A look at NELP- Part I - Views on News from Equitymaster

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A look at NELP- Part I

Jan 15, 2008

The Indian growth story hinges on the steady and affordable supply of energy. India’s energy basket is dominated by hydrocarbon fuels, the bulk of which is imported. This has brought the efforts to increase domestic exploration and production into sharp focus. The New Exploration Licensing Policy (NELP) is the most important step initiated by the Government of India towards it. We shall take an in-depth look at the NELP in the next few articles. In this article, we chronicle the events that led to the initiation of the policy. Why NELP?
The Indian hydrocarbon story began when oil was first struck at Digboi, Assam in 1889. However, even up to the 1960s, oil production in the country was limited to only Assam and Gujarat. Till the beginning of 1990’s, exploration and production activities in India was entrusted to the national oil companies (NOCs) who were granted the Petroleum Exploration License (PEL) on nomination basis.

As a result, there was no commercial production from sedimentary basins constituting almost 83 % of the total sedimentary area in India. Based on their hydrocarbon potential, these basins were classified as category-II (i.e. basins having hydrocarbon indications without any commercial production), category-III (i.e. basins, which on geological considerations were assumed to be prospective) and category-IV (basins, which on analogy with similar producing basins in the world were deemed to be prospective) basins.

The areas from these basins that were to be brought under active exploration were logistically difficult and geologically complex. The perceived risk involved in carrying out the exploration for hydrocarbons in these areas was rather high and required huge financial investment and induction of high technologies. Infact, the investment required in the upstream sector over a 15-year period was estimated to be in the order of US$ 60 billion.

Given these conditions and a widening gap of demand and supply, the government felt the need to accelerate the pace of exploration for hydrocarbons in the country. It came up with the ‘India Hydrocarbon Vision – 2025’ which laid out a programme for appraisal of the Indian sedimentary basins to the extent of 25 % by 2005, 50 % by 2010, 75 % by 2015 and 100 % by 2025. It also felt that the efforts of the two upstream NOCs might not be adequate to achieve the set mandate. Hence, opening up of the acreages for active exploration by private or joint venture companies, in addition to the efforts of the NOCs, was considered necessary.

This led to the introduction of NELP in 1997. NELP introduced a level playing field for public as well as private sector players. NOCs were also required to compete with the private and joint venture companies in acquiring exploration acreages. While NOCs were required to bear royalty, cess and PEL fees on behalf of private companies in the earlier rounds, companies were now required to bear royalty on their own. Cess and fees were exempted under NELP. Under the policy, NOCs no longer needed to participate as government nominees.

We shall continue with our discussion on NELP in subsequent articles.

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Oct 23, 2020 (Close)