In Country Value: Why India is an attractive investment destination for O&G?

In country value and Oil and Gas industry

You wonder what is ‘in-country value’ (ICV). Let’s understand the concept first.

ICV is the total revenue retained in-country that can benefit business development, contribute to human potential and stimulate productivity in the domestic economy. To put it simply, ICV enhances the local content of a country.

Let’s explore how are they connected and what is on the table for the oil and gas industry!

“Come make in India. Sell anywhere, but make in India.”

– Narendra Modi (Prime Minister Of India)

With this clarion call, the year 2014 witnessed the launch of ‘Make in India’, an ambitious initiative which seeks to make India a manufacturing superpower. The project has a powerful vision, that of making India an important investment destination. The government believes that with the right support and effective channelization of resources, India can turn into a global hub for manufacturing, design and innovation. Entrepreneurship in the country is being promoted with great vigor and consistent efforts are being made to create an environment which is conducive for investment and building modern and efficient infrastructure. Twenty five sectors have been identified for this program and the ‘oil and gas’ industry is one of them.

The oil and gas industry is a key contributor to the Indian economy. With 48% of the nation’s sedimentary area left to be explored, this sector offers immense investment opportunities. The government aims to reduce oil imports by 10% by the year 2022.

These measures have been taken in consonance with the government’s vision to turn India into a refining hub.

Crude oil strategic storage of 5.33 Million Metric Tonne (MMT) commissioned at Visakhapatnam, Mangalore and Padur
IOCL refinery with a capacity of 15 Million Metric Tonnes per annum (MMTPA) commissioned at Paradip, Odisha
726 MW gas based thermal power project of ONGC Tripura Power Company (OTPC) commissioned at Palatana, Tripura
Hydrocarbon and Exploration Licensing Policy (HELP) notified
INDMAX (lndane Maximisation) technology developed to maximize light distillates from refinery residue
INR 100 crore “ONGC Startup fund” announced

Let us discuss in detail the steps taken under Make in India for the development of the oil and gas sector.

A) FDI Policy:

100 per cent FDI has been allowed for-

Exploration activities for oil and natural gas fields
Infrastructure related to marketing of petroleum products and natural gas

Marketing of natural gas and petroleum products

Petroleum products’ pipelines
Natural Gas pipelines
LNG regasification infrastructure

Market study
Formulation and petroleum refining in private sector
Up to 49% FDI is permitted through automatic route for petroleum refining by PSUs, without any disinvestment or dilution of domestic equity in the existing PSUs.

B) Hydrocarbon and Exploration Licensing Policy (HELP)

HELP has unfolded a series of reforms for the revival of the upstream sector.

Uniform Licensing system has been introduced which will cover all hydrocarbons under the framework of a single licensing policy.
The present cost recovery model has been phased out and contracts will be based on Revenue Sharing Model.
Unlike the New Exploration Licensing Policy (NELP), whereby the bidding rounds were cyclic in nature, oil and gas acreages will be available round the year under Open Acreage Licensing Policy.
Under the Concessional Royalty regime, deep water and ultra-deep water areas shall not have any royalty for the first seven years, and thereafter shall have a concessional royalty of 5% (in deep water areas) and 2% (in ultra-deep water areas). In shallow water areas, the royalty rates have been brought down to 7.5% from 10%.
With greater freedom in marketing and pricing, explorers can now sell gas produced from geologically difficult, high risk / high cost areas with a ceiling price.
Extension has been granted for Production Sharing Contracts (PSCs) of 28 small, medium sized and discovered fields.

For a deeper insight into this topic and the New Exploration Licensing Policy (NELP), click here to read our blog.

C) Marginal Field Policy

This policy was announced with the objective of reducing the reliance on import of hydrocarbons. There is a single uniform license for the production of all types of hydrocarbons. Some of the elements of the policy are as follows:

No cess on oil production
Moderate royalty structure
Customs duty exemptions on import of goods and services for petroleum operations
Complete marketing and pricing freedom for the sale of produced crude oil and natural gas
Upto 100% FDI participation by foreign companies
Joint ventures
No restrictions on exploration activity during contract period

D) Policy on Testing Requirements for discoveries in NELP blocks

This policy aims at resolving long pending disputes associated with testing requirements. Contractors are offered choices with respect to the discoveries stuck owing to testing pre-requisites.

E) Policy framework for Relaxations, Extensions and Clarifications at the Development and Production stage under PSC regime

This policy framework aims to address the rigidities in the timelines of the PSC so that, the contractors can commence production at the earliest. The prime goal is to bring about early monetization of hydrocarbon discoveries.

