FROM THE DIRECTOR GENERAL’S DESK

The introduction of the New Exploration Licensing Policy (NELP) in the year 1997 ushered in revolutionary changes in the E & P sector. The NELP has brought about a paradigm shift in the E & P sector in India in the recent years. Indeed, it would not be an exaggeration to say that the introduction of NELP has been a landmark event in the history of oil and gas exploration in India. From two National Oil Companies engaged in oil and gas exploration, we have today close to 50 E & P companies in India. We have provided a level playing field to all the companies to compete on equal terms for award of exploration acreage. This has brought in a healthy spirit of competition between National Oil Companies and private companies. Further, there has been a welcome and perceptible increase in the partnerships between the public and private companies. The terms and conditions of this open and transparent policy rank amongst the most attractive in the world. DGH as the technical regulator for the upstream activities in India has been instrumental in bringing about these far-reaching changes. All these have resulted in important discoveries of oil and gas in various sedimentary basins of India.The major oil and gas discoveries in the east coast of India perhaps represents only the tip of the iceberg. It is quite likely that a lot more oil and gas remains to be discovered not only in the east coast but in various sedimentary basins as well. Today, a climate of positive expectation pervades the Indian E & P sector.It is pertinent to mention here that the Production Sharing Contract regime in India is considered one of the best in the world and has won global acclaim. This has been amply vindicated by the increase in number of bidders to the recent NELP rounds. Besides offering investment efficiency for the investors, the model PSC also safeguards the national interest.

The Production Sharing Contract or more simply, the PSC, is, in more ways than one, considered sacrosanct. All the E & P operations come under the ambit of the PSC. It is a document signed between the contractor and government of India and is valid during the tenure of the contract.

Under the provisions of the PSC, a Management Committee comprising representatives of the contractor and the government of India is constituted. The Management Committee has wide ranging functions and responsibilities with respect to the PSC and the decisions are taken through majority opinion. In the PSC regime, the government does not invest any capital ad hence the total investment risk is borne by the investing contractors. In the event of a discovery, the role of the government as per the PSC is that of a licensor and not of an investor. Government’s role is to monitor optimization of reserve exploitation, government revenues such as royalty and share of profit, and to ensure that resources are exploited economically since oil and gas constitute minerals that are the sovereign wealth of our nation. The government of India has entrusted the Directorate General of Hydrocarbons (DGH) with the responsibility of monitoring and technically regulating these activities.

There have been major discoveries of oil and gas both in the offshore and onland sedimentary basins of India. Under the NELP regime, there have been 68 discoveries of oil and gas. The discovery in the Krishna-Godavari basin off the east coast of India is one of the largest gas discoveries in the world during the year 2002. The oil discovery in the Barmer-Sanchor basin of Rajasthan is also very significant. These are discoveries that would make any nation proud. These discoveries, once they go on stream, will add substantially to the current production levels of oil and gas in India. For the first time since the discovery of Bombay High, there have been major oil and gas discoveries in India. It is a matter of great pride that all this has become possible within a few years of the introduction of NELP. It is unfortunate that production from both these fields is getting delayed due to irritants.

Nevertheless, the discoveries of oil and gas in various basins has resulted in a paradigm shift in the way E & P companies across the globe view the hydrocarbon prospectivity of India. Today, India is a favoured destination for companies to invest in E & P business. The fair and transparent procedures and practices adopted by the DGH has resulted in creating an E & P brand image that has become the hallmark of our efforts.

However, there have been dissenting voices. In recent times, decisions taken based on PSC provisions have been questioned and criticized in some quarters. Specifically, these relate to the major oil and gas discoveries.

There have been misplaced apprehensions of gold plating. It needs to be appreciated that the principles and documents used for profit sharing under PSC is similar to that based on which the corporate tax system functions. PSC requires that the contractors maintain details of expenditure incurred by them following accounting standards, duly supported by documents. The expenditure allowed for cost recovery is limited to the amount verified by two levels of audit done by independent firms of chartered accountants. The PSC also regulates the procurement process of the contractor to ensure that expenditure is incurred at arms length. Expenditure not in line with the PSC is not cost recoverable.

The idea of gold plating betrays a lack of knowledge of business economics. Inflating the expenditure does not benefit any stakeholder- neither the contractor nor the government. No company would like to increase its investment unproductively. Every addition dollar of wasteful investment dents the profit of the contractor. For a business enterprise, there is no motivation to gold plate its investment. Due to the higher share of profit generally earned by the contractors, the loss to the contractors due to inefficiency or gold plating is higher than to the government.

