Why it′s time to dig into the investment scope in India′s oil & gas sector

In the view of many in the business community, India has never been a more attractive investment destination. There are few better examples of this than the oil and gas sector, where operators are expected to invest around $25 billion over the next five years on some of the world's most exciting projects.

An industry expert writes exclusively for 'India Investment Journal' on why the investment spotlight is shining on India.

As a global leader of economic growth, a domestic market of 1.25 billion people, an educated and energetic workforce, a democratic political culture and an established and independent legal system, India offers foreign investors unparalleled investment opportunities across multiple business sectors. Increasing confidence in this constitutional and fiscal stability, when taken together with the size of the domestic market and its prospects for continuing growth, is particularly attractive to investors.

From the outside it seems that economic momentum is inexorable, as all the constituent parts of Team India - politicians, business leaders, entrepreneurs, workers, educational practitioners and media - appear to be aligned. There is a clear sense that India will emerge at the centre of the global stage in the coming decades.

Large scale infrastructure projects, smart city developments and modern communication systems are priorities driving the Indian economy forward. Areas for investment such as aviation, technology, power, rail, road, electronics, petrochemicals, space, agriculture, mining, tourism, health, media, entertainment and many more, are all booming. Underpinning and sustaining this remarkable economic growth is the Indian energy sector, where the exploration and production of oil and gas plays a fundamental role.

Role of Oil and Gas

India is energy hungry. As the third largest consumer of crude oil behind the US and China and an increasingly important player in the LNG market, India's balance of payments is greatly affected by the level of oil & gas imports and global prices. Successive central governments have shaped energy policy to promote the contribution of oil and gas, primarily through:

1. promotion of investment into known hydrocarbon provinces overseas by its state entities and its flagship companies, and

2. stimulation of investment in the search and development of hydrocarbons within India. The experience of ONGC Videsh, IOC and Reliance provides numerous examples of the former strategy working successfully and this international investment trend will no doubt continue. But what of the domestic strategy

Domestic Oil & Gas Activity

The early history of oil and gas activity in India can be traced back to pioneers such Burmah Oil in Assam. In the period after World War II and up until the early 1990s, however, the sector was dominated by the state entities and by ONGC in particular. Indian state operators were primarily responsible for the exploration and development of prolific provinces such as the Cambay Basin in Gujarat, the giant Bombay offshore field and the onshore and shallow water parts of the KG basin on the east coast.

Legislation and policy changes to liberalise the industry saw the entry of foreign investors in 1992/94 and the first licensing round open to international bidders. From this first generation of overseas entrants, the most successful include Cairn and BG (now Shell). There were some less successful stories too, the most notable from that era being Enron's ill-fated downstream involvement.

Foreign competition in the upstream oil and gas sector re-invigorated ONGC, in much the same way as the success of private airlines in India resulted in improved performance by their state-owned counterparts. This also led to a resurgence of established domestic downstream operators, such as Reliance and Essar, entering upstream oil and gas for the first time.

The early 2000s saw the first major success stories of the liberalisation of the industry. Large discoveries in Rajasthan and the deep water KG offshore transformed the general perception of the geologic and commercial potential of India, and created a new wave of interest from international investors. More recently BP entered the Indian upstream industry in a significant way for the first time.

The present government has sought to stimulate further investment in upstream oil and gas through a series of initiatives, including:

• modernising the fiscal contract terms to focus on profit share rather than cost recovery, which has resulted in several lengthy legal disputes over the last two decades;

• gas pricing initiatives, including enhanced pricing for the most difficult fields;

• new licensing rounds such as the 2016 Discovered Small Fields Round (DSFR) and the forthcoming HELP exploration round; and

• making unconventional resources a recognised investment target.

Challenges and Potential Remain

The economic exploitation of the “Tight Hydrocarbon” and “High Pressure High Temperature” (HPHT) bearing reservoirs of India presents both tremendous upside potential and severe geological, technological and commercial challenges. By analogy with the transformational successes in North America there is potentially a large in-place gas/gas condensate resource, commercial recovery from these tight and HPHT reservoirs in India but for similar value to be realised it is likely that commercial recovery of tight hydrocarbons will first require to be demonstrated in pilot “proof of concept” programmes before full-field development and material production can commence.

The industry needs to reflect on the most suitable way of approaching tight and HPHT hydrocarbons in India. One possible approach is seeking to overcome the considerable geological and technological challenges through technically-driven collaboration of operators and experienced service providers working in strategic partnership.

The Discovered Small Field Round is perhaps an indication of other challenges that lie ahead. The round offered 67 small and hence largely immaterial oil and gas discoveries, formerly operated by state companies, to the industry at large. Anecdotal evidence suggests that interest in the round, which closes on 21 November 2016, is correspondingly subdued. On a more positive note, it is hoped that the round represents a prelude to more attractive and substantial offerings in future.

The Way ahead

The oil and gas industry is responding to the government's fiscal incentives and is gearing up for a significant investment of around $25 billion over the next few years in the deep water projects of the KG and the desert of Rajasthan.

Over and above these traditional areas of focus, huge untapped potential remains in the tight, HPHT and unconventional hydrocarbon resources of India.

However, if the country is to replicate the success of the unconventional story in the United States, the Indian geology, the level of knowledge and technology applied by the industry, access to infrastructure, the commercial and legal arrangements and the ability to access investment capital, will all be fundamental to India unlocking and realising this potential.