India's upstream push needs foreign participation in licensing rounds

India's state-run Oil and Natural Gas Corp. has tapped TotalEnergies and other global oil majors to collaborate on deepwater exploration, but expanding those partnerships to ensure a steady inflow of overseas funds into the country's upstream sector would require more tax reforms and incentives, analysts and trade sources told S&P Global Commodity Insights.

The move is a part of India's upstream push in which TotalEnergies, ExxonMobil, Equinor and Baker Hughes are in discussions with state upstream players to collaborate in exploring frontier areas and geologically challenging locations, such as providing technical expertise and reducing greenhouse emissions during the development of deepwater blocks.

"The interest of global oil majors in India's upstream sector is a positive sign and partnering ONGC is the logical way to go," said Rajeev Lala, associate director, upstream companies and transactions at S&P Global Commodity Insights.

Although analysts say that New Delhi has been taking steps in the right direction, additional financial incentives might be needed to woo foreign investors to the upstream sector in India, where oil and gas demand is decades away from reaching its peak.

There is a need to entice global majors to participate in Open Acreage Licensing Policy bidding rounds as well as the Special Coalbed Methane bid round, the analysts said.

Windfall tax a deterrent

"Considering the fact that those global companies are generally averse to investing in countries with windfall taxes, taking an upstream position in India will be a significant change in their strategy and indicate their comfort with the spate of upstream reforms undertaken by the government," Lala said.

ICIC Direct in a research note said sustained higher crude oil prices and gas realizations could result in better profitability for ONGC. "Periodic revision in windfall taxes will be the key monitorable," it added.

India introduced windfall taxes on July 1 last year, joining a host of nations that levied a tax on the huge profits that energy companies earned due to high crude prices as a fallout of the Russia-Ukraine conflict.

The windfall tax on crude is calculated based on any price that producers get above a threshold limit and is adjusted regularly in line with global price movements.

In the latest revision, India raised the windfall tax on domestically produced crude to $53.50/mt on March 4, up 1.15% from the previous fortnightly revision on Feb. 16. The tax is revised fortnightly to sync with prevailing international prices.

ONGC has been tasked by the government with identifying assets where it could leverage foreign expertise and technical capabilities and with projects where it could involve private companies to grow India's production.

The move to sign agreements with global majors will likely support its $4 billion exploration campaign over 2022-2025 that will focus on the acquisition of seismic activity in India's unexplored Category II and Category III basins and deepwater assets, according to S&P Global.

Under the agreement, TotalEnergies will provide technical help in ONGC's push to explore and reduce greenhouse emissions in the development of deepwater blocks, especially gas-rich Mahanadi and Andamans off India's east coast.

Participation in licensing

ONGC last August signed a heads of agreement with US energy major ExxonMobil for deepwater exploration of the country's east and west coasts.

The tie-up focuses on the Krishna Godavari and Cauvery basins in the eastern offshore region and the Kutch-Mumbai region in the western offshore area.

ONGC in September also signed an agreement with Chevron New Ventures, a subsidiary of California-based energy major Chevron Corporation, to assess exploration potential in India.

The strategic tie-ups are a part of ONGC's global outreach program to invite global exploration and production companies to partner in exploring frontier areas and geologically challenging and difficult locations.

"What is worth noting is that these agreements are intended to assist the national oil company in technologically complex exploratory areas but do not affirm the commitment to developing India's hydrocarbon resources," said Mansi Anand, senior research analyst at S&P Global.

"The big story will be if those agreements result in participation in OALP Bid Round VIII and the Special CBM bid round."

ONGC reported its crude oil and condensate output fell 3.7% year on year to 21.71 million mt in fiscal year 2021-22 (April-March), while its total gas output fell 5% over the same period to 21.68 Bcm.

The company is forecasting a 1% year-on-year gain in production in FY 2022-23 and a 4%-5% increase in FY 2023-24 due to a rise in production from its ultra-deepwater assets in the eastern offshore Krishna-Godavari basin at KG98/2 block and western offshore projects, company officials said earlier.