Demand for Service Providers to Surge
Neetu Vinayek, Tax & Regulator, KPMG and Manish Baghla, Tax & Regulator, KPMG

The significant growth of India's economy over the past decade has led to increase in domestic energy consumption. A strong growth in automobiles sector and increase in industrial activity has led to a sustained increase in oil consumption. Oil & Gas constitutes around 45 percent of primary energy commercial mix. Energy security remains a challenge for India as India is significantly import dependent to meet its oil & gas requirement. The article details the scope of Hydrocarbon Service Providers in Indian Oil and Gas Industry.

Government of India (GoI) has the initiated process of developing road map of centrally planning for next five year, i.e., 2012-13 to 2017-18 as a part of 12th Five-Year Plan (FYP) and has outlined approach towards 12th FYP. The approach paper has acknowledged that one of the major challenges is emerging from rapid growth in the energy needs since these requirements have to be met in an environment where domestic energy prices are constrained and world energy pricesare high and likely to rise further.

For the gross domestic product (GDP) to grow at 9 per cent, commercial energy supplies will have to grow at a rate between 6.5 and 7 percent per year. Since India's domestic energy supplies are limited, dependence upon imports will increase. Import dependence in the case of petroleum has always been high and is projected to be 80 per cent in the 12th FYP.

The domestic oil supply has largely been constant despite the strong demand growth due to decreasing production from the oilfields (which are ageing) and no additions to oil resources due to lack of a major oil discovery. India has had a historic dependence on imports for meeting its energy requirements. The prospectivity of Indian sedimentary basins, a large unexploited resource base, scope for infusion of technology across the value chain, expanding pipeline infrastructure, upcoming City gas distribution networks, availability of skilled manpower, well established independent judiciary and a stable democratic government are the key attractive features for investment in Oil and Gas sector in India.

The liberalised policy environment through policies in the nineties and the New Exploration Licensing Policy (NELP) of Government of India has been instrumental in bringing about incremental growth in oil and gas production. NELP has created a conducive level playing field for all companies in the sector. 100 percent Foreign Direct Investment (FDI) has been permitted in exploration and production of oil and gas with an objective to rapidly increase the extent of area explored from the present 65 percent to 100 percent by the year 2015. With this in view, India has held 9 bid rounds. An investment of USD 16.5 billion has been made in exploration and production activities. The process of award of 9th bid round recently concluded future. More than two dozen foreign companies are working in Exploration & Production (E & P) sector which include global majors.

The investor-friendly policies of India government have been able to attract significant investments in the petroleum sector. In the last one year, two major investment decisions made by major company's viz. BP and Vedanta in blocks held by RIL and Cairn respectively have re-established faith in the hydrocarbon potential in India. While RIL-BP consortium has stated that its investments in exploration and marketing would be up to USD 20 billion, Vedanta's acquisition costs are likely to be about USD 8 billion excluding future investments.

It is imperative that an increased investment in E & P activity will require development of new infrastructure and modification of existing ageing infrastructure will be essential for increasing the domestic oil supply.

Oil and gas exploration policies under NELP were designed to achieve rapid expansion of domestic production with the involvement of private investors. So far 235 blocks have been awarded. However, the results achieved are not sufficient to meet growing requirements. There has been some increase in crude oil production and a significant expansion of domestic gas output. However domestic production of both oil and gas needs to be significantly improved. ONGC's performance in increasing production, despite the allocation of a large number of blocks, has been disappointing. The international response to the recent NELP offers has been poor. It is necessary to re-examine whether the current policy provides a sufficiently attractive framework for policy which can attract investors in this area. There is need for a stable long-term regime of fiscal incentives which is comparable to what exists elsewhere. The issue of pricing of natural gas and its linkage with international prices also need to be clarified if investors are to be attracted to this sector.

Recognising the need for comprehensive review of Upstream Licensing Policy, GoI has constituted a committee under the chairmanship of Dr C Rangarajan, Chairman, Prime Minister's Economic Advisory Council, to review the existing Production Sharing Contract (PSC). The review would be in respect to current profit sharing mechanism with the Pre-Tax Investment Multiple and exploring various contract models. The committee will also look into a suitable mechanism for managing the contract implementation and governmental mechanisms to monitor and audit the Government’s share of profit petroleum. It will also structure the guidelines for determining the formula for the price of domestically produced gas and for monitoring actual price fixation.

It is pertinent to note that, non-conventional gas resources, particularly shale gas and also coal bed methane (CBM), have dramatically changed the supply scenario in the US. Similar developments are taking place elsewhere. A major thrust needs to be given to the identification of shale gas resources in India and the determination of the feasibility of exploiting them, which depends on several technical factors. Expansion of CBM should also receive priority attention. An effort to map available Shale gas resources is currently underway. Further, GoI has recently released 'Draft Policy for exploration and exploitation of Shale Oil and Gas in India' and has invited comments from all stakeholders.

All the above efforts are towards increasing E & P activities in India which will result in increased requirements of exploratory drilling, 2D, 3D seismic survey, reprocessing of existing data and other surveys such as Gravity-Magnetic, Magneto Telluric, Transient Electro-Magnetic and Geochemical analysis etc. There will be potential for other E & P services as well viz:

• Drilling services including directional drilling of oil and gas wells, re-drilling oil and gas wells, re-working oil and gas wells, spudding in oil and gas wells, well drilling gas, oil and water intake.

• Oil and gas field exploration services including aerial geophysical exploration, exploration, geological exploration, geophysical exploration and seismograph surveys.

• Other oil and gas field services including excavating slush pits and cellars, grading and building of foundations at well locations, well surveying, running, cutting, and pulling casings tubes, and rods, cementing wells, shooting wells, perforating well casings, acidising and chemically treating wells, cleaning out, bailing, and swabbing wells, Well testing and completion services.

• Asset development services including project management, FEED (front end engineering design) and EPCC (engineering, procurement, construction and commissioning services).

• Facilities/asset management services including maintenance modifications and operations.

E & P service providers had played key role in enabling success for E & P operators worldwide. Since the late nineties, the balance in technology development and intellectual property has clearly shifted towards service providers. E & P companies leverage on latest technology and specialist services of oilfield service providers to reduce underground risks thereby improving chances of success in E & P operations.

In addition to the basic upstream services market potential there is scope for huge upsides in case of any hydrocarbon discoveries as a result of added appraisal and development activities as had been witnessed in past during development of KG-D6 discovery.

Over the next five years the average annual E & P activity growth in India under the NELP regime is expected to grow significantly in geophysical surveys, drilling and related activities. Further, as per 12th FYP, plan outlay expenditure by ONGC & Oil is estimated to be over USD 36 billion. This quantum jump in E & P activities across the country will increase the demand for E & P equipment and services such as drilling rigs, seismic vessels, cementing services, electro-logging services, and completion and testing services. Recent discoveries made in the offshore basins will lead to additional requirement of infrastructure and services such as offshore platforms, sub-sea pipelines, completion equipment and services and work -over rigs.