Oil and gas exploration policy set for a major shift

Govt recommends move to revenue-share model, freedom for the explorer to price and market oil and gas


New Delhi: India wants to follow the revenue-share model for all oil and gas blocks auctioned out for exploration.

In a draft paper put up for feedback, the petroleum ministry has recommended a shift to the revenue-share model, a uniform licensing model, and freedom to the explorer to price and market oil and gas.

Issues related to cost recovery in a production-sharing contract have resulted in a long and protracted legal dispute between the government and Reliance Industries Ltd over the latter’s KG-D6 block in the Krishna Godavari basin. The company, and its partners in the block, have also been lobbying the government to allow them to increase the price at which they sell gas.

The ministry’s thinking was evident in its move in September to announce the auction of 69 oil and gas fields under the revenue-sharing model, touting it to be more transparent and market-oriented. It also allowed pricing and marketing freedom. It is now extending this to all future hydrocrabon blocks that will be put up for auction.

The deadline for comments on the draft paper, titled New Fiscal and Contractual Regime for Award of Hydrocarbon Acreages, is 30 November.

The existing exploration policy entails a production-sharing contract, which allows for cost recovery by exploration and production companies before they pay the government its share of revenue.

However, the Comptroller and Auditor General (CAG) had questioned this regime and argued that it “does not provide adequate incentives to private contractors to reduce capital expenditure”.

“The (proposed) move is excellent in terms of moving forward in exploration and production. The biggest problem in the sector was that while petroleum prices were based on international prices, gas was dependent on domestic politics. So if gas will now also be based on international prices due to pricing and marketing freedom, then the gas fields which were earlier unviable will become viable,” said Debasish Mishra, senior director at Deloitte, an audit and consulting firm.

“The government proposes to award future acreages under a new fiscal and contractual regime,” the draft paper said while highlighting uniform licensing policy, open acreage licensing policy and revenue-sharing contract as the proposed changes.

The draft said that the uniform licence will enable the contactor to explore conventional and unconventional oil and gas resources including coal bed methane, shale gas, tight gas, hydrates and any other resource to be identified within the definition of petroleum and natural gas.

Under the proposed revenue sharing model, “bidders will bid the percentage of revenue that they will share with the government against two revenue scenarios—when revenue is less than or equal to lower revenue point or when revenue is more than or equal to the higher revenue point”.

The open acreage licensing policy will allow companies to submit bids for areas of their choice, which will be then validated by regulator with its own geological and geophysical data.

“It is important to evaluate if the revenue-sharing model will provide adequate confidence to oil explorers for deep water exploration. Deep water oil exploration involves significant capital and high risk projects, in a phase of uncertain energy prices. Absence of risk sharing by the state will adversely impact confidence of investors,” said Gokul Chaudhri, leader, direct tax, at BMR and Associates Llp, a tax advisory firm.

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