NELP-VII

POLICY IMPLICATIONS, FISCAL TERMS & BID EVALUATION BY U. S. SHARMA, ORF

CONTENTS

POLICY,REGULATORY AND LEGAL FRAMEWORK FISCAL TERMS BID EVALUATION CONCLUSIONS

LEGISLATIVE,POLICY AND REGULATORY FRAMEWORK

Legislative framework for E & P activities

Constitution of India provides ownership of petroleum resources in offshore with the Union of India 9 Article 297) Ownership of petroleum resources in onland areas rests with respective state governments However regulation and development of petroleum resources both in offshore & onland areas exclusively rests with the union government ( Schedule 7, entry 53 of the Constitution of India) The Oil Field (Regulation & Development ) Act, 1948 (ORDA) provides power to the Union Government, inter-alia, for grant of leases and licences, conservation and development of petroleum, collection of royalty on petroleum etc. Petroleum & Natural Gas (PNG) Rules, 1959 provides rules for carrying out the provisions of the ORDA PSCs are in nature of additional terms and conditions to PELs and PMLs granted under P & NG Rules, 1959 contd..

Legislative framework for E & P activities

Onshore Exploration Licenses/Mining Leases granted by State Governments with prior approval of Government of India Offshore Exploration Licenses/Mining Leases granted directly by Government of India Environment Protection Act, 1986 Arbitration and Conciliation Act, 1996 Income Tax Act, 1961 Customs Act, 1962 Oil Industry Development Act, 1974

Policy framework for NELP

NELP approved by the Union Government in February,1997 The NELP including its main fiscal and contract terms was laid in both the Houses of the Parliament in March,1997 The NELP was publicly notified through a gazette notification in February,1999 NELP provide award of acreages through International Competitive Bidding ( ICB) route NOCs and private companies required to compete for acreages and provided same terms and conditions NELP provides upto 100% interest by a foreign company/ a consortium of foreign companies through PSC regime No prior requirement for registration/incorporation in India for the purpose participating under NELP process NELP terms & conditions do have consents of the state governments

Regulatory Framework for E & P

Regulation of E & P activities mainly through ORDA, P & NG Rules, PELs and PMLs granted and PSCs signed. The Government with the assistance from DGH regulates the E & P activities MCs under PSCs have been empowered to take several decisions on exploration, development and production of oil and gas There is no comprehensive regulation document

Approval Processes

Bids to be received in DGH office on 25 April,2008 These are opened in public before the authorised representatives of bidding companies Bids are opened blockwise and all biddable terms bidderwise are read out by DGH in Public Any bidder can calculate its point and ranking ( provided any bidding company otherwise qualify i.e. do not attract any rejection criteria) DGH evaluates the bids and sends its evaluation reports including recommendations to the Government Government approves awards

FISCAL TERMS

Fiscal Regime

No state participation either itself or through NOCs No OID cess or customs duty No signature, discovery or production bonus No import duties Fiscal stability during entire period of contract 7 year corporate tax holiday Upto 100% cost recovery (biddable)

Contd..

Fiscal Regime

Special concessions for deepwater blocks Production Sharing with the Government based on Pre Tax Investment Multiple (PTIM) Tranches Securitization of participating interest for raising project finance Full repatriation of profits Liberal set off and carry forward of losses Tax Incentives for Site Restoration Fund Scheme (SRFS) contd..

Royalty Regime
Royalty pegged to the value of petroleum at Well head : Crude Oil 12.5% for on-land 10% for offshore Gas 10% for on-land and offshore Deepwaters ( oil and gas) Deepwater* : 5% for the first 7 years Royalty is cost recoverable
* beyond 400 m isobath

BID EVALUATION

Qualifying Criteria
Bidding Companies must ensure the following to avoid disqualification/rejection: Mandatory 2D seismic API where required in NIO At least of one exploratory well in Phase-II Networth atleast equal or more than the cost of MWP ( including mandatory work programme where applicable) of Phase-I. In case of a consortium bid, this should satisfy individually for all the partners for their respective participating interest Technical qualifying criteria for onland and shallow water blocks ( other than S type blocks) contd

Qualifying Criteria

Commitment for furnishing parent company guarantee, if these parameters are based on PCs strength Ineligible to bid as operator for the blocks relinquished under NELP without completing MWP Purchase of data package Submission of complete information/documents/ certificats as per NIO and bid format

