India unveils draft policy for shale oil/gas exploration

The government today unveiled a draft new policy for private participation in exploration and exploitation of shale oil and gas in the country. The move is in line with the government policy of attracting private investment for achieving self-reliance in the indigenous production of oil and gas, according to the policy draft.

The proposed policy aims at a framework to facilitate and regulate shale oil and gas exploration and exploitation in the country.

The offer of acreages under the `draft policy for the exploration and exploitation of shale oil and gas' would be made through an open international competitive bidding. The successful bidders would be required to enter into a contract with the government, which will be negotiated on the basis of the model contract (MC).

In case an offer of acreage for shale oil / gas overlaps or falls within an existing oil and gas /CBM block, the right of first refusal will be offered to the existing contractor to match the offer of the selected bidder, provided he agrees to all the terms and conditions of the bid. In case they refuse, they will have to enter into a model co-development /operating agreement for simultaneous exploration.

All areas, which are already allotted under nomination /pre-NELP/NELP/CBM rounds and where operations have entered the development/production phase, will be excluded from the area to be offered for shale oil/ gas exploration.

As financial and contractual regime for conventional oil and gas and shale oil and gas are different, in case of the same contractor operating both the blocks, the policy will be to adequately ring fence the two so that two distinct accounts are maintained, without affecting each other.

Assignment of interest would be permitted as in the case of NELP.

All data gathered during the course of operation will be the property of the Government of India.

Safety aspects will be regulated as per existing regulations / OISD guidelines and practices, as in the case of oil and gas and CBM operations. New rules / guidelines, whenever notified by competent authority, in this regard, will also become applicable.

The ministry of environment and forest (MOEF) will prescribe a panel of agencies competent to carry out the environment impact assessment for the blocks allotted to successful bidder.

The central government will seek in-principle approval of the state governments concerned for the areas of shale oil / gas blocks, prior to bidding, including facilitation in the matters of land acquisition and water management issues.

The government will ensure all statutory, regulatory and security clearances are obtained before bidding.

Exploration of shale oil / gas will be in accordance with the law of the land, including the Water (Prevention and Control of Pollution) Act, 1974, Air (Prevention and Control of Pollution) Act, 1981 and the overall ambit of environment protection measures.

Fiscal terms & conditions

The financial terms of offer to the investors will be adequately balanced in terms of risks and rewards associated with the exploration of shale oil/ gas, because of its unconventional and cost intensive in nature.

It should be globally completive and comparable to terms offered for similar operations elsewhere.

Fiscal regime proposed for exploration of shale oil / gas is proposed to be based on royalty and production linked payments, similar to the regime adopted for CBM operations. Ad-valorem royally at the prevailing rate for crude oil and natural gas would be applicable to shale oil and gas respectively, and accrue to the state governments, whereas the production-linked payment on ad-valorem basis, will be made of the central government. This is proposed to be linked to different production slabs, which will be biddable item. This will minimise government intervention and remove complications in accounting, and incentive for gold plating, which may occur while allowing profit sharing, based on cost recovery. The government's share of production will be net of all statutory dues.

Under the contract, a steering committee represented by both the government and the contractor will be constituted to decide upon the issue on projects / major work programmes, audits and accounts with a view of exploit resources optimally. The steering committee will be chaired by a government nominee. The contractor will submit relevant matters approved by the operating committee to the steering committee.

The collector of the district where the block is situated will be member of the steering committee, to facilitate the required assistance and coordination from the state government. A member of MOEF and the National Environmental Engineering Research Institute (NEERI) may also be included in the steering committee.

As production of shale oil / gas is likely to be made in small quantities over a longer period, it is proposed that the mining lease may be given for 30 years. Further, extension of mining lease may be made automatic to all the contractors who do not have any dispute with the state /central government, and who do not have any arbitration pending.

Bidding and approval system

The ministry of petroleum and natural gas will identify the blocks for shale oil /gas and the relevant data package and information docket for each block so identified will be made available for interested companies for inspection and purchase.

The size of the blocks and sub-surface operational window of depth will be determined by MoP&NG keeping in view the resources –in-place, the prospects of shale, location of the resource in relation to human habitations and economies of scale in shale gas operation along with other relevant factors.

The identified blocks will be advertised for international competitive bidding. Participation of the state will not be mandatory. Requisite promotional exercise would be undertaken to apprise the prospective bidders with the proposed fiscal and contractual arrangement.

In addition to the round system of bidding, the government may adopt open acreage bidding system at any given point of time.

Offer of blocks would be open to different categories of investors, ie, public / private sector and domestic / foreigners. Up to 100 per cent participation by foreign companies and participation through unincorporated joint ventures would be permitted.

