Oil ministry wants revenue sharing; to approach CCEA for decision soon

Written by Siddhartha P Saikia | New Delhi | Updated: Jun 7 2014, 13:28pm hrs
OilThe petroleum ministry has decided to go ahead with the revenue-sharing model for future oil and gas exploration contracts.
The petroleum ministry has decided to go ahead with the revenue-sharing model for future oil and gas exploration contracts, including those for deep and ultra-deep acreages. This is in keeping with the recommendations of the previous chairman of the Prime Ministers Economic Advisory Council (PMEAC) in the UPA-led government, C Rangarajan.

The auction of oil and gas blocks in the 10th round of New Exploration Licensing Policy (NELP) will be based on the revenue-sharing model, a senior petroleum ministry official told FE. Minister for petroleum Dharmendra Pradhan is expected to approach the Cabinet Committee on Economic Affairs (CCEA), headed by Prime Minister Narendra Modi, for a final nod to the proposal.

While the previous petroleum minister, M Veerappa Moily, had initiated the auction process in January this year, it did not take place. Moily had said his ministry would approach the CCEA for an approval to kick off the 10th round of oil and gas auctions by February 15, but that did not happen.

The nodal ministry has decided to go ahead with the revenue-sharing approach believing it to be transparent and having less room for government interference. In addition, the model would safeguard the governments interest in the event of any windfall gains arising out of higher-than- estimated output from unexpected finds. Currently, the petroleum ministry is shortlisting nearly 70 blocks to be offered under auction.

Under the present regime, an explorer gets to recover all costs incurred during the exploration cycle both successful and unsuccessful.

After this, it shares the profit with the government, known as profit petroleum. In the new regime explorers would need to pay the government a predetermined amount form day one, based on production levels at the block. In other words, the governments remuneration is de-linked from the quantum of investment made in developing the block and extracting the hydrocarbons.

Earlier this year, a high-level panel headed by former finance and petroleum secretary Vijay Kelkar recommended the continuation of the present cost-recovery model for high-risk deep-sea oil and gas exploration.

In 2012, the CAG had snubbed the government, suggesting a change in production-sharing contracts based on the cost-recovery model; it felt explorers inflated costs to earn bigger profits.

Reliance Industries (RIL), for instance, has been drawn into arbitration and been the subject of adverse comments for revising upwards the development expenditure at its D6 block in the Krishna-Godavari Basin from $2.47 billion initially to $8.84 billion.

In May 2012, the government disallowed $1 billion worth of expenses for KG-D6 and another $792 million in July 2013 because the Mukesh Ambani-led company could not meet the envisaged production targets. RIL and the government are locked in arbitration with the Centre to decide whether the company deliberately suppressed output or faced complexities.

The previous finance minister P Chidambaram too favoured shifting to a revenue-sharing model from the cost-recovery regime. However, some industry players are apprehensive about sharing revenues for deep and ultra deep-water exploration since the investments involved are large. Globally, both types of contracts exist. Revenue sharing is popular in countries such as the US, the UK and Canada, while others such as Oman and Kazakhstan follow cost-recovery model.