By R. Sasankan

British economist E.F. Schumacher propounded the theory that Small is Beautiful. In his scheme of things, people and ecology mattered more than anything else. But if Schumacher were alive today, he would have had to exempt the exploration and production (E&P) industry from the rigours of his concept.

In the E&P industry Big is Best – and this is best illustrated by highlighting the woes of the small players that are struggling to survive amid regulatory challenges and falling crude prices.

Niko Resources of Canada, a minor player in India’s upstream sector, is a small company. Faced with a mounting debt burden, Niko is finding survival extremely difficult. Niko’s problems started even before the crash in crude price.

Hardy Oil & Gas has always been a small company with certain acknowledged advantages in developing small and marginal oil and gas fields. Hardy entered India a few years ago through a Production Sharing Contract (PSC) for the PY-3 field in the Palar Basin on the East coast. Of late, it has started to specialise in the art of threat-cum-persuasion as it fights to stay on as the operator of the field that was shut down about five years ago.

A few weeks ago, Hardy threatened to quit as the operator of PY-3 if the government did not honour its commitments in the PSC. This was preceded by a presentation to Dharmendra Pradhan, minister for petroleum and natural gas. Hardy made a similar threat last year as well. Does Hardy deserve to be in the plight that it is in? Who is at fault: the Indian government or the contractors headed by Hardy? Is Hardy more sinned against than sinning?
The PY-3 consortium, headed by Hardy as operator, comprises ONGC, the original licensee, Hindustan Oil Exploration Company (HOEC) and Tata Petrodyne.

In the early 1990s, the Ministry of Petroleum and Natural Gas (MoPNG) was desperately trying to attract foreign E&P companies to India under pressure from the International Monetary Fund (IMF) which wanted cash-strapped India to open up the E&P sector to the private sector. As there were no experienced players from the private sector in India, the move was obviously designed to benefit the foreign players. The Ravva field on the East Coast, Panna, Mukta and Tapti (PMT) on the West Coast, discovered and partially developed by the state-owned ONGC, were handed over to foreign companies as part of the policy. The joint ventures included Indian private players as well. PY-3, a relatively small field, was farmed out later.

MoPNG messed up the PSCs for Ravva and PY-3 by committing that the original licensee, ONGC, would bear the entire burden of cess and royalty. Being a Public Sector Unit (PSU), the ONGC management could not resist. Both PSCs have since turned out to be an albatross around ONGC’s neck. However, the PSU behemoth succeeded in wriggling out of the Ravva mess when Cairn Energy sold out its stake to Anil Agarwal-controlled Vedanta. In the renegotiated PSC, ONGC was relieved of the exclusive burden of paying cess and royalty. But nothing could be done in the case of PY-3. Although a small field that produced only 3000 barrels of oil per day through an early production system, the PY-3 JV partners such as Hardy, HOEC and Tata Petrodyne raked in profits. However ONGC, the licensee, saw its losses rise as it had to pay the entire cess and royalty for the JV.

ONGC attempted a similar strategy to force all PSC partners of PY 3 to share the burden of cess and royalty. MoPNG stepped in by rejecting Hardy’s recommendation to award a contract to Aban Offshore for the Early Production System. Did Hardy violate the norms in seeking to award the contract to Aban’s Tahara? According to one JV partner, the contract was rejected by MoPNG on a mistaken assumption. Others do not share this perception. There was still a chance of working out a settlement. But that faint hope disappeared when the government raised the cess on crude from Rs 1800 a ton to Rs 4500 which broke the back of ONGC, the licensee which is committed to pay the entire cess and royalty for the JV.

The split in the ranks of the JV members aggravated the crisis. The trigger for the split was the Field Development Plan (FDP) that Hardy presented for approval. The FDP provided for the drilling of five new development wells and a few recompletions to ensure 14 million barrels of incremental oil production. The FDP met with resistance from ONGC, and HOEC which by then had become a unit of ENI, also raised objections. And that is when Hardy preferred to shut down the field.

The shutdown occurred when the international crude price was ruling very high. This not only meant a loss of revenue for the constituents of the JV, but also crimped the government’s share of the profit oil which could be a few million dollars.

The question now is whether it will be economical to re-commence production in PY-3 at the prevailing crude price? Definitely not. HOEC has come out with an innovative plan to use its already installed infrastructure at the adjacent PY-1 gas field in which it holds 100 per cent stake. Its proposal is to re-commence production by laying a couple of pipelines between the two fields. HOEC may want to be the operator if the field is to be bailed out by it. This can happen only after Hardy quits the operatorship. HOEC has not so far staked claim for the operatorship. Among the JV members, there is an argument that Hardy should not be the operator when production recommences in PY 3. Why? Hardy, they say, hasn’t been an operator anywhere for the last five years. Tata Petrodyne does not seem to share this perception. It is credited with the view that there is no such condition in the PSC.

HOEC is busy developing its gas field in Assam and may not like to assume responsibility for the fortunes of PY-3 before putting the Assam project into operation. The Assam project will brighten HOEC’s liquidity.

Did Hardy commit a mistake in shutting down the field without attempting a negotiated settlement? Will the government intervene to break the stalemate? Though small, PY-3 has been a star offshore field that was awarded under the pre-NELP round of offers. The field not only saw an enhancement of its reserves over time, but also produced close to 25 million barrels of oil, earning revenues of more than $1 billion. The Government of India share of profit oil amounted to $ 132 million during the period that the JV was in operation. PY-3 stopped production in July 2011.

The field deserves to be saved. The situation calls for imagination on the part of MoPNG. Will it rise to the challenge?