New Delhi, Jan 2 (IANS) A panel headed by the Prime Minister’s Economic Advisory Council chairman C. Rangarajan has recommended a production-linked regime for sharing profit with oil and gas operators and increasing the exploration period from seven to 10 years.
“Under the proposed model, production-sharing between the government and the contractor (of the auctioned oil and gas field) will be linked to the average daily production and prevailing average of oil and gas prices in a well-defined period,” the committee said in its 148-page report.
The committee was constituted in May last year to suggest changes in existing oil and gas exploration contracts with energy firms in order to minimise monitoring of expenditure, fix system to determine domestically produced natural gas price and modify existing profit-sharing mechanism, which, according to the national auditor (CAG) had favoured private energy firms such as Reliance Industries Ltd. It had submitted its report last month.
“A matrix has been designed, which incorporates both price bands and incremental production tranches, for computation of pre-tax production share between the government and the contractor,” it said.
The committee has thus recommended a production-linked payment regime where explorers will bid for a percentage of output they would share with the government. The firm offering the maximum would win a block or area.
The report says the bids would be progressive and incremental in terms of the government’s take going up with corresponding increase in both production and price.
“This would imply that for any given price situation which the contractor faces in the market, the government’s take should rise monotonically with rise in daily production, across incremental production tranches. Similarly, for any given tranche of output per day, the government’s share would rise monotonically with an increase in price as one moves across price-classes,” says the report.
“The proportion of sharing should depend on the value of both output per day and the price per unit of oil or gas.”
The matrix is different from the existing format of contracts that allow explorers to first recover all of their capital and operating expenditure from oil and gas revenue before sharing profits with the government as per a specific formula.
The CAG (Comptroller and Auditor General) has found the existing matrix to have given incentives to private producers and minimised the government’s profit.
“The extant fiscal model, with primary focus on recovery of upstream costs has been found to be a major constraint in expediting exploratory work and is also lacking in incentive to keep costs down…this constraints is now increasingly overshadowing the basic government objectives of energy security through expeditious development of hydrocarbon resources available in the country, while simultaneously conserving and promoting their efficient use,” the report says.
Owing to the cost-recovery factor in the prevailing system, the government has to get involved in minutae of the contractor’s day-to-day operations, through its representatives in the management committees (MC).
This results in more disputes than resolution in the MC meetings, which holds up project development progress.
The new proposed model aims to take care of this by clearly stating that no deduction, except royalty, would be allowed before splitting the share of produced oil or gas between the government and the contractor.
