India started its largest auction of oil and gas fields, offering 70 areas for exploration when energy producers are cutting investments because of falling prices and the global recession.

The nation is offering 24 deep-water blocks and 28 shallow- water blocks for exploration, Oil Secretary R.S. Pandey said in New Delhi today. The fields on offer include 18 on-land blocks, he said.

Asia’s third-largest energy consumer, seeking to cut oil imports, attracted bids for 45 of the 57 areas offered in the previous auction last year, when crude climbed to a record. Worldwide spending on oil and gas exploration may drop 12 percent in 2009 to $400 billion, Barclays Capital Research said.

“There might not be as much enthusiasm this time as in previous rounds,” Tony Regan, an independent analyst based in Singapore, said before the auction opened. “The biggest concern for companies is that India doesn’t allow export of oil or gas and, of course, pricing.”

The government has set the price of gas at $4.2 per million British thermal units, excluding transportation costs and taxes, based on crude oil costing at least $60 a barrel.

Bids for the 70 fields will close on Aug. 10, Pandey said. The South Asian nation is also seeking bids for exploration of gas trapped in coal seams in 10 areas. Contracts for the fields will be signed within four months of the bids’ closing, the government said in a statement.

The auction this year may be held in two phases, with the second part to be scheduled after the government assesses the response to the first, Pandey said.

Best Antidote

“The question was whether to go ahead or sit tight,” Pandey said. “We decided to open the auction because the best antidote for a slowdown is to generate economic activity. There is a question about liquidity, yes. But liquidity will improve.”

The government is optimistic also because a shortage of drilling equipment, which deterred explorers last year, has eased. Rig use in Asia fell to the lowest in 12 months in March as the global recession sapped crude demand and squeezed credit, according to data from Baker Hughes Inc.

“Exploration in India will increase as more rigs become available,” said V.K. Sibal, director general of hydrocarbons, the nation’s oil regulator.

The use of rigs on land and water peaked at 265 in June, a month before oil prices reached a record $147.27 a barrel. Crude has since dropped 65 percent as the weak economy dents energy demand, prompting explorers to reduce or postpone drilling plans.

Favored Companies

Increased availability of drilling equipment may not be enough to attract big overseas bidders.

“The squeeze on rigs is coming down and oil prices generally are expected to move up and that would keep companies interested,” said Regan, a former Royal Dutch Shell Plc employee. “But the big oil companies are unlikely to radically change their minds about India. There’s always a feeling among them that Indian companies will be favored.”

India is hoping explorers will be encouraged by the start of production this month from the biggest gas field operated by Reliance Industries Ltd., the nation’s most valuable company.

“We are hoping to catch investors’ imagination and show India is a prospective place to invest,” Pandey said.

India awarded 44 areas last year to companies, including BHP Billiton Ltd., the world’s largest mining company, and Oil & Natural Gas Corp., India’s biggest exploration company. A bid for one field by Cairn Energy Plc was rejected.

Tax Break

Explorers remain concerned about the withdrawal of a tax break for gas production, which led to bids for fewer fields than offered in the auction last year.

“The uncertainty on the taxation issue is a worry for investors,” said Niraj Mansingka, an analyst at Edelweiss Capital Ltd. in Mumbai. “Lower crude prices will not act as a deterrent as companies will bid with a long-term prospect in mind.”

India scrapped the seven-year income-tax holiday for gas in last year’s budget, while retaining it for oil projects.

“Investors have drawn our attention repeatedly on the issue of the tax holiday on gas,” Pandey said. “That is a matter under consideration of the government.”

The world’s second fastest-growing major economy started auctioning fields to overseas and domestic companies in 1999. Companies have spent around $10 billion on exploration and production from 1999 until December 2008, Pandey said.

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