To provide for a transparent bid evaluation system, detailed bidding formats would be provided to the interested companies to maintain uniformity in submission of bid documents.

A team constituted by the MoP&NG, which may include officers having knowledge and experience in technical and financial aspects and fiscal and contractual framework, will evaluate the bids. The report of the bid evaluation committee would be submitted to the MoP&NG.

It is proposed to constitute an empowered committee of secretaries (ECS), which will be a standing committee, competent to take various decisions relating to allocation and monitoring of shale gas / oil exploration and production. The committee, with the cabinet secretary as its chairman, will have secretaries of the ministries of petroleum and natural gas, finance, law and justice, environment and forests, defence and NEERI as members.

The committee will be responsible for finalisation of shale oil / gas block for offer, considering the report of the bid evaluation committee and making recommendations on award of contract to the Cabinet Committee on Economic Affairs (CCEA) and taking decisions on issues arising during the course of monitoring of exploration and production activities.

The committee will ensure that the block offered have the necessary statutory and regulatory clearances before the bidding. The committee will also monitor the progress of clearance during various steps of contract.

The MoP&NG will arrange the technical support and inputs necessary for the deliberations of the ECS.

The proposals along with the recommendations of the ECS will be submitted for the final approval of the CCEA.

The MoP&NG, in consultation with the law ministry and other relevant ministries will prepare a model contract, which will form the basis for negotiations of individual contracts with successful bidders. The terms and conditions of the model contract will be based on fiscal and contract terms outlined in the annexure.

Individual contracts will be finalised through negotiations with successful bidders on such points as indicated as negotiable in the model contract, after consulting the final outcome of such negotiation with the ministry of law. The contract will be executed with the approval of the minister of petroleum and natural gas.

Approval of the CCEA would be solicited for offer of blocks for exploitation of shale oil / gas through open global competitive bidding.

In case the acreage on offer for shale oil /gas overlaps or falls within an existing oil and gas /CBM blocks, right of first refusal will be offered to the existing contractor to match the offer of the selected bidder.

The empowered standing committee of secretaries (ECS) will ensure that the block offered have the necessary statutory and regulatory clearances before the bidding. The committee will also monitor the progress of clearance during various steps of contract.

The central government will seek in-principle approval of the state governments concerned for the areas of shale oil / gas blocks, prior to bidding, including facilitation in the matter of land acquisition and water management issues.

There will be freedom to market shale gas within India on arm's length basis within the framework of the government policies on marketing and pricing of the gas. Marketing of shale oil will be as per prevailing NELP guidelines for crude oil.

Environmental issues

The contractor will have to abide by water management provisions and other environmental issues related to exploration and exploitation of shale oil /gas within the framework of existing central and state environment Acts and statutes. New rules / guidelines, whenever notified by competent authority, in this regard, will also become applicable.

There will be mandatory full base line testing of water and air quality before undertaking drilling of wells.

Rainwater harvesting provision in a suitable area in the block will be a mandatory requirement under this policy and will be guided by the relevant guidelines of the government. As far as possible, river rain or non-potable groundwater should only be utilised for hydro-fracturing jobs. Re-use/recycling of water should be the preferred method of water management.

Multi-well pad based drilling would be mandatory in phase II, to have lesser footprint in view of limited land availability, local concerns and large number of wells.

The other environmental issues related to exploration and exploitation of shale oil / gas will be addressed by the contractor within framework of existing central and state environment Acts and statutes. New rules/guidelines, whenever notified by competent authority, in this regard, will also become applicable.

The contractor should make ample provisions for site restoration as per provisions under NELP/government guidelines, which will be part of the model contract.

Financial obligations

The contractors will pay royalty either to the central government or the respective state government for shale oil/gas, at the prevailing ad-valorem rate at the well head, as determined by government under the P&NG Rules 1959 / ORDA Act 1948 for crude oil / natural gas.

In addition, the contractors would be required to pay to state / central government, license / lease fee and charge, including surface rentals, land acquisition charges, water charges etc as per the Petroleum & Natural Gas Rules or as required under any other provision.

Contractors will be required to bid for ad valorem Production Level Payments (PLP) on a sliding scale based on incremental production wherein incremental PLP will be applicable only to the incremental production. Slabs of production rate for bidding PLP will be decide by the petroleum ministry. This arrangement will give the contractor the flexibility to offer higher PLP for prospective areas and vice-versa while at the same time capturing the highest market determined value for the block on offer to the government. PLP would be made to the Government of India. Further, the government's share of production will be net of all statutory dues.

Cost recovery will not be admissible.

