Relinquishment: Exploring Ultimate Recovery

T N R Rao
Former Petroleum Secretary
Though India has zeroed the 10th round of NELP through a revenue sharing regime, the fate of blocks relinquished during the last nine rounds of NELP is still under cloud. Our Guest Columnist T N R Rao, Former Petroleum Secretary, believes unless maximising the ultimate recovery is made a bid condition, introduction of revenue sharing in the PSCs would be short-sighted and would result in loss of precious resources of the nation.

Relinquishment of areas from oil/gas fields contrac ted to investors under the production sharing scheme is in the news lately, for really very wrong reasons.

The Production Sharing Contract (PSC) initially delineates large areas for the contract, on the basis of indications of hydrocarbons on available scanty data. The whole exploratory and drilling phases of the PSC are meant to zero in on areas most likely to contain commercially exploitable reserves . These two phases narrow down the areas for profitable development and consequently the areas not so profitable should cease to be of interest to the contractor.

But for the Govt as a resource owner, these areas continue to be of interest , as it is quite possible for another risk taker to explore fur ther again for oil/gas. To make such areas viable, they are added to contiguous areas and offered again for bids. The sooner such exercises are done, the better for the country, as they get subjec ted to repeated scrutiny for possible reserves and quicker exploitation.

Why Relinquished?
Contractor has to obtain a Petroleum Exploration License (PEL) for the areas he decides to explore. After such exploration and exploratory drilling within the period allowed for such ac tivities under the PSC, he should decide on the area for development. He should then apply for a Petroleum Mining License (PML) for the area required for development and production only. On the expir y of the PEL for the area covered for exploration, the balance of the area other than covered by PML stands relinquished. Even within the PMLs, the areas specifically of fields for which development plans have been approved, should only be retained and the rest should be relinquished.

What PSC Says on Relinquished Blocks
The PSC has therefore provisions that make it mandatory for the contrac tor to decide on the areas he wants to retain for commercial exploitation and give up areas not so required. These are non-negotiable clauses of the PSC and any contractor signatory to the PSC is bound to honour this and quit the areas not subjected to commercial exploitation by him, to enable the Govt as owner to arrange in getting the vacated areas for further exploration. These areas, together with possible contiguous areas will be auctioned again and nothing prevents the earlier contractor from bidding for it again.

Looking Ahead
The time limits laid down for each phase of work, quantum of work and work programme, mandatory relinquishment of areas not covered by development plans are very significant for a country like India, heavily dependent on imports of energy resources. With a burgeoning demand for energy, India cannot afford to be complacent in its oil/gas development plans and brook delays. It should be remembered that Indian basins are under explored and poorly drilled. Our drilling intensity, that is, number of wells drilled per unit area is one of the lowest in the world. Not withstanding the progress in technology, the only way to say definitely that hydrocarbons exist is only by actually digging a well and taking it out. The sooner we bring more and more areas under development, the better it is for the country.

It is in the above context that it is necessary that areas are not allowed to remain unexplored and undrilled far too long. The time limits for relinquishments should be strictly enforced. That alone will not solve the problem. Additional data, gathered if any during the earlier PSC should be suitably added on a real time basis and should be available to the bidders in the next round. This cycle of operations should be speeded up for quicker exploitation of our resources.

In fact re-auctioning areas not required for development benefit both the Govt and the contractor as the new PSC will give them a fresh lease of 7 yrs for exploration and another 20 to 25 years for development and production. It is a win-win for both.

It is thus clear that delay in enforcing relinquishments is against public interest. Contractors should not be allowed to squat on their contract areas on one pretext or the other. The PSC clauses are very clear and should be made more clear wherever necessary to enforce strictly the time limit for relinquishment. Extensions if any, should be rare and exceptional and never routine. Even time limits for declaration of commerciality, submission of development plans, etc should be enforced.

It may be noted here that the PELs and PMLs are issued under specific legislative acts and so have statutor y force. Even the PSC has a clause which enjoins all par ties to the PSC to act in good faith in the discharge of their duties and obligations under the contract. The sanctity of the contract should be maintained by all.

Policy Regime: Revenue Sharing in PSC
It is unfortunate that regulatory enforcement & oversight has been lax and even permissive. This is compounded by crony capitalism practised by politicos. The matter is not helped by the regressive recommendations of the Rangarajan committee. The recommendation to ex tend the period to ten years for relinquishment is a backward step. Even more damaging to optimal exploitation is the proposal to bring in revenue sharing. The committee as well as the Govt have not realised that revenue maximisation does not necessarily mean maximising oil/gas extraction.

In fact, there is a conflict of interest between the two. Most often revenue maximisation which is in contractor's interest (and Govt's also in the new dispensation) results in sub- optimal recovery, leaving scarce resource irretrievably lost in the ground and this is against Nation's interest. Unless maximising ultimate recovery is made a bid condition, introduction of revenue sharing in the PSCs would be shor t-sighted and would result in loss of precious resources. O ver the ground problems should not be sought to be solved by sacrificing under the ground interests of the country.