India’s dependence on imported crude oil remains a significant macroeconomic and strategic vulnerability. Hence, increasing domestic exploration and production is an important policy goal.
The government’s approval of the Samudra Manthan scheme is welcome in its intent. Its emphasis on modern seismic data, common offshore infrastructure and local oilfield capabilities addresses gaps that markets are unlikely to correct. Geological information and basin knowledge are public goods, and governments have a vital role in creating them.
The programme departs from this logic in its proposal to reimburse up to half the cost of selected exploration wells. This invites a basic question: what makes an upstream petroleum fiscal regime attractive?
Such regimes are not designed merely to collect revenue. Their greater function is to allocate uncertainty. Few industries require investors to commit billions of dollars before knowing whether the asset they seek actually exists.
A successful regime allocates geological and commercial risk between the sovereign owner of the resource and the investor, while ensuring that the public receives an equitable share of economic rent from commercially viable discoveries.
It is against this standard that India’s revenue-sharing regime deserves reconsideration. The shift from production-sharing contracts under the New Exploration and Licensing Policy (Nelp) to revenue sharing under the Hydrocarbon Exploration and Licensing Policy (Help) was meant to simplify administration and reduce disputes over cost recovery. Whether it improved the allocation of exploration risk is another question.
Revenue is easier to verify than costs. But administrative simplicity is not economic efficiency. Two offshore discoveries may generate similar revenues while requiring radically different investments.
A shallow-water field near existing infrastructure bears little resemblance to a deepwater discovery requiring floating production systems, subsea facilities and new pipelines. Their economic value lies not in gross revenue but in the surplus after these investments.
A fiscal regime linked primarily to revenue is inherently insensitive to this distinction. It taxes turnover before establishing whether a meaningful economic rent exists. This matters most in frontier exploration, precisely where geological uncertainty and capital intensity are greatest.
The proposed reimbursement of exploration wells should be seen in this context. Rather than let the fiscal framework itself respond to uncertainty, the state proposes to socialize part of the exploration expenditure. The subsidy does not address the underlying weakness, but compensates for it.
A well-designed cost-recovery production-sharing contract would reflect upstream economics more naturally. The investor finances exploration and bears the full cost of failure. If it succeeds, legitimate costs are recovered from production and the profits are shared progressively between the investor and the state, whose share can thus rise when rents are high and fall when they are marginal.
The contractual label matters less than this principle. Norway achieves a similar outcome through profit-based petroleum taxation, while Brazil, Malaysia and Guyana use variants of production-sharing arrangements.
Indonesia, after experimenting with gross-split contracts, now permits cost-recovery structures alongside them. Their systems differ, but the common principle is that the state’s fiscal claim responds to project economics and not gross revenue.
Cost recovery, of course, requires discipline. Recoverable costs must be clearly defined, while procurement must be transparent and audits rigorous. These audits need not reside with a technical regulator like the Directorate General of Hydrocarbons (DGH).
Determining whether an expense is deductible is an accounting function and could be entrusted to competent specialized entities within the finance establishment, leaving the DGH to concentrate on geology, reservoir management, production oversight and resource stewardship.
A drilling subsidy poses another difficulty. Operators select prospects, design wells and incur expenditure while possessing vastly more geological information than the government reimbursing them.
This data imbalance cannot be eliminated through elaborate guidelines or appraisal panels; it is intrinsic to exploration. The government therefore confronts an uncomfortable question. Is it subsidizing wells that explorers would have drilled anyway, or wells they consider commercially unattractive without a subsidy?
In the first case, public money achieves little, and in the second, taxpayers assume part of the risk associated with the less attractive portion of an exploration portfolio. Neither is particularly compelling.
India undoubtedly needs greater exploration. But government intervention is most valuable where it creates public goods: geological knowledge, common infrastructure, efficient regulation and stable fiscal institutions. These improve the attractiveness of an entire basin. Subsidizing an individual well does not.
Samudra Manthan has elements of both approaches. Its lasting contribution will depend less on how many wells it subsidizes than on whether it prompts a reconsideration of India’s upstream fiscal architecture.
In the field of oil and gas exploration, uncertainty cannot be eliminated. It can only be shared. Good fiscal regimes price risk. Poor ones subsidize it.
The author is vice president, Pune International Centre and former secretary, ministry of petroleum and natural gas.