But theres a catch here that can be quite serious and may stop companies from exploration. Under whats been approved, companies cannot expense what they spend on the new exploration unless there is a new discoveryso if Cairn spends $1 billion on the new exploration and ends up finding nothing, it cannot deduct this from the revenues it earns from the oil produced in the rest of the field. This is in keeping with what the CAG has said, that fresh approvals for exploration can be given beyond the existing PSC provisionsfor the benefit of GoI or its parties. While the government wants to be cautious in giving fresh permissions since companies can pad up costs, the better solution is to move to pure revenue-shares without cost recoverythe Rangarajan panel is looking at this. But in such revenue-share agreements which have no cost-recovery, the revenue-shares promised are much lower that those where companies get to recover their costs first. So, by telling firms they cant expense their exploration costs, but must pay the government higher cost-recovery-based revenue shares, the oil ministry wants the best of both worlds. Thats unfair and will discourage further exploration, which is what the government is trying to promote.
The Rangarajan panel recommendation that gas prices be almost doubledthis will apply to RIL after 2014is sure to energise exploration since gas prices need to bear some relation to other energy prices. The exact details of what formula has been proposed are not out, but its important to keep in mind a $4 mmBtu hike in gas prices will necessitate hiking electricity tariffs by around R1.6 per unit and a Rs 35,000-40,000 crore hike in annual fertiliser subsidies. Thats the next leg of this reform that needs chasing.