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Business News/ Industry / Energy/  Petroleum minister signals incentive regime for oil exploration
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Petroleum minister signals incentive regime for oil exploration

At 21st World Petroleum Congress in Moscow, Dharmendra Pradhan says govt's intent aimed at reviving investor interest in the energy sector

The new incentive regime for oil exploration is likely to be based on the revenue sharing model, as opposed to the existing cost recovery model. Photo: BloombergPremium
The new incentive regime for oil exploration is likely to be based on the revenue sharing model, as opposed to the existing cost recovery model. Photo: Bloomberg

New Delhi: India’s new petroleum and natural gas minister Dharmendra Pradhan on Tuesday signalled that the government was reworking the incentive regime governing hydrocarbon exploration.

The government’s intent, aimed at reviving investor interest in the sector, was articulated by Pradhan at the 21st World Petroleum Congress in Moscow.

The new incentive regime is likely to be based on the revenue sharing model, as opposed to the existing cost recovery model.

The move, which has been widely debated, if effected, would mark the country’s shift from the present production sharing contract (PSC) framework for the oil and gas sector that allows for cost recovery by exploration and production (E&P) companies before they pay the government its share of revenue.

Alongside, the government will also put in place a uniform licensing policy (ULP), which would allow licences, once awarded, to be extended to all fuel sources, including oil, gas, shale and coal-bed methane.

This comes in the backdrop of waning investor interest in the Indian hydrocarbon sector, with around 70% of Indian basins remaining largely under-explored. Even response to the new exploration licensing policy (Nelp) has been tepid.

According to a statement issued by the petroleum ministry, while responding to queries from representatives of exploration and production operators and various countries, Pradhan said the government intends to bring in policies that would ease the way for large foreign investments in the oil and gas sector.

“He (Pradhan) informed that there is a need for facilitating increased production in India and the need to hasten the pace of domestic exploration and production. He said that to do so, his ministry is already in the process of bringing out amendments and new policies," the statement added.

India approved Nelp in 1997—it took effect in January 1999—to boost hydrocarbon exploration. Under Nelp, the government allocates rights to explore hydrocarbon blocks through a bidding process and has done this in nine phases so far for 360 blocks, with an investment of around $21.3 billion.

Hydrocarbon explorers in India have made a total payment of $15.41 billion to the Union government as royalties, cess and profit petroleum, and $1.93 billion to state governments since 1994.

India, the world’s fourth largest energy consuming nation, imports 80% of its crude oil and 25% of its natural gas requirements. The country trails the US, China and Russia, accounting for 4.5% of global energy consumption.

Pradhan also outlined India’s proposed policy changes, including bringing in ULP to facilitate exploration and production operators to work on a single policy regime.

“There are currently mutually exclusive contracts under different regimes like Nelp for oil and gas blocks and CBM (coal bed methane) policy for CBM blocks; however, there is overlapping of resources in certain blocks, which cannot be explored due to separate contractual conditions.

ULP proposes to ensure uniformity in contractual provisions for exploration and production for all kinds of hydrocarbon resources by the same operator(s), which could expedite exploration in absence of hindrances due to multiple operators," rating firm Icra Ltd wrote in a January report.

Speaking at the World Petroleum Congress on Monday, Pradhan also stressed the need to focus on promoting fiscal and regulatory regimes that are stable and equitable for both investors and owners of natural resources.

This comes in the backdrop of a committee, led by former finance secretary Vijay Kelkar, recommending the continuation of the present PSC framework, which was contrary to the recommendations of another committee headed by C. Rangarajan, former chairman of the economic advisory council to the prime minister, which favoured a revenue-sharing regime.

The government’s intent in favour of moving to a new regime was first articulated by former petroleum secretary Vivek Rae at the Petrotech 2014 meet in January.

“We are moving towards revenue sharing model," Rae had then said adding that the Rangarajan and Kelkar committee reports “will be reconciled".

India’s energy demand is expected to more than double by 2035, from less than 700 million tonnes of oil equivalent (mtoe) today to around 1,500 mtoe, according to the oil ministry’s estimates.

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ABOUT THE AUTHOR
Utpal Bhaskar
"Utpal Bhaskar leads Mint's policy and economy coverage. He is part of Mint’s launch team, which he joined as a staff writer in 2006. Widely cited by authors and think-tanks, he has reported extensively on the intersection of India’s policy, polity and corporate space.
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Published: 18 Jun 2014, 12:15 AM IST
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