Greater Noida: Two of the 10 members in the committee led by former finance secretary Vijay Kelkar have dissented against the panel’s opinion to continue with the production sharing contract (PSC) framework for exploration and production of oil and gas, instead of migrating to a revenue sharing model.
The PSC for the oil and gas sector allows for cost recovery by exploration and production (E&P) companies before they pay the government its share.
“The Government is seeking to move away from the current PSC mechanism to a Revenue Share mechanism linked to production and price for future E&P (exploration and production) blocks. While several arguments have been presented for and against this recommendation, this move needs to be carefully evaluated on the likelihood of maximizing production, government revenues and risk capital," the panel said in its report, arguing in favour of the PSC model. Mint has reviewed the report.
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 the state governments since 1994.
“The PSC system appears to be the better regime to maximize production, government revenues and committed risk capital," the Kelkar panel surmised. “The interest of both the Government and Contractor is fully aligned with Government getting a larger share in case of any upside, while sharing some amount of risk post production. Under the Revenue Share framework, the interests of the investor are not fully aligned with the Government, with the investor not likely to invest to optimize recovery from a field under some conditions."
“Further, as the upside is retained by the investor the contractual regime may be less stable in times of ‘windfall’ gains," it added.
The Kelkar panel effectively overturned the recommendations of another committee, headed by C. Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, which favoured a revenue sharing regime.
The government appears to have decided in favour of moving to a new regime.
“We are moving towards revenue sharing model," petroleum secretary Vivek Rae said at the Petrotech 2014 meet on Sunday, adding that the Rangarajan and Kelkar committee reports “will be reconciled".
The two opposing members of the Kelkar committee—Rajiv Nayan Choubey, director general of hydrocarbons, and S.V. Rao, former director (exploration), Oil and Natural Gas Corp. Ltd—have officially recorded their dissent against the panel’s recommendation.
“We are trying to take a considered view of this (the dissent) and that will be in the best interest of everybody. Whether we should have a mixture of revenue sharing and production sharing will be looked into later," petroleum minister M. Veerappa Moily said.
Choubey, who is also the member secretary to the panel, in his dissent note expressed reservations about the recommendations made by the panel on the appropriate E&P contract as it is not within its ambit.
“It is thus clear that it is not within the mandate of this Committee to give its recommendations about the appropriate E&P contract because that work has already been done by the Rangarajan Committee after a very elaborate exercise involving all the stakeholders," Choubey said in his dissent note, which Mint has reviewed.
He suggested a third contract model wherein the only biddable parameters will be the exploratory work programme and the techno financial standing of the company.
Rao, in his dissent note wrote, “In the opening remarks the statement “little incentive for the investor to (I) goldplating (II) for wilful underproduction" can be valid only for the PSC contracts after NELP-VI (New Exploration Licensing Policy-Six). The earlier contracts from NELP I appear to suffer from this."
Mint reported on Saturday about the panel’s conclusion on the basis of detailed calculations that there was little incentive for the investor to “gold plate" costs or go for “wilful under-production".
Rao couldn’t be contacted.
Choubey declined to comment on his dissent note, saying, “It’s (the panel report) a work in progress."
To be sure, the Kelkar panel clarified it would be “recommending the ‘right’ contractual model for India" in the second part of the report, which is to be submitted this year. The panel will have to seek extension for the submission of the second and final part of the report.
India is the world’s fourth-largest energy-consuming nation and imports 70% of its crude oil and 30% of its natural gas requirements. It imports around 35% of its primary energy needs and trails the US, China and Russia, accounting for 4.4% of the global energy consumption.
A member on the Kelkar panel, requesting anonymity due to the sensitive nature of the issue, said, “The second chapter is a contentious one. It is a big issue and has to be sensitized. This contentious part will be sorted out in the next part of the report."
In the second chapter titled “Centrality" of E&P contracts for Development of Oil and Gas Sector, the panel wrote, “In recent years the PSC has come into the Public eye because of the controversies related to the KG-D6 basin and the CAG report."
The KG-D6 controversy erupted after the Comptroller and Auditor General of India said in a report that Reliance Industries Ltd (RIL) had breached some terms of its contract with the government.
“These perceptions have not just vitiated the environment of policy making and implementation but also vitiated the public discourse in the sector; they have called into question the choice of the current contractual model of PSCs and led to the selection of Revenue Sharing Model (RSM) as the model going forward," the panel wrote.
A RIL spokesperson didn’t respond to Mint’s query on Sunday.