Canada: India Launches Largest Auction Of Oil And Gas Interests To Date

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on India Practice / Oil & Gas, August 2009

On August 8, 2009, the Government of India announced the launch of its largest ever auction of oil and gas exploration blocks, aiming to attract $3-4 billion dollars in new investments to its energy industry. Calgary has been chosen as one of the host cities for the eighth round of India's Ministry of Petroleum and Natural Gas New Exploration Licensing Policy (NELP-VIII) offering, with a road show taking place in the city on August 24 and 25. The NELP-VIII round offers 70 exploration blocks comprising of 24 deepwater blocks, 28 shallow water blocks, and 18 onshore blocks to qualified bidders. These 70 blocks cover a sedimentary area of approximately 164,000 square kilometres and represent 5.2% of India's sedimentary basin area.

NELP was established by the Government of India in 1997 in order to increase investment in India's energy industry. Prior to the establishment of NELP, 11% of India's sedimentary basin was under exploration. After the conclusion of NELP-VII, the area of exploration had increased to approximately 50% of the sedimentary basin, and total accretion of in-place hydrocarbon reserves discovered under NELP are estimated at more than 600 million tonnes of oil equivalent.

The NELP form of Model Contract can be characterized as a "production sharing contract" wherein the Government of India (the "Government") delegates exploration and development rights to a qualified international oil company who acts as the contractor (the "NELP-VIII") for the exploration and development of the contract area. If the project is successful, both the Government and the Contractor receive a share of the profit oil produced from the contract area in the production phase of the contract. Some of the key provisions of NELP-VIII are summarized below.

Contract Phases

• Consists of an exploration period that is divided into two phases: the "Initial Exploration Period" and the "Subsequent Exploration Period"

• Provided that Contractor has completed the Minimum Work Program by the end of the Initial Exploration Period, Contractor has the option to relinquish the Contract Area or proceed to the Subsequent Exploration Period

• During the Subsequent Exploration Period, the Contractor retains the blocks by committing to drill one well each year in the contract area (or one well in three years in the case of deepwater blocks)

• At the end of the Subsequent Exploration Period, the Contractor only retains those portions of the contract area where commercial discoveries have been made

Termination

• The Agreement automatically terminates if no commercial discovery has been made in the Contract Areas by the end of the Exploration Period

• The Government is entitled to terminate with notice upon occurrence of a material default by the Contractor

• The Contractor is entitled to terminate upon prior written notice to the Government

Minimum Work Obligations and Work Program

• The Contractor is obligated to commence petroleum operations not later than six months from the effective date

• The Work Program to be completed during the Initial Exploration Period includes conducting seismic work and drilling exploration wells

• The Work Program for the Subsequent Exploration Period provides for the Contractor to drill at least one exploration well per year (or one exploration well for the period in the case of deepwater blocks)

• Work Programmes must be approved by a Management Committee composed of two Government nominees and one nominee of each company making up the Contractor (or two nominees if the Contractor constitutes only one company)

• The Contractor is obligated to pay the Government liquidated damages proportionate to the Work Programme not completed as required

Relinquishment

• The Contractor has the option to relinquish those parts of the contract area where no commercial discoveries have been made at the end of the Initial Exploration Period

• At the end of the Subsequent Exploration Period, any areas where a commercial discovery has not been made will automatically be relinquished

Operator

• The Contractor is designated as Operator under the Model Agreement. No change of Operator can occur without prior Government consent

Assignment/Change of Control

• The Contractor is entitled to assign its interest to an affiliate with the approval of the management committee, and otherwise with the prior written consent of the Government

• In the event of a change of control, the Contractor is obligated to seek Government consent

Declaration of a Commercial Discovery

• When a discovery of recoverable petroleum (a Discovery) is made, the Contractor is required to conduct testing to determine if the Discovery is of potential commercial interest and warrants appraisal

• If the Discovery is of potential commercial interest, an appraisal program must be prepared and conducted by the Contractor, following which the Contractor must notify the Management Committee whether or not the Discovery should be declared a Commercial Discovery

• Once a Commercial Discovery has been declared, the Contractor must prepare a development plan for the recovery of petroleum substances (a Development Plan)

Petroleum Exploration License

• When a Development Plan has been approved, the Contractor may obtain a lease (the Lease) of an initial period of 20 years from the applicable State Government

Cost Recovery

• The Contractor is entitled to recover exploration, development and production costs out of a percentage of the petroleum produced and saved from the Contract Area each year (the Cost Petroleum)

• If not 100% of the production, exploration or development costs are recovered in a particular year, the unrecovered portion of such costs may be carried forward in each subsequent year until the full amount of the costs have been recovered by the Contractor

Expenses and Production Shares

• Both the Contractor and the Government are entitled to a share of the petroleum substances produced under the Agreement (the Profit Petroleum) calculated on the basis of the "investment multiple" (which requires a calculation of a ratio of accumulated net cash income to accumulated investment)

Royalty

• The Contractor is required to pay a royalty to the Government in the amount of: (a) 10% for offshore areas for crude oil and natural gas; and (b) 12.5% for crude oil and 10% for natural gas for onshore areas

Taxes and Duties

• The Contractor is obligated to pay income taxes, but is entitled to deductions at a rate of 100% per year for all capital and revenue expenditures per year for all exploration and drilling operations

Supply of Domestic Market

• Contractor is obligated to sell all of the Contractor's entitlement to crude oil and condensate to the domestic market based on generally accepted international terms

• The price for crude oil and condensate are to be determined each month on an import-parity basis

Option to Take in Kind

• The Government has the option to take its share of the Profit Petroleum, with such option exercisable for five year intervals

Training Host Government Personnel

• The Contractor is obligated to maximize employment of citizens of India having appropriate qualifications and experience and to give preference to the purchase and use of equipment, materials and supplies manufactured, produced, or supplied in India

Comparison to Alberta's Oil and Gas Regime

The production sharing regime utilized by the Indian Government and many other governments of developing nations can be contrasted to the License or Concession regime utilized by the Alberta government and other jurisdictions such as the United Kingdom and the United States as set out below:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.