IT’S worth remembering that both oil exploration as well as production were originally pioneered by private players, a reflection that innovative technologies are a product of the enterprise and risk invested in finding oil and gas in different regions of the world. Though a flexible, convenient, relatively clean source of energy, the world of oil is dominated as much by politics as economics. While it is a boon for those in the possession of vast reserves, it can impoverish others dependant on its import. No wonder that in the current scenario of spiralling prices, oil deficient countries are exploring all means of locating indigenous oil and ways to source the necessary capital to be invested. India is no exception. Private players, with their vast resources and technology and an appetite for risk, are thus the ones that we need to entice to a poor, relatively unexplored country like ours.

Energy plays a critical role in the socio-economic development of any country. In fact, it is the prime driver of any economy for maintaining its growth and raising the living standards of people. And while conservation and improved efficiency can partially alter volumes, they do not change the fundamentals of this relationship captured by the high demand for oil, coal and other sources of energy in the emerging economies of India and China. It is estimated that overall global energy (all forms) use will grow by about 40% by 2020 as demand rises from about 215 million oil equivalent barrels per day to almost 300 million oil equivalent barrels per day, and this is almost equal to eight times the current production of Saudi Arabia, the world’s largest producer of oil. For several good reasons, fossil fuels are expected to provide about 80% of the energy used in 2020, an increase in absolute numbers by about 65 million oil equivalent barrels per day.

To alleviate poverty and keep our economy on a high growth path, it is essential to develop sustainable energy resources to fuel the growth. Nevertheless, for the moment the predominant energy sources will remain oil and gas because with current technology these are both relatively inexpensive and versatile. Energy use is rising most rapidly in the developing world, partly because these economies are experiencing faster growth than the developed world, and partly because they use energy less efficiently. India is no exception to this phenomenon. It has a very high oil intensity, a fact that has not received sufficient attention from policy-makers.

We are highly dependent on coal, lignite, oil and gas, which account for 95% of the country’s commercial energy mix. Coal and lignite form 48% while oil and gas are a close second at 47% of this energy mix. With increasing compulsions for a cleaner environment, pressure on oil and more so on gas will be unavoidable to provide relatively cleaner fuels for economic development. As a result it will become imperative to increasingly look for indigenous hydrocarbon resources to prevent costly imports. In this context, as more of our areas come to be explored, the role of private players with their resources, technology and ability to take risks in frontier areas becomes critical.

 

Before considering the energy policies to be put in place, it is important to take note of the future energy environment in which these policies are likely to operate. Oil will continue to remain a global commodity and India will just be one of the many players in the market. It just cannot isolate itself from the world oil market.

In order to appreciate the task involved, it will be helpful to take a look at our natural resource endowments and the work done so far. India with 28 basins covering a sedimentary area of 1.4 million sq km onshore, 390,000 sq km on the shelf and a further 400,000 sq km in deep water, has a potential of about 30 billion tonnes of oil and gas, including a conservative estimate of about 9 billion tonnes in deepwater areas. But the conversion of this potential to discovered reserve is less than 20%. With this vast territory of poorly explored and unexplored basins it is easy to visualize the amount of exploration work that needs to be undertaken in our country.

So far, medium, large and giant size discoveries have only been made in the Upper Assam shelf, Cambay and Mumbai offshore basins. In two other producing basins of Cauvery and Krishna-Godavari on the eastern seaboard, the oil discoveries are mostly small-sized and the recent gas discoveries in the Krishna-Godavari basin are yet to be fully developed and monetised. In the North East sector (Upper Assam Shelf and Assam Arakan Fold Belt) socio-environmental problems have been a hindrance in the exploration process, a matter of serious concern as these areas are assessed to hold rich prospects.

 

It is clear that Indian basins remain vastly under-explored. Even in fairly explored areas, drilling intensity is very low, averaging only 12 wells per 10,000 sq km. Notwithstanding the advances in technology, oil and gas have to be actually struck before their presence is established. Unfortunately, inadequate or poor quality data deter companies from investing. Despite having large sedimentary basins, we are yet to evaluate and prove the existence of hydrocarbons. The amount of work to be done in the country is therefore stupendous. As part of the exploration policy for the next 25 years, updating knowledge assumes utmost importance, both to convert such areas/basins into producing category as also to entice private players into investing.

