New Delhi/Mumbai: In a radical overhaul, a high-level government panel recommended the freeing of gas pricing, and migrating to an entirely new model for oil and gas exploration.
The panel chaired by the Prime Minister’s economic adviser C. Rangaranjan recommended that the domestic gas price be indexed with international prices, implying that the present practice of the administered price mechanism be scrapped. At the same time, it has proposed doing away with the existing production sharing formula for hydrocarbon excavation, and replacing it with the sharing of revenue between the contractor and the government.
The committee’s recommendation, if accepted, is likely to bring about paradigm shift in the pricing of gas, a key input, and may lead to an increase in input costs for power and fertilizers. The new gas price will be calculated on the basis of an average of prices at exporting countries and at prices at international hubs such as the US’s Henry hub, the UK’s National Balancing Point and Japan’s custom cleared rate.
“The present production sharing contract (PSC) between government and contractors have run into trouble and has resulted in delay of projects. We have suggested four major steps and it will result into speedy implementation of projects and more bids. But this will only be applicable on new contracts. Some people are calling it a win-win situation,” Rangarajan told reporters in New Delhi on Wednesday.
“There will be a single gas price...and the arm’s length price thus computed as the average of the two price estimates would apply equally to all sectors, regardless of their prioritization for supply under the gas utilization policy,” he added.
Dilip Khanna, partner (oil and gas practice) at Ernst and Young, said the committee has addressed the right issues and the measures proposed will lead to additional investments in the petroleum sector.
A Reliance Industries Ltd executive said, “With respect to the netback price of imported LNG (liquefied natural gas) into the country, where is the government going to get this data from? A lot of companies import gas either under long-term contracts or from the spot market depending on their needs and there is a lot of variance in pricing. Also, the netback price for LNG exporters in foreign countries varies from country to country. Various regimes offer fiscal incentives for oil and gas production—so on what basis will the netback price be calculated.”
Netback refers to the costs associated with bringing a unit of oil to the marketplace and revenue generated from the sale of all the products from that same unit.
“Even if gas prices are decided in line with the recommendations of the committee, it wouldn’t really be a market-determined price, which is what as per the terms of the PSC,” said the executive, who didn’t want to be identified.
The price will be administered as per a set formula under which various components will be assigned different weightages, he said.
“The demand-supply situation for natural gas in India is totally different and there are a number of local factors which lead consumers to switch to gas from other types of fuel even at a higher cost,” the same executive added.
The committee has recommended the sharing of the overall revenue of the contractor with the government, without setting off any costs. The new mechanism will replace the current fiscal model for PSCs signed under the New Exploration Licensing Policy of 1999. The existing norms allow a company to recover all its capital invested in exploration and production of the gas, after which the profits are shared with the Union government under an agreed formula.
The panel has now proposed that under the new mechanism, the government’s share in the contractor’s revenue will be determined through a competitive bid process for future PSCs. The bidder will offer different percentage revenue shares for different levels of production and price levels.
The bids will have to be progressive with respect to both volume of production and price level to ensure that as the contractor earns more, the government gets progressively higher revenue. At the same time, it will also safeguard the government’s interest in case of a windfall arising from a price surge or a surprise geological find.
The suggested changes will see the role of the management committee, which has government and private party representatives, being reduced to monitoring and overseeing technical issues. It currently oversees issues relating to approval of budgets and procurement. The reorganization is expected to address delays arising in decision-making and enforcement.
Further, an extended tax holiday of 10 years, as against seven years, is proposed for blocks having a substantial portion involving drilling offshore at a depth of more than 1,500m, since the cost of a single well can be as high as $150 million. Also, the time frame for exploration in future PSCs for frontier, deep-water (more than 400m depth) and ultra deep-water (more than 1,500m depth) blocks is proposed to be extended from eight years currently to 10 years.
The panel has also proposed an overhaul of the current practice of audits undertaken by the Comptroller and Auditor General of India (CAG).
On the audit front, the committee has recommended that CAG will select blocks that it will directly audit on the basis of its financial merit, and focus on blocks in the exploration and development phase, when costs incurred are higher.
Other blocks will ordinarily be audited by CAG-empanelled auditors, although the authority of CAG to directly audit even these is unquestionable. Further, it has been recommended that CAG perform the audit within two years of the fiscal year under audit, as prescribed under the PSC and for PSCs beyond a financial threshold, a concurrent audit mechanism may be considered.