India Mulls Higher Price For Crude Extracted Using Costlier Techniques

Explorers like Oil and Natural Gas Corporation Ltd. stand to gain as India plans to incentivise oil producers that use costlier methods like injecting gas or liquid into fossil fuel reserves to boost output.

A draft policy released by the Directorate General of Hydrocarbons suggests up to 50 percent waiver in oil cess and up to 10 percent higher wellhead price for production using enhanced oil recovery for up to 10 years. It's invited comments from stakeholders by Jan. 16.

The policy is aimed at helping the government meet its target to reduce oil imports by 10 percent by 2022. Imported crude contributes about 80 percent of the consumption in Asia's second-largest economy, and rising prices widen the current account deficit besides stoking inflation.

“The draft is forward looking. Not only does it demonstrate the government's intent to boost domestic production but also factors in the learning of the past,” said Deepak Mahurkar, partner and leader (oil and gas), PwC. The production sharing contract prevalent till 2016 didn't allow unconventional production methods. “Also, the input cost-based recovery led to disputes and investor disappointment. This policy proposes both: incentives to unconventional production and outcome-based evaluation.”

State-run ONGC got a third of its output in the year ended March 2017 by employing such methods that help extract oil not recovered from a reservoir by traditional techniques.

Enhanced or improved oil recovery includes methods to boost the output by increasing the pressure in the reservoir, displacing the crude oil, and improving the flow by changing fluid properties like density and viscosity. The best technique depends on temperature, pressure, and depth of the reservoir.

ONGC, which has been using such methods, stands to particularly gain from the proposed incentives. Higher exploration costs when oil prices are low threatened its ability to sustain production, it said in its annual report for the year ended March.

The draft said there shall be an incentive equivalent to 10 percent of gas wellhead price on the gross production for 10 years. The incentive shall be capped at $0.6 per million British Thermal Units for offshore fields and $0.3 per mmbtu for onshore fields.

The policy proposed a government-appointed committee comprising officials from the Ministry of Petroleum and Natural Gas and Directorate General of Hydrocarbons to review and approve the eligibility criteria, pilot and commercial phase, besides the incentives in each case.