NELP Policy Global E&P Practices

R.K.Sinha Advisor (Production)

Directorate General of Hydrocarbons Noida, India

Presentation Outline
Petroleum Regulatory Framework

Types of Agreements
Contracts in India PSC Regime

New Exploration Licensing Policy - NELP

Indias Perception

Conclusions
2

Petroleum Regulatory Framework

Petroleum Regime Framework

CONSTITUTION Legislative/ Regulatory PETROLEUM LAWS/ REGULATIONS

E & P BUSINESS REGIMES

CONCESSION

JOINT VENTURE

SERVICE CONTRACT

HYBRID

PSC 4

Global Energy Resources Management Structure More countries adopting the "separation of roles for Resource Management
Ministry Regulator

Policy

Regulations

NOC/IOC/ JV

Business
5

Pillars of Oil & Gas Regulatory Regimes

A good oil & gas regulatory regime addresses certain major regulatory issues in a satisfactory way: The right to monetize resources Fiscal and contract stability Enforceability of contract A regulatory regime that fails on any one of these points puts its investment favourability at risk
6

Types of Agreements

Types of Agreements
Concessions

Joint Ventures
Service Contracts

Production Sharing Contracts/Risk Sharing Contracts Hybrids

8

Concession
Contractor has exclusive rights to explore, develop, sell, and export oil/gas from a specified area for a fixed period of time Equity or Royalty & Tax structure Maximum control to Contractor Oldest & most widely used

Joint Venture
Private/Foreign Companies and NOC form a Joint Venture Each JV partner pays/receives its share proportion to its Participating Interest. in

JV pays royalty, income tax and usually some form of Petroleum Revenue Tax (PRT)

Low success rate, less commonly used

10

Service Contract
Contractor costs pays all exploration and development

Contractor works under governments mandate and is paid for its work Government maintains ownership and title of minerals Most suitable for Contractor for risk-free operations and for States having Producing Assets

11

Production Sharing Contract

State enters into a PSC with Contractor specified period for a

Contractor finances exploration and development. If successful, Contractor will recover its costs and earn a profit by receiving a share of production. Royalty & Income Tax are paid as applicable

Significant control to Contractors, but State has contractual controls

12

Hybrids
Combinations of Concession /JV / PSC, royalty, tax, cost oil / profit oil shares and fees etc. Efforts to develop a world model Hybrid agreement have been unsuccessful because structures are becoming more diverse Host governments seeking structures that suit their particular needs

13

Comparative Analysis of Agreements

Type of agreements Contractor Concession Joint venture Service contract All risk All reward Share in risk & reward No risk Government Reward is a function of production & price Share in risk & reward All risk All reward

Hybrid
PSC

Mixed
Exploration risk Share in reward

Mixed
Share in reward
14

Usage of Contract Types

Type of agreements Concession Number of countries utilizing this type 59

Joint venture
Service contract Hybrid PSC

31
2 16 40
Source: Macleod Dixon Workshop, 2007
15

Countries and Agreement Types

TYPE OF AGREEMENTS COUNTRIES UTILIZING

CONCESSIONS (59)

JOINT VENTURES (31) PSC (40)

UK, US , Norway, Australia, Canada, Peru, Namibia, Thailand, Sudan, Ecuador, Kuwait, Bahamas Colombia, Cameroon, Netherlands, Pakistan Egypt, Yemen, Angola, Indonesia, India, Guatemala, Sri Lanka

SERVICE CONTRACTS (2) Iran , Qatar HYBRID (16) Libya, China, Malaysia, Kenya, Tanzania, Gabon, Myanmar

16

Right Agreements Main Elements

Right contract is vital to a governments effort to reap the benefits of its natural resources Balance needed between countrys and investors

interests
Takes into consideration the communities or entities not party to the deal but who will be interested or affected by it
17

Approaches to Resource Exploitation

Many developed countries use unilateral licensing /

leasing approach
Many developing countries use consensual

approach and prefer mining agreements Political will of host country to develop resources is key and expressed through regulatory instruments, Contractual guidelines obligations, National Policies and