All over the world including India, the easy-to-find fields are already under exploitation. Consequently, oil companies are forced to look for new sources in ever more hostile environments; not just under thousands of feet of water but also across frozen tundra and in countries marked by political unrest. Nevertheless, thanks to the sustained high price of oil and improved technology, exploration and production expenditure is on the rise. For example, the Exxon-Mobil corporation has hiked its exploration and production expenditure by 50% since 2000, to $12 billion a year. Similarly, Chevron Corporation has invested enough to add one-third to its current production.

According to the global oil industry, much of the new supply expected in the next few years will come from unconventional sources – fields that require additional technologies to extract their hydrocarbons. These include heavy sulphur oil that must undergo extra refining before it can be converted to usable fuels, as well as coal bed methane fields. Two other potential energy strikes are tight sands and shale oil, and offshore deepwater fields. Though such fields cost more to develop than traditional ones, their potential is huge. According to one study, a vast resource of oil-shale with a probable reserve of 14 billion tonnes of syncrude has been identified in the North East, capable of sustaining a production of 140 million tonnes of syncrude per year for 100 years. This shows that our own reserves of shale in the North East are enough to make us self-sufficient. And as a country we should take advantage of this and allow for more investment along with cutting edge technology to flow into these basins.

 

The new mantra for squeezing out more oil from old, aging or abandoned fields is ‘tapping gushers beneath the gushers’. It is common to think of oil deposits as vast underground pools and oil wells as large pipes that suck up the liquid to the surface. Ultimately the pool gets drained and the field is abandoned. But when the major oil companies abandon the wells, they usually leave a lot of oil behind. For example, the reservoirs under most US wells drilled in the past century are estimated to still hold twice the amount of oil than has been lifted. Many petroleum technologists are reassessing the riches lying under such wells. Using new, enhanced recovery techniques the output from such wells can be dramatically increased. It is even possible to revive old wells that are not producing a drop. We have such an example in the Cauvery basin where a private explorer was given a field with non-producing wells in the early nineties and has made it productive.

 

Further, new supercomputing technologies are powerful enough to simulate not just individual wells but entire fields. These improved models reveal underground details that geologists and petroleum engineers were not aware of earlier. They often spot isolated pockets of oil and gas that can be tapped by extending a nearby well. With improved models of underground oil bearing structures, simulations can help decide which of the new and expensive recovery methods might work for a given deposit.

In the early 20th century, barely 20% of oil in a reservoir was extracted. After World War II, the industry developed secondary ‘lifting’ techniques which enabled oil companies to withdraw 30% of the oil in deposits below. Now technologies involving third or tertiary level of recovery methods, using gas, chemicals and colonies of specially engineered microbes, are being used to rejuvenate old fields. These methods can double the recovery factor potential to 60% or 70%. Under ideal conditions, it can even go up to 80%. Even if 60% is taken as a rough average, it would virtually double the known reserves of oil.

These are no doubt expensive methods. In the 1990s, when oil prices were low, major producers did not see much point in embracing these methods. But the recent rise in oil prices has spurred quite a few smaller independent producers to try out these measures. In India, since the recovery factor is very low and shows the extent of untapped potential even in producing fields, one can imagine the contribution private players can make to the country’s oil production. What latest technology and management can do to even old fields is demonstrated in our own country in the fields offered in the nineties. Though only 5% of the producing fields were offered under production sharing arrangements, they are a decade later, the only fields where not only has production increased but new reserves have also been added. Just imagine the gains to the country if this is extended to the remaining 95% of the producing fields. Alas, this has not been done in even an additional 5% of the fields, and technology absorption by our national oil companies is still not a critical issue!

 

The oil majors have realised that they must move further into international exploration if they are to replace declining reserves of North America and the North Sea. Their emphasis is on finding large to giant fields in excess of 150 million barrels recoverable. The smaller independents, however, will look for accumulations using new technology, lower overheads and their entrepreneurial skills. The Russian Far East and CIS countries offer excellent technical opportunities for discovering such large fields. Similarly, the Tarim Basin of China, Gulfs of Bohai and Tonkin are all attractive candidates, in addition to large acreage let out in the entire Far East. Mongolia has opened up its sedimentary basins to foreign investment and the North Koreans are soliciting interest in the East Bay and West Bay basins.

