BJP Allows Oil Companies To Operate Beyond Contracted Area

The BJP-led NDA government is offering a bonanza to companies engaged in oil exploration and production (E&P) by allowing them to access contiguous reservoir areas beyond the oil and gas blocks originally contracted to them.

As reported by theBusiness Standard (BS),the Ministry of Petroleum and Natural Gas (MoPNG) has sent a notification to the Directorate General of Hydrocarbons (DGH) on 25 June informing it of this decision.

‘Blocks’ — oil and gas exploration blocks, to be precise — are geographically demarcated areas that are awarded to the E&P companies to carry out exploration of the oil and gas potential. ‘Reservoir’ refers to underground porous, permeable or fractured rock formations containing oil and gas trapped in them.

After the exploration phase comes the development phase for the actual extraction of oil and gas. The exploration consists of seismic surveys for identifying possible areas where there may be hydrocarbons – oil and gas – and test wells drilled verify the potential. After verifying that there is oil and gas in the block, the next phase, converting this potential to oil production begins.

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Under the existing terms and conditions of the exploration license, the contracted company could only dig wells or carry out other exploration activities in the area inside the boundaries of its block, even if the reservoir underneath, extends beyond the boundary. Contracts are awarded to the oil and gas companies by the government on the basis of ‘blocks’ – designated areas on land or undersea, and not on the basis of ‘reservoirs’. In fact, the concept of the reservoir per se is not a part of the contract. A company thus has rights to explore or develop oil wells only within the block.

The notification dated 25thJune changes the E&P contract by brining in the concept of the reservoir. Obviously, the boundary of a reservoir is not coterminous with a block. It is only after exploration that we even know of the existence of reservoirs within a block. By including the right to the reservoir, if effect the notification expands on the area originally allotted to the E&P company and therefore could hand over a significant additional hydrocarbon wealth to the company.

The notification says, “it has now been decided to allow the Contractor to carry out the appraisal activities and grant Petroleum Exploration Licence (PEL) in the adjacent area outside the Contract Area (…) to ascertain the extent of the commercial discovery and area thereof.” The only condition is that the reservoir area should not have been awarded to any other company or should not have been put on offer by government and should not be “of strategic importance.” And the company has to prove the reservoir extension before it gets the licence.

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This raises the question can the government modify the E&P contract to increase the areas given to the companies that was not a part of the original contract? Does the government, as a custodian of the people, retrospectively modify the original contract to hand over additional areas? And can this be done by merely issuing a notification?

The immediate and major beneficiary of this change — as the BSreport mentions — will be Vedanta Cairn Oil & Gas, as its Rajasthan block in Barmer district has contiguous reservoirs with significant hydrocarbon potential beyond the contract area. The move is also likely to benefit tother major producers of oil and gas, such as Reliance, and the public-sector ones like ONGC and Oil India.

There is a dispute between Reliance Industries (RIL) and ONGC in the Krishna Godavari basin due to overlapping reservoirs between the blocks operated by the two companies. However, the BS report said, that this easing of norms for extended exploration “will not affect this case since the new policy has riders”.

There are also other decisions in the notification aimed at relaxing the regulations and appear to be geared towards helping out the private companies. One such decision is to relax the terms on which a company can enter the next phase of oil and gas exploration, even if the company has not completed the amount of work it had agreed to do by a certain deadline.

Experts consulted by Newsclick point out that these weakening of the terms and conditions of the contract could mean additional oil reserves to be added to the existing proven reserves of the private companies, and therefore a bonanza.Others such as TNR Rao, former Petroleum Secretary, opined that these measures are only to speed up paper work and are a part of ease of doing business. These were procedural issues and were clogging up work everywhere for want of prompt meeting of management committees.

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