NELP: Bid Evaluation Criteria

Criterion / Type of Blocks Onland & shallow Deepwater Blocks water Blocks A Technical Capability Work programme Fiscal package Total (Points) B SType 40 60 100 A 30 15 55 100 B 30 25 45 100

Qualifying

40 60 100

50 50 100

NELP: BEC Technical Capability

Onland & Shallow water

Deepwater

Qualifying Criteria Non- zero score by designated operator on operatorship experience and Non- zero score on any one of the following : i) Acreage holding (all acreages) ii) Reserve accretion (P1) iii) Annual Production

Evaluation Criteria Evaluation of the following parameters: i) Acreage holding ( PML) ii) Operatorship experience iii) Reserve accretion (P1) iv) Annual Production v) Consortium/ partnership

S (Small) type block : .Technical competence is not required

NELP : BEC Fiscal Package

Onland & shallow water Blocks Deepwater Blocks Points A 60 B 50 S- Type 60 A 55 B 45

Bidder to be evaluated on the basis of bid cost recovery percentage and

offered profit share to Government

Profit Petroleum to be computed based on assumed CAPEX, OPEX,

Production Profiles for each block and Price and production profile scenarios as per weightages under 9 scenario. All assumptions, capex,opex and production profiles are available on NELP-VII web site Share of Government profit petroleum shall be computed taking a discount rate of 10% over project life

Bidder offering highest profit share to Government as per above will get
maximum points and others will get proportionate points accordingly

NELP : Profit Petroleum Spilt

Illustration to show calculation of Govt. share of Profit petroleum when PTIM is between 1.5 and 3.5 Bid PTIM ( Govt share ) - Upto 1.5 is 30% and for 3.5 and above 80%
In any year if the PTIM is between 1.5 and 3.5, then Govt profit share =Z % , and Contractor's PP share shall be (100-Z)%

Z = a + [(b a) * (X 1.5)/2]
Where, a denotes Government share at PTIM upto 1.5 b denotes Government share at PTIM 3.5 and above b should always be higher than a X denotes PTIM of Contractor at the end of preceding Year

PTIM X = 2.5

GOVT PP Share Z = 55%

Contractor's PP Share 45%

If PTIM(X) is 2.5 in the previous year, as per above example, the Govt.s share (Z) in the subsequent year, would be 55%

Evaluation of Fiscal package

PTIM of more than 3.5 (Govts share) Deepwater Block-Type A 70% Bidder 20% A Bidder PTIM up to 1.5 (Govts share ) Bidder 30% B 80% Govt. Points Annual NPV Cost recovery ($MM)

80%

791

44.8

80%

971

55

Analysis of BEC for S- type blocks

No technical capability requirement implies any company with financial resources can bid and qualify for award Work programme and fiscal package to determine points Expected to attract a number of new players other than E & P players Expected to result in aggressive bidding beyond techno-economic rationality of the blocks on offer Therefore, one should be prepared to bid aggressively to improve chances of winning block (s)

Shallow and onland ( other than S type) blocks BEC

technical capability requiring just non-zero scores implies there would be no difference between a big E & P operator and a small E & P operator Work programme and fiscal package to determine points and ranking Expected to attract small E &P operators, who believe with this BEC they have better chance to compete Small E & P players may give stiff competition to relatively bigger E & P players

Deepwater blocks BEC

BEC provides advantage to E & P companies with deepwater reserves and production head on advantage If an E &P company as operator with deepwater production joins an Indian Co., it can have upto 10 points advantage Work programme may not be generally aggressive due to lower points 15 ( type A) and 25 ( type B) Fiscal package may be good/aggressive as it carries significant weightage Expected to interest some foreign deepwater E &P producers with Indian tie-ups

Some uncertainty/ area of concerns

While NIO, PTG and Gazette NELP Policy of Feb, 1999 provides availability of 7 years tax holiday and fiscal stability during the contract, Finance Bill, 2008 defines the termm mineral oil to exclude petroleum & natural gas. How to deal and structure the bid terms ? Freedom to market gas price is subject to Gas Utilisation policy formulated by the Government from time to time. Further any gas price formula now require prior Government approval before going to buyers. This is subject to pulls and pressures and may create uncertainty on market gas price realisation Article 15.13 of the MPSC provides any upward variation in bid cost estimates require GOI approval for the purpose of cost recovery.