The contractor will be required to pay a commercial discovery bonus of $0.3 million or its equivalent amount in Indian rupees from Indian companies on the declaration of commercial discovery.

No cess would be levied on shale oil. The contractor, however, would be required to pay applicable income tax as per Income Tax Act, 1961 / DTC.

Import of goods and materials required for exploration and exploitation of shale gas / oil, as defined in NELP and other government guidelines, will be exempt from payment of customs duty.

The contractor would be responsible for site restoration as practised under NELP / CBM contracts.

An individual contract, based on the model contract will be executed between the government and the successful bidders.

Following are the proposed terms for the model contract:

The contract duration will be of 32 years and will be divided into two phases - Phase I and Phase – II. Phase I will be for a period of 7 years and will be for exploration, appraisal, evaluation of the prospect and feasibility. This would include detailed geological, geophysical and geochemical studies, drilling of test wells, hydraulic fracturing and flow rate studies, scheme for availability of water and treatment / recycling / disposal/ disposal of flow back water and any other study which the contractor considers relevant to assess the prospectively of the block and feasibility to exploit the resource in a commercial manner. Third party certification of shale gas / oil resources for techno-economic feasibility report and fullscale commercial development plan.

Extension of Phase-I would be permissible similar to NELP/ CBM or any other government guidelines and will be a part of the model contract.

The block will be deemed to be relinquished at the end of Phase-I if the operator does not enter into Phase II, unless prior written communication is given by the contractor to this effect.

The contractor will have the option to relinquish part / whole of the contract area during Phase-I subject to completion of minimum work programme and / or other applicable provision of the contract. The contractor will be allowed to retain only the development area (s) approved by the steering committee at the end of Phase-I.

Phase-II will be the development and production phase for duration of 25 years, plus time saved in Phase-II if any.

This would include the following:

(a) Development wells drilling
(b) Establishment of field facilities
(c) Commercial production and marketing

The steering committee will decide on the issued on project / major work programme, audits and accounts with a view to exploit resources optimally.

The contractor will submit a bank guarantee towards committed work programme bid during phase-I.

Dispute resolution would be done through arbitration in accordance with the Indian laws.

Up-front / pre-determined liquidated damages (LD) will be payable by the contractor, in case of non-completion of committed work programme as bid by the contactor.

The contractor will have the option to enter the phase-II at any given time within duration the phase-I, with the approval of the steering committee. However, the contractor will be required to complete the minimum work programme (MWP) of Phase-I.

Interested entities, which are otherwise eligible for bidding under NELP/CBM rounds, should submit bids for a minimum work programme (MWP) for phase-I in terms of the test wells to be drilled which should penetrate the target shale interval as defined in the notice inviting offer (NIO). The contractor will also indicate the total investment that will be made for competing the MWP of Phase-I. The weightage of this parameter in the bid evaluation criterion (BEC) would be as determined by the government from time. In the first round of bidding, this parameter is assigned 40 per cent weightage.

Production-linked payments, which would be a fixed percentage of revenue receipt from the shale gas and / or shale oil and any other mineral resource sold from the contract area, net of royalty, tax/ cess on a monthly basis. The weightage of this parameter in the bid evaluation criterion (BEC) would be as determined by the government from time to time. In the first round of bidding, this parameter is assigned 60 per cent weightage.

The contractor should have at lest 3 years of operational experience in upstream conventional oil and gas / CBM/ shale gas or oil, anywhere in the world, and will be considered as one of the basis for award of contract. The operator, in case of a consortium, should have a minimum of 25 per cent participating interest (PI).

The net worth of the bidders will be the qualifying criterion for the bid.

India is the fourth largest oil and gas consumer in the world after the US, China and Japan. The share of crude oil and gas in primary energy consumption in India is about 40.3 per cent, which is second to coal, which meets 53 per cent of the total requirements.

Of late, natural gas has increasingly become the preferred option globally, as it offers clean and low price energy equivalence to expensive liquid fuel. Demand of natural gas in India was 179 MMSCMD during the year 2010-11 and it is projected to be 473 MMSCMD in 2016-171. As against this, total production of natural gas from indigenous sources was 146 MMSCMD during the year 2010-11. Thus, there is an express need for availability of natural gas to be enhanced.

This has necessitated the need to explore vigorously for unconventional or alternate hydrocarbon resources like coal bed methane (CBM), shale gas / oil, and gas hydrates etc.

Unconventional gas resources are also natural gas deposits but in a different and difficult environment from the exploitation point of view. Success of the recent specialised techniques such as horizontal drilling combined with fracturing of the rock has led to path breaking development of shale gas as an unconventional or alternate gas resource.