Before embarking on an exercise in criticizing the role of the government and the DGH in this issue, it is important to understand certain fundamental aspects of the Field Development Plan (FDP) and the role of the Management Committee in the decision making process with reference to the Field Development Plan.

Contrast this with PFC, a reputed global financial organization that has paid glowing tributes to the Indian upstream seWhile approving the Field Development Plans (FDPs) the Management Committee approves only the related development activities and not the cost involved as the approval of the costs are taken separately through annual work program and budgets which may span 5 to7 years.

Contrast this with PFC, a reputed global financial organization that has paid glowing tributes to the Indian upstream sector, in particular, the initiatives taken by the government and DGH. They have rated India as the second best destinations for investments in the E & P sector.

In addition, the procurement of the items is carried out as per set Purchase and Procurement procedure as defined in the PSC. Notwithstanding the above, the PSC also requires auditing of the exploration and development expenditure by internal as well as Government appointed auditors. Even the whole process of expenditure starting from Management Committee review/ approval of work program and budget to purchase and procurement of materials & equipments are amenable to CAG audit. The CAG team has been in DGH office since last 6 months carrying out audit work.

In the case of more than one discovery in a block, development projects may be spread over the block area. Each of the development projects to develop such discoveries has to undergo the rigorous test of techno-commercial viability on stand-alone basis. Approvals are granted to FDP proposals only when each of the discoveries withstands the techno-commercial aspect of development. It is once again submitted that the capital cost estimates are indicative in nature and approvals are accorded only to development activities and not to the capital expenditure. In cases where the discoveries are not commercial on stand-alone basis due to various factors, the contractor may propose integrated development project containing many discoveries. This is a standard E & P practices acknowledged and adopted globally with the objective of optimal exploitation of mineral resources.

In order to allay the fears expressed in various quarters, the project can be reviewed by various agencies, such as Expenditure Division and Revenue Division of Finance Ministry. Government also appoints, at times, independent and reputed technical experts to evaluate the development plan. The Goldman Sachs Report on Global Finding & Development Costs 2008 clearly states that the out of 32 deep water projects developed in the world, the gas discovery ranks amongst the lowest in terms of costs and amongst the fastest in terms of time from discovery to production.

Energy remains the primary driver of our economy. Oil and gas are critical components of our energy basket and will continue to play a crucial role in meeting the energy requirements of our country in the foreseeable future until some renewable form of energy becomes viable. It is, therefore, very important that we stand united in our efforts towards energy security and in meeting the objectives of India Hydrocarbon Vision 2025. E & P companies in India are doing well and it is our responsibility to nurture and encourage them. The brand image that DGH has created should not be allowed to lose its sheen and importance. In order to achieve this, it is imperative that the government, DGH, media and industry synergize and complement each other’s strengths rather than try and pull the carpets under each other’s feet. While criticism and dissent is an intrinsic characteristic of a democracy, it should not become the obsessive subject of endless public debate. Irresponsible and biased views and opinions are bound to send negative signals to the E & P companies across the world and cause irreparable damage to the growth and development of the oil and gas industry in India.

The corporate family feud that is now raging between two major corporate houses in India seems to have caught the fancy of a section of the media. Based on their leanings, a section of the media, at times, have given their own interpretation and color to the corporate rivalry. Such irresponsible and biased reporting by a section of the press reflects not only ignorance about the oil and gas industry but also some ulterior motive. The problem stems from the fact that in India, often, reporting on such specialized topics is done by novices who have little or no domain expertise. In comparison, in the western world, a mature, objective and well-informed journalism gives an unbiased picture to the outside world. The press and media have an important contribution to make in this regard and I hope that they will not absolve themselves of their responsibilities.

Harping on such matters endlessly is a waste of time and effort, which can very well be avoided. The Government, the DGH, the policy makers and the elected representatives of the people should be allowed to utilize their time and energies in a more constructive and fruitful manner for the benefit of the people.

The E & P scenario in India has improved dramatically during the past few years. The recent discoveries of oil and gas fields have been truly outstanding and reflect the relentless efforts put in by the government of India, the DGH and the E & P companies operating in India. Therefore, my appeal to all concerned is that one should not be so uncharitable as to deny credit where it is due. Let us work together as a team towards the common goal of finding more oil and gas for the country.

(V.K.Sibal)