Is OALP Another Shot at Bad Policy: Foreign Oil Companies Remain Unimpressed

The much hyped Open Acreage Licensing Policy (“OALP”) recently witnessed its first round in January, 2018. Touted as a complete reform aimed at revolutionizing the upstream sector after a failed New Exploration and Licensing Policy (“NELP”) saga, the bidding saw absolutely no participation of the foreign oil companies (“FOCs”). Except for a few new domestic participants, the bidder league predominantly comprised the same old players such as Cairn India, ONGC, OIL among others. Prominent media outlets flashed headlines highlighting the 110 bids received for the 55 blocks on offer with the prima-facie appearance of a phenomenal success. Considering the history of such rounds, receiving bids double the total number of blocks on offer is not a bad score. But whether this response to a massive shot at policy reform that came after more than two decades of wait and was meant to revolutionize the upstream sector in all of its scope was good enough to be labeled as “tremendous” or “spectacular”?I hardly think so.

Past Regimes and OALP

Let’s look at some of the performance factors: NELP V, VI, VII and IX; each of them had a better bid average than OALP-I. In particular, NELP V received more than triple the number of bids than the number of blocks offered. These figures may not show the decisive success of the rounds, but they do reflect the enthusiasm each of these rounds received from the market players. Additionally, observing the number of companies participating in bidding presents a clearer success fact—the nomination and pre-NELP era had witnessed the participation of a total of 35 companies, foreign and domestic through different rounds, while OALP-I saw the participation of only 9 domestic companies laced with a complete indifference of the FOCs. In fact, the replaced NELP regime had also seen the participation of 48 foreign companies at different stages even though only 4 of those FOCs are currently operating in India. Some may argue that judging OALP on the absence of the FOCs is premature as this was only the first round; however, they must keep in mind that the corporations are eyeing every opportunity possible in India given the growth curve it is currently on. The Government may remain inclined to downplay the no-show by FOCs at the bidding in an attempt to glorify its policy feat, but their absence does raise multifaceted doubts over the famed launch of OALP as a panacea for India’s upstream woes.

Importance and Need for FOC Participation

The high risk-high reward model of the upstream market makes the upstream sector extremely capital intensive. Investing companies need to be able to put a considerable sum at risk to even prospect for a commercial discovery. Many of such explorations can become even costlier due to technical difficulties of exploring the reservoir, environmental compliances, expensive technology etc. Through decades of experience in the domain, the FOCs have obtained the cash reserve and operational capability to run these risks, which the Indian domestic entities largely lack. The cash troves of domestic companies are comparably much smaller, inhibiting them from taking higher exploration risks, which their foreign counterparts easily can.

The higher the competition, the better the bids; this is a grundnorm of any bidding process. With foreign companies in the fray, the bids are bound to soar with more promising commitments to work programmes and Government revenues. Also, on the performance front, with their innovative technologies and vast breadth of experience, the foreign entities would hold better promise of performance under their contracts. Especially, in context of the past experiences of non-performance of the contracts and the ever-widening gap between the domestic demand and indigenous production, this factor assumes considerable significance. Many earlier contractors have defaulted on their contracts either having overcommitted in their work programme against their actual capability or by failing to explore and develop appropriately. With their expertise and better capabilities, the FOCs can certainly be expected to fare better. In the past, some FOCs have also failed at completing their work programmes, but for reasons not attributable to them.

In addition to these domain-specific benefits, the multi-billion dollar FOCs have the potential to bring phenomenal foreign exchange for the Indian exchequer, which almost no other industry can possibly match. Such massive investments can bring sweeping economic positivity for any nation.

Factors Raising Disinterest among FOCs

Over the coming years, Indian economy is poised to grow at a robust pace. It has emerged as a bright spot amidst the depressing global trends with strong endorsements from independent observers. From an investor’s perspective, India does show the economic promise that one may rely upon. Global energy players, including the FOCs, have also expressed their interest in coming to India, but the skepticism over the unstable and unreliable regulatory framework, past experiences and general perception of India’s governance mechanisms continue to usurp their confidence in the Indian market.

