1. Revenue-share model for oil explorers to debut with marginal fields

Revenue-share model for oil explorers to debut with marginal fields

The ministry of petroleum and natural gas (MoPNG) is likely to usher in the much-anticipated revenue-share model...

By: | New Delhi | Published: January 5, 2015 1:10 AM
ONGC, Coal fields, Gas production

In FY14, only 7.19% of ONGC’s standalone crude oil production and 13.74% of its gas output came from the marginal fields.

The ministry of petroleum and natural gas (MoPNG) is likely to usher in the much-anticipated revenue-share model for the nearly 60 small and marginal fields surrendered by PSUs ONGC and Oil India and are being auctioned.

The ministry is currently preparing the policy guidelines for the auction, and if the Cabinet Committee on Economic Affairs (CCEA) approves the proposals, it would mark the launch of the new bidding mechanism for hydrocarbon explorers, as recommended by the C  Rangarajan Committee.

The move comes at a time when it is widely believed that auction of hydrocarbon acreages under the next (10th) round of  the New Exploration and Licensing Policy (NELP) regime will be based on the revenue-share model.

The MoPNG also intends to offer an attractive fiscal regime for those who bid for the marginal fields.

This is in keeping with the Narendra Modi government’s strategy of plucking the low-hanging fruit first when it comes to augmenting the country’s oil and gas output.

A few months ago, MoPNG came out with a model revenue-sharing contract (MRSC) to replace the PSCs and had sought industry’s comments on it.

ONGC-gas-production

The current model where developers grab by bidding the maximum work programme was criticised by the CAG which said it kept room for companies to keep jacking up costs and defer a higher share of profits to the government.

In the revenue-sharing regime, the companies will have to indicate the quantity of oil and gas they will share with the government at various stages of production along with the rates. So the  government’s remuneration is de-linked from the quantum of investment made in developing the block and extracting the hydrocarbons. Under the present production-sharing contract (PSC) system, applicable for blocks auctioned under all the previous NELP rounds, an explorer gets to recover costs incurred during the exploration cycle, before sharing profits with the government.

These 60 fields (five surrendered by Oil India and the remaining by ONGC) were left idle by the two firms as they found it difficult to put these acreages under production, since they were ‘not economically viable’. Petroleum minister Dharmendra Pradhan targets to increase hydrocarbon output from domestic fields by exploiting the marginal fields, a strategy he believes would yield immediate results.

“It will take a while for the auction to kick off, as post-CCEA clearance, the model production-sharing contract has to be drafted,” a senior government official told FE. The expected reserves in the 60 blocks to be auctioned are not immediately known (the total recoverable reserves of the 165 marginal fields held by the two PSUs, including these 60 were estimated at 340 million tonnes of oil equivalent, or mtoe).

In FY14, only 7.19% of ONGC’s standalone crude oil production and 13.74% of its gas output came from the marginal fields.

Sources said an explorer bidding for the marginal fields on offer would be allowed to combine multiple fields and develop them as a cluster. At the same time, if any of the auctioned marginal fields is in the vicinity of existing asset of any firm, it would be allowed to prepare a development plan in parallel with its old asset, the official added.

The ministry feels that the revenue-sharing approach leaves less room for government interference, and hence, will be attractive to investors. In addition, the model would safeguard the government’s interest in the event of any windfall gains arising out of higher-than-estimated output from unexpected finds.

According to industry watchers, the gas drilled from marginal fields not connected to the pipeline network could be filled into cylinders and transported. The life of these fields would be less than a decade and, of this, four-five years would yield higher production.

Earlier, ONGC had sought a market-driven price for the hydrocarbon produced from its marginal fields. This means the company wants these fields to be exempted while forking out subsidy for compensating oil-marketing companies.

The ONGC board, under former chairman and managing director Sudhir Vasudeva, had decided to bid out 26 marginal fields comprising six in KG onshore, seven in Western onshore and 13 fields in Western offshore to private explorers as ‘service contracts’ under a fixed international pricing model. However, fluctuations in net realisation because of the higher subsidy burden did not allow the government-run firm a go-ahead.

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