The government’s recent decision to review the model contract used to sign up oil and gas exploration companies is a useful step in promoting investments in the sector. India is a hydrocarbon-starved nation. The country imports close to 80% of its crude oil needs and gas imports are on the rise.
In the past as well, the government has tweaked the contract. In one case, it plugged two loopholes that allowed companies to make seemingly aggressive offers that won them the bids, but in reality, gave the government little revenue.
However, more patchwork needs to follow. This is especially true in situations where the crucial issue is that of dealing with geological risk and where promising finds may not yield expected returns. This is important if foreign exploration companies are to be attracted to Indian shores.
The key question is: what happens if owing to a misread of geological forces, the production estimates go awry? Especially, since commitments are drawn up on probabilistic estimates of reserves. Moreover, the incentive principle followed so far in the exploration sector is to allow contractors to recover their investments for most part before sharing revenues with the government.
The answer perhaps lies in delineating exploration areas based on the prospects of finding oil and gas. If the prospects are high then the regime ought to be less generous. The test of such a system containing a gradation of incentive-based regimes would lie in the displacement of exploration blocks from high to low incentive regimes.
A review of the exploration regime will be incomplete unless it covers the taxation aspect too. Here again, the government needs to calibrate the giveaway based on the risk of exploration in the hope that investors would come forward and find commercially exploitable reserves. Given the poor prospects of hydrocarbon discovery in most parts of the country, it is essential that the purse strings are loosened. However, improved prospects must lead to sharp curbs.
Once such a policy has been framed, its implementation must be scrupulous and is best entrusted to an independent regulator with a right of appeal against the award of the regulator to a specialized tribunal. The markets regulator is a good example to follow.
Finally the technical body that oversees the implementation of the contracts needs to be strengthened in a manner that leaves little room for subjective decisions. For there is enough of it in the subject of geology, which fails to offer exactness.
What incentives are required to give a boost to hydrocarbon exploration in India? Tell us at firstname.lastname@example.org