PSC in India

19

Historical Background
First concept for PSC was introduced in Bolivia in 1950

PSCs were successfully implemented in Indonesia in 1966

PSCs are being widely used in more than 40 countries

In India, first PSC was signed in 1993 for a Pre-NELP Block

231 Exploration PSCs have been signed so far PSC terms continuously improved in consecutive NELP rounds
20

Legal Framework

Constitution of India, 1950 The Oilfields (Regulation and Development) Act, 1948 The Petroleum and Natural Gas Rules, 1959 & Amendments Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 Income Tax Act, 1961 Customs Act, 1962 Foreign Exchange Management Act, 1999 Environment Protection Act, 1986

Arbitration and Conciliation Act, 1996

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Production Sharing Contract Attributes

Contract term Relinquishment Management Committee Discovery, Development & Production Unit Development Cost Recovery & Production Sharing Taxes, Royalties & Rentals Domestic sourcing & supply obligations Employment & training Title to assets
22

Effective Regulatory Mechanism

Prime Ministers Office Ministry of Petroleum & Natural Gas Planning Com

Hydrocarbon sector vision Role for different sectors in energy fuel mix

Managing resource base Bringing accountability Managing licensing Mandate for data repository
1950s-93

NATIONAL OIL COMPANIES

1993+

Investing capital and technology

REGULATOR
Upstream: DGH Downstream: Gas Regulator
Public (Central): ONGC OIL GAIL

OPERATOR
Public (State): GSPC
Private: Reliance Jubilant Videocon Essar Foreign: BG ENI Cairn 23 Niko

Petroleum Expenditure & Revenue Profile

Costs Revenues

Exploration
& Appraisal

Development
Abandonment & Reclamation

Production

10

20

30

40
24

Cash Flows Under PSC Regime

Production value
Royalty Production Exploration

Cost Petroleum

Profit Petroleum

Development

Contractors share

Governments share
Governments take

Income tax

Contractors take

25
25

Pre Tax Investment Multiple (PTIM)

Gross Revenue

Cost Petroleum (includes Royalty, OPEX and allowed cost recovery of CAPEX)
Contractors take

Profit Petroleum (both of contractor & Government)

= Cost petroleum + Contractors share of Profit petroleum

Contractors net cash flow = Contractors take ( Production cost (OPEX) +Royalty ) Contractors Cumulative net cash flow

PTIM

Cumulative exploration & development cost

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Sharing of Profit Petroleum

Profit share bidding (example) :

PTIM Tranches
Upto 1.5 3.5 and above

Profit Share to Government

30% 80%

Upto 1.5 Profit Share

3.5 & above PTIM

27

Methodology of Bid Evaluation

1.Technical Capability
1. 2. 3. 4. Operatorship Experience Annual Accretion of proved reserves Acreage Holding Annual Production

2. Work Programme
1 2 3 3D seismic surveys Exploratory wells Other Surveys 1. Cost recovery 2. Profit share to Government

3.Fiscal Package

Income Tax Regime in Oil Industry

90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

33.66%

INCOME TAX RATE FOR OIL INDUSTRY

29

100%

120%

20%

40%

60%

80%

0%

Cost Oil Limits

Cr oa tia Li by a Vi et n My am a Ka n m a za r kh Ba ng sta n ala de sh Ma Ch la in a O ysi Ch ns a h in a O ore ffs ho Pa re ki Co sta ng nO o ffs ho re In di aN EL Gu P at em ala

100%

Cost Recovery Limit

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

0.00%

5.00%

G Au st ar al ia O ns ho re re en la nd

Ar ge nt ia In d ia NE LP

(10%-12.5%)

Ka za kh st an

Royalties

Co

ng o

Bo

liv ia Co Te xa s lo m bi a O ffs ho Ve ne zu

Fixed Percentage Royalties

re

al a

NELP A Progressive Policy

32

POLICY REFORMS
New Exploration Licensing Policy (NELP)
New Exploration Licensing Policy announced in 1997, Effective since 1999
100% FDI in E&P sector approved Seven rounds of international bidding completed

(NELP)

Administrative Price Mechanism (APM) abolished

203 blocks awarded up to NELP-VII

Vision to offer 80% by 2012

Path Breaking Exploration Policy

Award of licenses through international competitive

bidding
Fast track approval mechanism, DGH as single

window clearance
No State participation or any carried interest International pricing for Crude oil Approval of price formula/ basis of Natural gas by

