected to boost new exploration activities for oil, gas and other hydrocarbons and reduce import dependence.
• It has the potential to increase the employment opportunities especially in the petroleum sector.
• It has potential to bring in substantial investment in to this sector.
• Shifting to revenue sharing model will help in “ease of doing business” and “minimum government maximum governance”. Revenue sharing model will bring in revenue to the government immediately on production unlike in cost recovery model where the government shares the profit only after contractors claim of cost incurred by them.
• Disputes, corruption, administrative delays, administrative discretion, arbitrations and litigation will reduce and result in growth.
• The uniform license policy will encourage the contractors to explore conventional as well as unconventional sources of hydrocarbons under a single license.
• The Open Acreage Policy will enable the companies to choose the blocks which interest them. This will help in enhanced exploration activities and tapping of untapped resources.

Gains for the E&P companies

HELP provides more pricing freedom to the companies. Although, the revenue sharing model will enhance the investment recovery period for these companies, the prospect of less government intervention is an incentive.  Since HELP is applicable to existing discoveries that are yet to commence production, the companies like RIL, ONGC, Gujarat State Petroleum Corporation stands to be benefitted.