Vietnam, Laos, Cambodia, Thailand and Myanmar are going through a boom in exploration and development. Thailand, with its current oil and gas production, infrastructure, strong economy, high predicted growth rates and an expanding industry, is well placed to act as a catalyst for future oil and gas development of this region. India is also struggling how best to attract foreign capital to its acreage. There is a constant review and improvement to the terms and simplification of procedures, but the basic flaws of scanty data and state control in the key area of marketing down the value chain remain major impediments for majors and super-majors to enter our country in a significant way.

 

Never has so much acreage all over the world been on offer to oil companies through government tenders and via farm-outs. These call for huge amounts of capital investment among several competing countries. Funding of frontier exploration and high risk appraisal of projects have rested firmly on the shoulders of major and larger independent exploration and production companies, while smaller independents have been reliant on shareholders’ funds. Even under the recent climate of high oil prices generating huge cash surpluses for these companies, supplementing these funds is necessary and the industry will need to be innovative in attracting additional capital from shareholders via stock markets, institutions, investors and banks.

In the developing countries of South Asia, the respective state governments have made available some additional risk finance to their national oil companies to participate domestically and internationally for the primary purpose of securing energy supplies. The best model is the financial incentives provided to all Japanese explorers for approved energy ventures. The Japanese National Oil Corporation (JNOC) has played an important role in providing risk finance for all Japanese companies worldwide. This is worthy of emulation, considering the fact that Japan without any indigenous oil, has today secured for itself full energy security. But other banks have not fallen behind either. The large capital budgets required for development projects have created an opportunity for international banks to participate in project financing. Financial and legal structures have been evolved to set the pattern for syndicated financing of many offshore developments which involved even smaller independents, in addition to majors. Thus, private banking institutions have a major role in financing exploration and production ventures.

 

Despite the large sedimentary area, hydrocarbon potential and sheer market size, India is yet to occupy an important position on the international oil explorers’ chart. Despite acreage offerings in 1980, 1982 and 1986, India did not emerge as a full-fledged international exploration candidate until 1992 with the launch of fourth round bidding and more importantly, the one and only offer of discovered fields. A data inspection room at Houston was opened in 1993 to provide companies easy access to documents and field queries on all current and future bid offerings. Policy initiatives during the past decade and a half have thrown the country open to private and foreign investment in exploration. But reforms further down the value chain are in doldrums and if anything, are tending towards state monopoly, thereby discouraging potential investors.

The country must devise investor friendly policies to enable companies with expertise and technology to begin prospecting in India. Simultaneously, prior ground work is required, viz. wherever the data is scanty, it must be augmented so as to interest prospective investors. There must be a level playing field created with an independent regulatory regime that would inspire confidence. Policies must be long term and not subject to the whims of transient ministers or governments.

 

In particular, the following long term policy measures are essential to create an attractive environment and enabling conditions for investment:

a) encourage intensive exploration efforts in the producing basins for establishing extension of reservoirs and re-evaluating existing reservoirs and for discovery of new resources in subtle traps with appropriate technology;

b) aggressively pursue extensive exploration in non-producing and frontier basins and deepwater areas;

c) maximise recovery from currently producing fields through improved technologies;

d) develop low cost production systems for marginal fields and take up development of all discovered fields;

e) identify the technology gap and introduce state of the art E&P technology specific to each basin and production process and system and make technology absorption mandatory in all production sharing contracts;

f) establish concrete supportive role of government for exploration in high risk areas;

g) put in place a policy regime covering both private and public capital for equity oil investments abroad;

h) concretize a plan for assisting all explorers with risk capital and/or soft loans from our Oil Industry Development Board funds on the lines of JNOC; and finally,

i) de-regulate the entire value chain up to marketing and retailing, ensuring common access with independent regulator and dismantle entry barriers to interest majors and super-majors in the country.

Such focused policy measures should help make India a favoured international exploration target.