Whalesbook
Policy's Promise Falls Short
Nearly ten years after its introduction, India's Hydrocarbon Exploration and Licensing Policy (HELP) has failed to unlock the nation's vast oil and gas potential. The policy, which replaced the earlier New Exploration Licensing Policy (NELP), aimed to invigorate domestic production through a revenue-sharing model and open acreage licensing. However, the outcome has been a significant shortfall. Data indicates that while 172 exploration blocks were awarded under the Open Acreage Licensing Programme (OALP), attracting cumulative investment pledges exceeding $4.36 billion, only 14 discoveries have been made. Critically, just one marginal field in Gujarat has begun producing, contributing insignificantly to national output. This stark reality contrasts sharply with India's estimated 22 billion barrels of unexplored oil and gas reserves. The policy's aim of reducing import dependence remains elusive, with the nation still importing approximately 90% of its crude oil.
High Risks, High Costs Hamper Exploration
A key issue is the over-reliance on potential rather than proven geological data, leading to bids based on optimism. Most awarded blocks are in deepwater and ultra-deepwater areas, which are expensive, technologically complex, and high-risk. This makes swift profitable production difficult, requiring years of sustained investment and modern technology. The shift from the older Production Sharing Contract (PSC) model, which allowed companies to recoup costs, to the current revenue-sharing model under HELP has increased the risk for companies. This, coupled with delays in approvals and past issues like taxes applied retroactively, has created a significant lack of confidence, deterring foreign players. Since 2017, no major international oil company has committed to a new exploration project in India, preferring to revitalize existing fields with state-owned entities. The operational costs for Indian offshore projects, estimated at $15-20 per barrel, are considerably higher than regional peers.
State Firms Lead as Foreign Investors Stay Away
The oil and gas exploration sector is still heavily dominated by state-owned companies (PSUs) like Oil and Natural Gas Corporation (ONGC) and Oil India. ONGC alone accounts for about 71% of India's oil and 84% of its gas production. While these companies are pushing new initiatives, such as ONGC's large $20 billion deepwater drilling program, the lack of significant private and foreign investment in new exploration projects is a critical weakness. Reliance Industries, once a major player, has largely avoided new exploration. This reliance on PSUs, whose staff are sometimes on deputation from companies they oversee, raises potential conflicts of interest within the Directorate General of Hydrocarbons (DGH). Meanwhile, India's oil consumption is projected to lead global demand growth, highlighting the urgent need for increased domestic production.
Key Challenges and Risks Remain
Despite policy reforms and investment pledges, India's upstream oil and gas sector faces major challenges. The core problem remains the persistent inability to turn exploration activity into actual output, keeping the reliance on imports high. The natural geological challenges and rising costs for deepwater exploration in India present a significant obstacle. The revenue-sharing model, while aiming for clarity, places heavy risk on operators, especially in high-risk areas, which global players find less appealing than previous PSC contracts. Past issues like approval delays and earlier tax problems have weakened confidence. Furthermore, the nation's energy security is increasingly vulnerable to global political events and supply disruptions, which worsen the risks of relying on imported crude. The success rate for new discoveries in India, estimated at one commercial discovery per 8-10 attempts, lags behind benchmarks like Malaysia. Vedanta, a player in the broader resources sector, carries a significant debt load (D/E ratio of 2.12), adding another layer of financial risk to its operations.
Outlook: Cautious Optimism Tempered by Production Woes
The outlook is cautiously optimistic, noting that the upstream sector's earnings are expected to grow, partly due to favorable oil prices. For ONGC, every $10 increase in oil prices can add about Rs13,000 crore to its EBITDA, while for Oil India, the impact is around Rs2,200 crore. Analyst target prices for ONGC have recently been raised, citing updated growth forecasts and a slightly lower future price-to-earnings ratio. The analyst consensus for Oil India is 'Buy', with a target price around IN₹525.05. However, this positive outlook is tempered by the ongoing struggles to boost domestic production. ONGC's KG-98/2 deepwater block and Mumbai High redevelopment are seen as key for future production, but analysts caution it is too early to rely on them fully. The industry is expected to grow at a CAGR of approximately 5% through 2031, but achieving this growth depends on overcoming the structural issues that have hindered India's exploration efforts for the past decade.