Independent oil firms: a fresh spurt?

The recently concluded submission of bids for Discovered Small Fields (DSF) suggests that a fundamental shift is afoot in the Indian oil industry. It marks the creation of the low-budget, independent oil explorer or producer.

Small companies form the backbone of a vibrant energy sector in mature markets. The United States, home to the world’s most innovative and competitive oil industry, has thousands of oil companies, ranging from producers, extracting a few hundred barrels of oil per day, to global super majors, such as Exxon and Chevron. The Indian oil industry, in comparison, is dominated by six state-owned companies and a few private sector firms. The bidding for DSF could mark the beginnings of a change.

How did this come about?

ONGC and Oil India discovered many small and marginal oil fields that they had not been able to develop over several years, decades even, in some cases. This is because a company can only work on limited projects at a time, the bigger ones being a priority. Smaller oil fields are also unviable sometimes for a large corporate to operate because of the higher overhead costs involved.

To bring these fields to production, the government invited interest from private sector players under a simplified set of rules. They included a single license for oil hydrocarbons– conventional, unconventional, shale or coal bed methane–and sale of crude oil and natural gas via a transparent bidding process.

The government put out for bidding a total of 46 contract areas, 26 onshore and 20 offshore, with a total of 67 small oil and gas fields. The submission of bids for these oil fields closed on November 21. The salient aspects were:

The 26 onshore areas received 120 bids
Of the 20 offshore areas, eight were bid for and received 14 bids; 12 elicited no interest
ONGC didn’t bid for any of these blocks while Oil India bid for four blocks (in consortium). Global oil majors, such as BP, Shell and Exxon, stayed away
Many of the companies that bid for these fields are unknown, first-timers, bearing names such as Gem Laboratories and Global Coal & Mining Private Limited, among others.

Why is the arrival of these companies on the scene significant?

Unlike the U.S., India never had small, independent oil and gas producers as the ecosystem did not support their emergence. The DSF bidding is an attempt to create the space and conditions for them to flourish as it provides a relatively low-cost, low-risk way for companies and entrepreneurs to foray into the sector: the large number of first-time bidders shows that this is happening. If some of these companies are successful, they could scale up to operate more oil fields in India and overseas too.

The presence of a larger number of companies creates a more competitive and innovative operating environment. Many technological developments in the field, even the shale gas revolution in the U.S., have been driven by independent oil companies, trying to find answers to problems on a low budget: pursuing different approaches increases the chances of success.

Rumours have it that ONGC and Oil India were asked to stay away to give the newcomers a chance to bid. The fields on offer had lain fallow with the two companies for years and this was a way to develop them.

The fact that global oil majors and even smaller international companies abstained from the bidding is not surprising. India has been largely unable to attract foreign oil companies during earlier rounds of bidding for oil exploration. Expecting interest from them at a time when cheap and lucrative oil assets are on sale all over the world is unrealistic. Oil majors typically deal with big projects that have hundreds of millions of barrels of oil reserves, and where costs run into billions of dollars, such as Sakhalin in Russia and Rovuma Basin in Mozambique. They are not usually interested in oil fields producing only a few hundred barrels a day.

The offshore areas received very few bids, with many not being bid for at all. Drilling for oil and gas in the offshore space requires expensive equipment, such as jack-up rigs and support vessels, and has high upfront costs. A field, producing a modest amount of oil at the current low prices, is not always commercially viable.

This round of bidding is a beginning made. Governments have tried, before now, and failed to interest the private sector in oil exploration. For this attempt to be any different, the rules of doing business must be simplified. It should be easier for companies to buy and sell exploration or production acreage. And if the business does not pay off, winding up should not be a fraught exercise either.

Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House.

This blog was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive features here.

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