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
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Petroleum Regulatory Framework

Petroleum Regime Framework

CONSTITUTION Legislative/R egulatory 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
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Types of Agreements

Types of Agreements
Concessions Joint Ventures Service Contracts Production Sharing Contracts/Risk Sharing Contracts Hybrids
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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
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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
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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
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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
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Comparative Analysis of Agreements

Type of agreements Concession Joint venture Service contract Hybrid PSC Contractor All risk All reward Share in risk & reward No risk Mixed Exploration risk Share in reward Government Reward is a function of production & price Share in risk & reward All risk All reward Mixed Share in reward
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Usage of Contract Types

Type of agreements Concession Joint venture Service contract Hybrid PSC Number of countries utilizing this type 59 31 2 16 40
Source: Macleod Dixon Workshop, 2007
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Countries and Agreement Types

TYPE OF AGREEMENTS CONCESSIONS (59) COUNTRIES UTILIZING UK, US , Norway, Australia, Canada, Peru, Namibia, Thailand, Sudan, Ecuador, Kuwait, Bahamas Colombia, Cameroon, Netherlands, Pakistan Egypt, Yemen, Angola, Indonesia, India, Guatemala, Sri Lanka Iran , Qatar Libya, China, Malaysia, Kenya, Tanzania, Gabon, Myanmar 16

JOINT VENTURES (31) PSC (40) SERVICE CONTRACTS (2) HYBRID (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
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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

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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

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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
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Effective Regulatory Mechanism

POLICY
Prime Ministers Office

Hydrocarbon sector vision

Ministry of Petroleum & Natural Gas Planning Com

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
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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

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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 )

PTIM

Contractors Cumulative net cash flow 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

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Methodology of Bid Evaluation

1.Technical Capability
1. 2. 3. 4. Operatorship Experience Annual Accretion of proved reserves Acreage Holding Annual Production 3D seismic surveys Exploratory wells Other Surveys 1. Cost recovery 2. Profit share to Government

2. Work Programme
1 2 3

3.Fiscal Package

Income Tax Regime in Oil Industry

33.66%

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00 0%

00 0%

0% 0

0% 0

0% 0

0% 0

0 %

Cost Oil Limits

Cr oa tia Lib Vie ya tna My m a Ka n m a za r kh Ba ng sta n ala de Ma sh Ch ina la y On sia Ch ina sho Of re fsh or Pa e k is Co ta n ng Of o fsh Ind ore ia Gu NEL ate P ma la

100%

C o s t Re c o v e r y L im

Royalties
0. 0 00 % 0. 0 00 % 0. 0 00 % 0. 0 00 % 0. 0 00 % 0. 0 00 % 00 % . 0 00 % . 0
NE LP ng o liv ia ia Ka za kh sta n Gr ee nl an d lo mb ia Ar ge nt ns ho re Bo re ala Ve ne zu

(10%-12.5%)

Co

In d

Co

Au

st ar ali a

Fix e d P e rce nta ge Roya ltie s

Te xa sO

ffs ho

ia

NELP A Progressive Policy

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

Growth of Discoveries
180

107

Discoveries in all Basins

Cambay, 24%

KG, 43%

Rajasthan, 15% NE
Co ast Ca 7 , uv %
3% ery ,

GS, 1%, MUMBAI, 1% SAURASTRA,

3% i, ad % an ,2 an ah M Arak A-

Discovery by all Operators

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

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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 Optimizing Bid Evaluation Undeveloped Data availability Nigeria 2006 Indonesia 2007 Nigeria 2006 INDIA Open & Transparent Bid Indonesia 2007 rounds Brazil Round 9 USGOM INDIA Brazil Round 9 USGOM Technical Weight

Indonesia 2007

Rich-Accessible INDIA Data Brazil Round 9 Nigeria 2006 USGOM INDIA

Weak Norms & Benchmarking Administered Pricing

Nigeria 2006 Indonesia 2007

Brazil Round 9 USGOM

Strong

Nigeria 2006

Indonesia 2007

INDIA Market-based Brazil Round 9 USGOM INDIA

Competitive Landscape

Concentrated

Indonesia 2007 Nigeria 2006

Brazil Round 9

USGOM

Diversified 47

Source :PFC Energy

HOW ARE WE DIFFERENT FROM OTHERS ?

MALAYSIA INDONESIA PHILIPPINES AUSTRALIA NEW ZEALAND

INDIA
Shallow water Deep Water

Type of system Contractor take Royalty Cost rec. limit Access to gross revenue
* Govt.

PSC 5% 5 0. % 00 0% 0 0% 0 0% 0 Yes

PSC 0% 0 0 % 0% 0 0% 0 0 % Yes

SA* 0% 0 -00 . %*** 0% 0 0% 0 0 % Yes

R/T* 0% 0 0 % 00 0% 00 0% 0 % No

R/T* 5% 5 0 % 00 0% 0% 0 0 % Yes

PSC

PSC

Biddable 0% 0 00 0% 00 0% 0 % Yes 0&

0 %** 0

00 0% 00 0% 0 % Yes

carry Ring fence

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

India: Operations Risk

Best
A B C D F

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

Source: PFC Energy

India: Oil Sector Entry Risk

Best
A B C D F

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
worst

Source: PFC Energy

India and Other Asian Countries

5= best Indias Politics and Economics scores are among the highest in Asia, Oil Sector Entry scores are average for the region.
4.17 3.91 3.66 3.63 3.49 3.33 3.33 3.32 3.17

2.96

Source: PFC Energy

India and Other Deepwater Players

5= best
4.17

Compared to other Deepwater Players, Oil Sector Entry scores are higher than major resource holders such as Mexico and Brazil.
3.74 3.63 3.63 3.43 3.33

3.14

3.07

Source: PFC Energy

Conclusions

Indian PSC is considered to be Progressive & investor friendly India has large unexplored area with uncertain prospectivity Needs extensive exploration and risk capital PSC enables exploration at no cost to Government Cost Recovery acts as incentive to continue success is achieved exploration till

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