F) Major investments and FDI inflows

FDI equity inflows during April 2014-March 2016 increased by 267% (3.7 times) to USD 1.2 billion from USD 327 million during the same period in 2012-14
The basic customs duty and countervailing duty exemption on specified goods imported for petroleum exploration have been merged into a single exemption with unified list of goods and conditions.
Infrastructure Creation:
- IOCL refinery with top notch refining technology at Paradip, Odisha was commissioned in February 2016. This refinery will help Paradip emerge as the energy hub of eastern India as It will lead to development of downstream industries in the region including petrochemical units.
- The second unit of gas based thermal power project of ONGC Tripura Power Company (OTPC) at Palatana, Tripura was inaugurated on December 1, 2014.
- Strategic Crude Oil Reserves have been built at three locations viz. Visakhapatnam (1.33 MMT), Mangalore (1.5 MMT) and Padur (2.5 MMT). The project at Visakhapatnam has already been commissioned.

G) Hydrocarbon Vision 2030 for North East India

This policy framework has been designed to focus on doubling the production of oil and gas by 2030 and leveraging the hydrocarbons sector for social and economic development. The policy shall also promote engagement and cooperation with the neighboring countries such as Bangladesh, Myanmar, Nepal and Bhutan. Moreover, a 40% subsidy on gas operation has been extended to the private firms operating in North east to enhance exploration and production activities in the region.

H) Technology

In the realm of technology, the innovations and developments are focused upon bringing about indigenization in the oil and gas industry. The idea is to buoy up the domestic industrial establishment and support the progress of the local oil and gas industry professionals. Moreover, with lesser import of technology from various geographies, the costs can be effectively brought down. Under the ‘Make in India’ program, following technological developments have taken place:

INDMAX (Indane Maximisation) Technology- To maximize light distillates from refinery residue by IOCL R&D.
HP HiGAS- Separation technology for gas processing
Four Ball Test Machine
Gasoline Corrosion Inhibitor additive – To control corrosion
Indigenous development of products by BPCL (Imported earlier)- :Light liquid paraffinic oil for use in cosmetic applications, Viscosity Modifiers for Hydraulic fluids, Phenolic antioxidants for lubricant formulations, Viscosity Index Improver Polymer, Thermic fluid.
Indigenization Development Group (INDEG)- Specialised INDEG constituted by every PSU under the Ministry of Petroleum and Natural Gas (MoPNG) to promote indigenization and promote the idea of ‘Make In India’.

I) Other Initiatives

w.e.f. October 19, 2014, diesel prices were fully deregulated by which fuel prices (petrol and diesel) will be aligned to international crude oil prices on a daily basis.
Direct Benefit Transfer (DBT) in Kerosene scheme was introduced w.e.f. 01.04.2016 whereby, direct transfer of subsidy takes place and the consumer pays the non-subsidized price of kerosene at the time of purchase. Subsequently, the amount of subsidy is directly transferred to the bank account of the beneficiary.
Under Pradhan Mantri Ujjwala Yojana (PMUY) scheme launched on May 1, 2016, 5 crore LPG connections will be provided to BPL families with a support of Rs.1600 per connection in the next 3 years
PAHAL, the world’s largest Direct Benefit Transfer scheme, launched on January 1, 2015, directly transfers LPG subsidy to consumers all over the country.

J) Provision of Clean Fuel

The Bureau of Indian Standards (BIS) has revised the standards on petrol and diesel as per Bharat Stage (BS) VI fuel norms from the previous BS IV emission norms. The revised standards will enhance the environment and mitigate respiratory problems due to reduction in permissible Sulphur content which will also bring down the emission of nitrogen oxides (NOX).
Many countries including India have adopted ethanol blending in petrol for reducing vehicular exhaust emissions. In the long run, it will also bring down the import costs on account of crude petroleum, which is the source of petrol. Procurement of ethanol has been allowed at a fixed delivered price ranging between Rs.48.50 to Rs.49.50 per litre (including all taxes and transportation cost). The government has allowed procurement of ethanol produced from other non-food feed stocks besides molasses. Excise duty has been waived on ethanol supplies to oil marketing companies for Ethanol Blended Programme by sugar mills during 2015-16.

Undoubtedly, the oil and gas industry is the foundation of many other industries and reforms in this sector are bound to have ripple effects. Make in India has designed an efficient framework whereby, the Indian energy sector has opened up a plethora of opportunities for both – domestic and foreign players. It is a leap forward in the process of nation building.

The ‘lion’ is leading us into the future of energy!