An in-principle solution, though a flawed one, was found some months ago when the oil ministry allowed operators to do continuous exploration, but only on the condition that firms could not expense this unless they actually found some oilso, in case Cairn finds oil, the government will allow it to recover the $1 billion it will have spent on exploration from the oil that it produces; in case no new oil is found, Cairn will not be allowed any expensing from the old discoveries. It is based on this in-principle decision that, last week, the managing committee of Cairns Rajasthan blockthis has representatives of the government as well as the Directorate General of Hydrocarbonsapproved the companys fresh exploration plans. If all goes to plan, Cairn will end up giving the governmentCentre, Rajasthan as well as ONGCa total of $15 billion on an NPV basis once the oil is found.
While Cairn is going ahead since it is confident of finding oil, linking expensing to finding oil looks like a short-sighted decision, more so since expensing is allowed in the first 7 years regardless of whether oil is found. The obvious solution, if the government doesnt want to take any risk at all, is to move to pure revenue-share-based exploration instead of the current investment-multiple-based expensing model. Both have their advantagespure revenue shares dont allow expensing and so keep the government out of the operators day-to-day operationsand a final decision on which India will use is yet to be taken. But a combination of the twoas is now being used in the case of firms like RIL and Cairnserves no purpose as it doesnt encourage exploration except where its a dead certainty.