Oil and Gas Auction

Oil and Gas Auction

Why in News

  • Significant Change in Oil and Gas policy: Earlier it was cost sharing and now Revenue sharing mechanism
  • Will applicable to marginable field
  • Out of these 69 oil fields which are to be auctioned 63 has been relinquished by the ONGC and 6 by oil India as they found that to be unviable to explore due to their small area.
  • Meanwhile government has decided to allow the operators to sell at price which they fix without making any interference in it.

How this model will work ? What are the hindrance and benefits?

  • Unified licensing ie. For oil and gas you need not to have a separate license.
  • But there is a conflict of interest in revenue maximization and production maximization because :
  • If you want to extract more oil you may have to take recourse to Intensive Oil extraction Methods etc.
  • But they are going to cost more which in turn will affect your revenues, so you want to maximize than you won’t go for full oil extraction because that will cost more and revenues would go down which otherwise would have been higher if not gone for Intensive oil extraction.
  • So this would discourage the Full extraction method as emphasis is more on revenue not on production.
  • This should be addressed by making the bidding process subject to the revenue sharing with a condition of applying maximum oil recovery methods.
  • According to experts this new revenue sharing policy is going to attract more investors, although some committee headed by Vijay Kelkar suggested that cost sharing method will be more attractive to Big players in oil extracting.
  • But other experts claim that cost sharing model is idol for deep water extracting where costs are really substantial but for oil extraction in marginal areas revenue share model is going to attract more investors.
  • Considering the fact that world over big players and government are more inclined towards renewable source of energy like nuclear or solar or wind so investors attraction is necessary in oil sector.
  • There are few reasons that why even under change scenario the investor may invest in Indian oil and gas sector .
  • India as a market for energy still rely highly on petroleum products and in near future this demand is going to increase.
  • Prospects of finding new fields are good.

But the question arises that the current auctioned 69 fields were with ONGC and Oil India but they returned why? And how it will be that new bidders will come and extract crude oil more successfully than ONGC and OIL INDIA?

  • One probable answer could be that these are big giants who deals generally 5000 or 6000 crores of profit so these companies may not be very interested in smaller fields like those in the question.
  • On the other front if these 69 sites are set free for private investment than it may boost other players to invest in Indian oil and gas market.
  • One more reason is that ONGC is having very high overheads and the fields were given on the nomination basis, without actual business returns. But then question arises that why they were given such areas which were economically unviable for such big players. The answer is because they were the only operators available at those times.

Should Revenue sharing be extended to the main stream Blocks as well ?

  • First government need to experiment it with the present auctions than if all goes well than it may choose to do so with the main stream Blocks as well.
  • Moreover it is a point worth testing that whether under these new policy conditions the health of the oil reservoir is proper taken care of.
  • Because the company will be only the exploiter the government will remain the owner. So before extending the same policy to the main stream Blocks one need to consider this aspect as well.

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