Govt , Allocation governed by Gas utilization policy

Cost recovery biddable - Up to 100% No custom duty on imports for Petroleum Operation

Path Breaking Exploration Policy

No Signature, Discovery or Production bonus Sharing of Profit Petroleum with Govt. on biddable pre-tax investment multiple Low to moderate royalty rates between 5% to 12.5%

Special concessions for deepwater blocks

Full repatriation of profits Liberal set off of losses and carry forward provisions for income tax purposes Tax Incentives for Site Restoration Fund Scheme (SRFS)

NELP- Positive Results

Opened up more acreage Voluminous E&P data generated Impetus to E&P Activities Growing Competition Remarkable Hydrocarbon Discoveries established Proven Potential Increasing oil and gas production Remarkable Investment in E&P and Infrastructure

E&P Activities Growth

1 Company 1 Producing Basin 2 Companies 3 Producing Basins 12 Companies 7 Producing Basins 71 Companies 10 Producing Basins

1947 1990 2000

2009

AREA AWARDED
AREA awarded : 2.15 Million Sq Km (68%)

Total area : 3.14 Million Sq Km

Area Opened up

NELP GLOBAL INTEREST

180

15-16 14-15 13-14 12-13

Growth of Discoveries

11-12 10-11
107

09-10 08-09 07-08 06-07 05-06 04-05

Actual

Projected

03-04 02-03 01-02 00-01

99-00
200 120

160

80

40

Discoveries in all Basins

Cambay, 24%

KG, 43%

Rajasthan, 15%

GS, 1%, MUMBAI, 1% SAURASTRA, 1%

Discovery by all Operators

CAIRN 22%

GSPC 18%
ONGC 11%

RIL 36%

HARDY 1%

BGEPIL NIKO 1% 2%

FOCUS ESSAR 2% HOEC 3% JUBILANT 2% 2%

EMERGING GAS POTENTIAL - EAST COAST

Basin Area (Sq.km) : 299,000

Resources (O+OEG) : 48 (Billion bbl)

Resources Gas : 153 TCF (Approx)

GIIP Reserves (TCF) : 16.38

Current Gas Production : 60 (MMSCMD) Anticipated Production: 100 (MMSCMD) Drilling Density : 0.15 wells/ 1000 Sq. Km
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Indias Perception

45

Indias Perception
Prospectivity
Materiality and scale of opportunities are world class - as proved by Barmer Basin oil and KG Basin gas discoveries

Market

Gas market policies and regulatory framework are in place now gas pricing and marketing rules are simple and clear

Competition

Its a level playing field bid evaluation system is more transparent, fair and competitive. Technical and commercial merits weights have been optimized

Operator Friendly Policies

Negotiated Access Bidding Fiscal Weight INDIA Nigeria 2006 Indonesia 2007 Brazil Round 9 INDIA Nigeria 2006 Indonesia 2007 Brazil Round 9 USGOM Open & Transparent Bid rounds USGOM Technical Weight

Optimizing Bid Evaluation

Undeveloped

Indonesia 2007

Data availability

RichINDIA Accessible Data Brazil Round 9 Nigeria 2006 USGOM INDIA

Weak
Norms & Benchmarking Administered Pricing

Nigeria 2006 Indonesia 2007

Brazil Round 9 USGOM INDIA Brazil Round 9 USGOM INDIA

Strong

Nigeria 2006

Indonesia 2007

Marketbased

Competitive Landscape

2007 Concentrated IndonesiaNigeria 2006

Brazil Round 9

USGOM

Diversi -fied 47

Source :PFC Energy

PARTNERING OPPORTUNITIES
NATIONAL OIL COMPANIES
ONGC OIL HPCL Reliance Essar Videocon Tata Adani HOEC Jubilant Aban Deep Welspun BPCL IOC NTPC BP Eni Statoil Gazprom Cairn Santos Tullow Hardy NIKO Petrobras Naftogaz Canoro M3energy Geoglobal BG

INDIAN PRIVATE SECTOR

FOREIGN PLAYERS

BUSINESS RISK EVALUATION

PFC ENERGY ANALYSIS

PETROLEUM RISK MANAGER (PRM) FOR 59 COUNTRIES AGGREGATING 5 RISK CATEGORIES

27 INDIVIDUAL RISK FACTOR

1990 2014 TIME HORIZONS COMPARED ENTRY DEVELOPMENT RISK RISK, EXPLORATION RISK AND

Best

1 worst 2 3 4 5 A

Source: PFC Energy

India: Operations Risk

B C

In terms of Oil Sector Operations Risk, India scores in the low risk range (B).

