India mulls incentives for upstream oil and gas companies to combat price slump

KOLKATA (miningweekly.com) – The Indian government plans to introduce incentives for upstream oil and gas companies to maintain exploration and production (E&P) activities in a low-price environment.

The government was expected to announce details of the incentives at the forthcoming Union Budget session of Parliament on February 29.

Unofficial indications are that the proposed incentive package will include most of the suggestions mooted by the industry, including changing the conversion of rate of cess on oil and gas to ad valorem rate, a calibrated lowering of royalty rates pegged on the age of the reserves and fiscal incentives in the form of lower taxes.

It was learnt that the government could also consider extension of production sharing agreements with E&P companies for currently operational blocks at a time when the government is shifting to revenue sharing contracts at the policy level.

Government has acknowledged that oil and gas major ONGC Limited and foreign energy companies operating in India are facing hard times in maintaining margins and generating sufficient surplus to fund exploratory projects with oil prices hovering at below $30/lb, an official in the Oil and Natural Gas Ministry said.

The Confederation of Indian Industry said in a representation to the government that India would be able to step up oil production from 37-million tons a year to 42-million tons a year, and gas output from 95-million cubic metres a day to 150-million cubic metres a day, by 2022, but only if long-term fiscal benefits were available to E&P companies. E&P companies would also have to extend their existing production sharing contracts with the government, the official added.

The need for an incentive package for oil and gas E&P companies came in the wake of a meeting held by Prime Minister Narendra Modi with global energy industry leaders, earlier this month, on measures to cope with oil and gas prices hitting record lows and India’s failure to make any new discoveries in the last five years.

The meeting was attended by amongst others BP Group CE Bob Dudley and International Energy Agency executive director Fatih Birol.

According to a former executive of ONGC, most the reserves of the company’s fields currently in production were ageing, leading to reduced oil and gas output. He said that the situation could be corrected by adopting “enhanced oil recovery’ methods, provided the government ensured adequate support through fiscal incentives to meet the cost of such technology.

The executive said that ONGC had not pruned its capital expenditure (capex) plans yet, as it would achieve a 10% saving on its $5.37-billion capex plan for the current financial year, owing to lower prices for services and equipment. However, there was no indication as to whether ONGC would be able increase or maintain current capex levels in the next financial year to sustain exploration and drilling activities.