From UPSC perspective, the following things are important :
Prelims level : OALP
Mains level : India's oil sector
India’s crude oil production fell 7.1% in May 2020 compared to May 2019 on the back of low demand due to the Covid-19 pandemic.
Practice question for mains:
Q.Discuss the impact of Covid-19 pandemic on the global crude oil dynamics.
Crude oil exploration in India
- Crude oil production in India is dominated by two major state-owned exploration and production companies, ONGC and Oil India.
- These companies are the key bidders for crude oil block auctions and end up acquiring most of the blocks that are put up for auction in India.
- Domestic production of crude has been falling every year since FY 2012.
- This has led to a steady climb in the proportion of imports in domestic crude oil consumption from 81.8% in 2012 to 87.6% in 2020.
Why is production falling?
- Most of India’s crude oil production comes from ageing wells that have become less productive over time.
- A lack of new oil discoveries in India coupled with a long lead time to begin production from discovered wells has led to a steady decline in India’s crude oil production making dependency on imports.
- The output of these ageing wells is declining faster than new wells can come up according to experts.
- Domestic exploration companies are attempting to extend the life of currently operational wells.
Why are there not more private players?
- There has been a lack of interest in exploration and production in India from major private players, particularly those based abroad.
- According to experts, this is because of long delays in the operationalization of production even after an oil block is allotted due to delays in approvals.
- Some of the key approvals which are required to begin production include environmental clearances and approval by the Directorate General of Hydrocarbons after the allottee completes a seismic survey and creates a field development plan.
What policy changes could help?
- Existing public and private sector players have asked for reduced levies of oil production including oil cess, royalties, and profit petroleum especially when crude oil prices are below $45/barrel.
- Experts say the requirement to pay royalties to the government at low crude prices can make it unviable for these companies to invest in further exploration and production.
OALP could help
- The government introduced the Open Acreage Licensing Programme (OALP) in 2019 to allow companies to carve out blocks that they are interested in and with lower royalties and no oil cess.
- However, existing players are calling for a relaxation of royalties and oil cess on block allotted under previous policies.
- The Chinese government offered a floor price to oil producers insulating them somewhat from any sharp falls in international crude prices.
- This kind of policy at least allows for a company to have a fixed worst-case scenario for the sale of crude oil attracts more investment in exploration and production.
- The OALP, a part of the government’s Hydrocarbon Exploration and Licensing Policy (HELP), gives exploration companies the option to select the exploration blocks on their own, without having to wait for the formal bid round from the Government.
- The company then submits an application to the government, which puts that block up for bid.
- OALP offers single license to explore conventional and unconventional oil and gas resources to propel investment in and provide operational flexibility to the investors.