D F

Canada Australia United Kingdom Bahrain Norway United States Chile United Arab Emirates Malaysia Qatar Thailand Ghana Oman Trinidad China Brazil Mozambique Nicaragua Madagascar Mauritania Morocco India Mexico Viet Nam Egypt Cuba Gabon Congo Brazzaville Kuwait Libya Peru Saudi Arabia Equatorial Guinea Colombia Angola Angola-Offshore Syria Azerbaijan Russia Sao Tome Argentina Indonesia Iran Algeria Bangladesh Kazakhstan Pakistan Timor Leste Turkmenistan Papua New Guinea Chad Bolivia Venezuela Nigeria-Offshore Ecuador Yemen Nigeria Iraq Sudan

Best

1 worst 2 3 4 5

Source: PFC Energy

In terms of Entry Risk, India scores in the medium risk range (B), while many major resource holders are in the D to F range
C D F

India: Oil Sector Entry Risk

Canada United States United Kingdom Peru Colombia Australia Madagascar Ghana Nicaragua Gabon Mauritania Thailand Timor Leste Morocco Cuba Argentina Pakistan Mozambique Papua New Guinea Congo Brazzaville Nigeria-Offshore Norway Equatorial Guinea Trinidad Chile Libya Qatar Angola-Offshore Bangladesh India Sao Tome Bahrain Syria Yemen Malaysia Egypt Oman Chad Brazil Sudan Indonesia Kazakhstan China Azerbaijan Viet Nam Angola Nigeria United Arab Emirates Bolivia Russia Turkmenistan Algeria Ecuador Mexico Iraq Venezuela Kuwait Iran Saudi Arabia

India and Other Asian Countries

5= 5 best
4.17

Indias Politics and Economics scores are among the highest in Asia, Oil Sector Entry scores are average for the region.
3.91
0.47
0.45 0.44 0.86 0.39 0.47 0.84 0.80 0.65 0.84 0.76 0.76 0.57 0.30 0.67 0.55 0.40 0.88 0.23 0.35 0.73 0.59 0.63 0.57 0.51 0.58 0.67 0.30 0.70 0.58 0.25 0.35 0.62 0.23 0.54 0.14 0.30 0.83 0.79 0.80 0.35 0.42 0.42 0.44 0.42

3.66

3.63

3.49

3.33

3.33

3.32

3.17
2.96

0.47

0.80
0.70

1
0.84

0.77 0.49

0.76

0.82

0.78

0.66

0.72

0.68

0.66

0.66

0.72

0
Malaysia Thailand China India Vietnam Bangladesh Indonesia Timor-Leste Papua New Guinea Pakistan

Economics
Source: PFC Energy

Politics

Social

Oil Sector Entry

Oil Sector Operations

Oil Sector Surprises

India and Other Deepwater Players

5

5= best
4

4.17
0.47

Compared to other Deepwater Players, Oil Sector Entry scores are higher than major resource holders such as Mexico and Brazil.
3.74
0.45

3.63
0.49

3.63 3.43
0.39 0.43 0.42 0.38 0.67 0.67 0.68 0.23 0.31 0.80 0.66 0.58 0.39 0.25 0.77 0.76 0.86 0.50 Mexico Nigeria-Offshore 0.35 0.77 0.16 0.45 0.63 0.76 0.38 0.45

3.33

3.14

3.07

0.86

3
0.65

0.79

0.69

0.76

0.59

0.47 0.35

0.74 0.30

0.88

1
0.84

0.94

0.65

0.62 Brazil Politics

0.76

0.78

0.68 Angola-Offshore

0.68 Indonesia

0
Malaysia Economics Equatorial Guinea Social India Oil Sector Entry Oil Sector Operations Oil Sector Surprises

Source: PFC Energy

Conclusions

Indian PSC is considered to be Progressive & investor friendly India has large prospectivity unexplored area with uncertain

Needs extensive exploration and risk capital PSC enables exploration at no cost to Government Cost Recovery acts as incentive exploration till success is achieved to continue

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