Sun. Jun 20th, 2021

City gas distribution

Transporting future fuel

#81 New Exploration and Licensing Policy (NELP)

8 min read

New Exploration Licensing Policy (NELP) is a policy adopted by Government of India in 1997 indicating the new contractual and fiscal model for award of hydrocarbon acreages towards exploration and production (E&P).

NELP was applicable for all contracts entered into by the Government between 1997 and 2016.

In March 2016, Hydrocarbon Exploration and Licensing Policy (HELP) replaced the extant policy regime for exploration and production of oil and gas -New Exploration Licensing Policy (NELP), which has been in existence for 18 years.

Objective: The main objective of NELP was to attract significant risk capital from Indian and Foreign companies, state of part 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.

Background:

  1. Till the adoption of Liberalisation policy in 1991-92, petroleum exploration and production (E&P) activities were carried out in India only by public sector oil companies viz, Oil and Natural Gas Corporation Limited (ONGC) and Oil India Limited (OIL).
  2. NELP was formulated during 1997 by the Government of India, with Directorate General of Hydrocarbon as a nodal agency, to provide a level playing field for both the public and private sector companies in exploration and production (E&P) of hydrocarbons.
  3. 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).
  4. 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).

NELP was approved in 1997 and it became effective in February, 1999 (with the first production sharing contract (PSC) getting signed in 2000).

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.

Features of NELP: 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.

As at the end of nine rounds, 360 exploration blocks have been offered under NELP, and for 254 blocks, PSCs have been signed.  Presently, 166 blocks are active and 88 have been relinquished.

The NELP bidding rounds have attracted many private and foreign companies, in addition to public sector oil companies.

Before NELP, a total of 35 E&P Companies (5 PSUs, 15 Private sector Indian companies and 15 foreign companies) were working in India in Nomination blocks, Producing Fields and Pre-NELP blocks, either as Operator or Non-Operator.

After conclusion of nine rounds of NELP, the number of companies increased to 117. This includes 11 PSUs, 58 private Indian companies and 48 foreign companies.

However, NELP had many problems.

  1. Presently, there are separate policies and licenses for different hydrocarbons. 
  2. There are separate policy regimes for conventional oil and gas, coal-bed methane, shale oil and gas and gas hydrates. 
  3. Different fiscal terms are also in force for allocation of acreages for exploration for different hydrocarbons. 
  4. In practice, there is overlapping of resources between different contracts.
  5. Unconventional hydrocarbons (shale gas and shale oil) were unknown when NELP was framed. This fragmented policy framework leads 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.
  1. 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. 
  2. 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.

  1. 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.
  1. 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.

  1. 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

Leave a Reply

Your email address will not be published. Required fields are marked *

Copyright © Citygasdistribution |All rights reserved |