Vijay Kelkar panel backs production-sharing model for gas and oil exploration

Written by fe Bureau | New Delhi | Updated: Jan 13 2014, 17:27pm hrs
The committee led by former finance secretary Vijay Kelkar, tasked to come up with recommendations for making India energy independent, has suggested the continuation of the current production-sharing contract (PSC) model that allows cost recovery by exploration and production (E&P) firms.

This comes at a time when the government is all set to move to a revenue-sharing model in the upcoming New Exploration Licencing policy (NELP X) round as recommended by another committee headed by C. Rangarajan, chairman of the economic advisory council to the Prime Minister.

The Kelkar committee report, the first instalment of which was submitted a few days back, notes that the E&P contracts in India have evolved to offer a good risk reward balance under the PSC framework.

The final report will be submitted in the next few months, which will include steps to free gas prices starting 2019.

Under the PSC, as the investor returns improve, the government take also increases as it is designed to allow the govt to retain a fair share of the upside. There is little incentive for the investor (I) to gold-plate or (iii) for wilful under-production, said the report titled Roadmap for Reduction in Import Dependency in Hydrocarbon Sector by 2030.

The Comptroller and Auditor General, however, has in the past stated that of oil and gas companies like Reliance gold plate costs that results in loss of revenues to the government.

Oil ministry officials said the revenue-sharing model will give operators greater flexibility in undertaking E&P activities without having to take approvals at different stages of the project. The Kelkar committee has also recommended major tax benefits for E&P players. It calls for an income-tax holiday for all forms of hydrocarbon.

Also, a tax holiday for assets where production is inherently slow due to weather and other logistical issues (eg deepwater, ultra deep water, Northeast, high temperature high pressure assets) should be extended to 12 years (from the current seven years) from the date of first production. It also wants a reduction in the rate of dividend tax paid on income earned internationally bysubsidiaries of Indian oil and gas companies, which stands at 16.99% currently.

The report also suggested that the Open Acreage Licensing Policy (OALP) be kicked off soon and the National data repository (NDR) be expedited to appraise the sedimentary basins in Indian.

Under OALP, oil and gas acreages will be available round the year instead of cyclic bidding rounds launched under (NELP).

Other recommendations of the committee includes reducing the under-recovery burden of upstream oil companies and the phasing out of regulation of diesel and kerosene prices.

Also, granting the E&P sector benefits similar to those given to sectors that have been conferred infrastructure status.