BackGovt to auction 69 oil, gas fields under revenue-sharing model
Move from production-sharing model reorders incentives for hydrocarbon exploration in India
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New Delhi: India adopted a more transparent and market-oriented regime for hydrocarbon exploration and production on Wednesday with the government announcing the move to a revenue-sharing model.
The change reorders incentives for hydrocarbon exploration in the country.
The current production sharing contract (PSC) framework allows for cost recovery by exploration and production (E&P) companies before they pay the government its share of revenue.
The move is consistent with the observation of the Comptroller and Auditor General (CAG) that the PSC “does not provide adequate incentives to private contractors to reduce capital expenditure".
In one of the most high-profile instances involving the PSC framework, the government auditor had effectively accused Reliance Industries Ltd (RIL) of goldplating costs. RIL, which has denied this, is currently locked in arbitration proceedings with the government over cost recovery.
A spokesperson for RIL had no immediate comment on the regime change.
The new template will be first introduced for 69 marginal oil fields held for many years by national oil companies such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd. The Union cabinet on Wednesday took a policy decision to call for competitive bids for these blocks.
“It is a paradigm shift. With the cabinet decision, the government moved to revenue-sharing model and a unified licensing regime for all hydrocarbons. Successful bidders have to share minimum revenue even if they sell hydrocarbons at a cheaper price, thus protecting government’s income," petroleum minister Dharmendra Pradhan told reporters.
The so-called marginal fields that have been put on the block were awarded to the state-owned firms on a nomination basis, but remained undeveloped because they lie in rough terrain or had low reserves.
The government has been debating the incentive regime for hydrocarbon exploration, swinging between two options—the existing cost-recovery model and the alternative revenue-sharing model.
“The government is testing the model with marginal fields," said a person involved in the process who spoke on condition of anonymity. This person described the move as “courageous".
Mint reported on 18 June 2014 that the government was considering moving to a revenue-sharing regime.
“The earlier contracts were based on the concept of profit sharing. Under the profit sharing methodology, it became necessary for the Government to scrutinize cost details of private participants and this led to many delays and disputes. Under the new regime, the Government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc," the government said in a statement.
India has inked 310 PSCs so far, and the government is fighting 22 arbitration cases.
Another change that the policy brings about is that the licence granted to the successful bidder will cover all hydrocarbons found in the field. Earlier, it was limited to one, and a separate licence was required if any other hydrocarbon, such as gas, was discovered and exploited. The new policy for the marginal fields also allows the successful bidder to sell at the prevailing market price of gas, rather than at an administered price.
“We will invite international bidding (for the fields). Bid documents will be made public in three months. We hope new technology will come and investments will increase. In the 69 oil fields, there are unutilized resources of 89 mmt (million metric tonnes) worth ₹ 70,000 crore which can be exploited over a period of 20 years. At the current (price of) $45 per barrel, the price of produce will be ₹ 3,500 crore per annum," Pradhan said.
The government’s move comes in the backdrop of waning investor interest in the Indian hydrocarbon sector, with around 70% of Indian basins remaining largely under-explored. Even response to the new exploration licensing policy (Nelp) has been tepid.
Experts welcomed the move.
“This is an excellent move by the government to try out revenue-sharing model in the marginal fields before they can be applied in the next Nelp (New Exploration Licensing Policy) round and other licensing rounds," said Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd.
“The move from the existing PSC regime to revenue sharing model should result in simpler approval process and less intrusive regulatory process for investors," he added.
The move is a step in the right direction to monetize hydrocarbon resources in the country, a Cairn India Ltd spokesperson said.
“Also access to all forms of hydrocarbons and market pricing for gas are positive developments. We now look forward to the bid documents for greater clarity," the spokesperson said.
A senior ONGC executive said, “We are fine with both the models. When you are talking about 50s of blocks, everything gets evened out."
India approved Nelp in 1997—it took effect in January 1999—to boost hydrocarbon exploration. Under Nelp, the government allocates rights to explore hydrocarbon blocks through a bidding process and has done this in nine phases so far for 360 blocks, with an investment of around $21.3 billion.
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 state governments since 1994.
A committee led by former finance secretary Vijay Kelkar recommended the continuation of the present PSC framework, which was contrary to the recommendations of another committee headed by C. Rangarajan, former chairman of the economic advisory council to the prime minister, which favoured a revenue-sharing regime. The government’s intent to move to a new regime was first articulated by former petroleum secretary Vivek Rae at the Petrotech meeting in January 2014.
In a written reply to the Rajya Sabha on 31 July, Pradhan said: “Some of the major issues/constraints in the existing PSC model are i. Inadequate incentives for the operator to keep the cost low. ii.Require constant and micro monitoring by the government... leading to procedural delays and arbitrations. iii.Assessment of recoverable costs leads to dispute between the government and contractor. iv.Provide opportunity to operator to leverage/ manipulate Investment Multiple in their favor based on which profit sharing is determined."
The government’s efforts to push hydrocarbon exploration in the country stems from broader concerns around energy security.
India’s energy import bill of around $150 billion is expected to balloon to $300 billion by 2030. India, the world’s fourth largest energy-consuming country, imports 80% of its crude oil and 25% of its natural gas requirements. The country trails the US, China and Russia, accounting for 4.5% of global energy consumption.
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