Between more production for the Indian oil and gas industry and more revenues for the Government, the Government seems to have prioritized the latter, but sadly, failed at both. At this stage, when Indian upstream is almost going nowhere in terms of revenue generation or productivity against a skyrocketing consumer demand, dire measures are needed let alone a short term sacrifice of revenues to attract more and more participants. Several issues like the ones discussed here mar the Indian upstream:

i.  No Independent Regulatory Authority

Officially a technical arm, Directorate General of Hydrocarbons (“DGH”) acts as an alter-ego of the Ministry of Petroleum and Natural Gas (“MoPNG”). Given its inherent nature and position in the regime, it is bound to advance the interest of the Government rather than promoting the interests of the sector, which may often not be the same. It lacks autonomy and is exposed to extensive possibility of being influenced by political and other vested interests in performing its executive duties. With its top officials inducted mostly from the National Oil Companies, which are overseen by DGH for different activities in the upstream sector, a potential conflict of interest is created to the detriment of investor’s confidence in the fairness and impartiality of DGH operations. In a way, for the investor, it is a condition where its contractual partner itself is responsible for policing the investor.

Recently, the Minister of Petroleum and Natural Gas while attending a presentation by one of the prominent consultancy companies, ruled out the suggestion of turning DGH into an independent regulatory body saying that the sector was not fully developed and needed government support. The statement reflects that the Government fails to realize that its presence, which it considers necessary, is a problem in itself.

ii.  Excessive Regulation

For a sector to breathe, you have to give it some space. But as evinced by NELP and HELP both, the Government has been adamantly unwilling to do that. The general tendency of overregulation is manifested even under the Model Revenue Sharing Contract (“MRSC”), which introduced the new revenue sharing model. Several clauses under the MRSC either transgress into areas they need not be in or impose suffocating restrictions for the contractor. For example—Article 26 of the MRSC requires the prior approval of the Government for mergers or acquisitions of the Contractor in addition to the prescribed requirement of assignment. M&A among upstream companies is a relatively common practice, especially in growing upstream sectors. Also, such transactions are already governed by other applicable laws with necessary government oversight. Incorporating this clause under MRSC inhibits the flexibility of operations by the Contractor. Another pertinent example is the mandatory requirement of domestic arbitration under Article 31 for dispute settlement. It is only legitimate for an FOC to expect fast, fair and efficient resolution of disputes at a neutral venue without any inappropriate interference. The compulsion of a domestic arbitration weighs heavily against that. The often protracted and lengthy appellate and enforcement mechanisms for arbitration in India aggravate the issues even further. In the absence of an autonomous regulator, the need of international arbitration gains even more ground.

iii.  Prioritizing short-term revenues over long-term growth

For as infant of a market as the Indian upstream sector, it is important that it is nourished with risk incentives, tax-breaks, constructive regulation and high returns on investment until it matures into a productive and profitable industry. This would ensure a robust sector with long term benefits at short term costs. Contrarily, the Government appears to be bent upon obtaining quick revenues at this stage when the sector is still flagging with myriad issues. At this stage, the Government should have been ready to suffer some interim loss of revenues and/or taxes to let the sector thrive over the long term, but that is sadly not the perspective. Some of the best established production hubs such as Texas and Oklahoma, which have grown over the years on minimal regulation-maximum production model, adopted a similar approach in the past that rooted their growth into what became of them eventually. Texas, in particular, which is currently setting the tone of the international crude market with massive productions from its shale reserves in the Permian Basin and Barnett Shale adopted a highly liberal approach in its initial days. Admittedly, there are fundamental differences between the Indian and US upstream sectors, but there still are broad areas where the learnings from the US can be instructive for the Indian upstream sector. Historically, the State of Texas offered several benefits to the oil and gas developers alongside minimal regulatory intervention, which encouraged the sector to grow at an enormous pace. Despite becoming one of the biggest upstream industries of the world, Texas still offers several incentives and tax abatements to the oil and gas producers to encourage more participants to venture into the business. A similar approach would go a long way in encouraging the FOCs enter the Indian market.

The Way Ahead

Over the past few years, the Government has been on a spree of assuring investors of an investor-friendly environment in the country. But unfortunately, the assurances have not been met with tangible efforts. In almost all sectors, India is considered a tough nut to crack, not because of its market potential, but the excessiveness and errs of its policies. It is ironical that India is the third largest importer of petroleum with the third highest consumer demand, while majority of its own reserves lie unexplored due to the sheer lack of a healthy policy environment. Participation of FOCs is highly needed to boost the upstream sector with the impetus that it badly needs and an improved policy will act as its spine.

 

 

Author: Vatsal Kishore 

Vatsal is a post graduate in Energy Laws and International Arbitration from University of Texas School of Law. He is currently working as an in house counsel with a major renewables corporation operating in the North American Market.