1. New oil & gas policy shifts risks to developers: Report

New oil & gas policy shifts risks to developers: Report

The government's decision to auction 69 oil and gas fields with market-linked prices and a revenue sharing mechanism under its proposed marginal fields policy (MFP) is a positive for the sector as it shifts the key risks to developers, says a report.

By: | Mumbai | Published: September 7, 2015 9:10 PM
crude oil prices

The government’s decision to auction 69 oil and gas fields with market-linked prices and a revenue sharing mechanism under its proposed marginal fields policy (MFP) is a positive for the sector as it shifts the key risks to developers, says a report. (Reuters)

The government’s decision to auction 69 oil and gas fields with market-linked prices and a revenue sharing mechanism under its proposed marginal fields policy (MFP) is a positive for the sector as it shifts the key risks to developers, says a report.

The new policy is also likely to result in simplification of calculating government share, which will help developers make bids in a prudent manner as the biddable parameters are likely to be the revenue share of the government, according to a report by rating agency India Ratings.

The new methodology, the report said, though simplifies the basis of calculation of the government share, would place a greater risk on developers as they will have to estimate three key variables in advance before placing a bid, exploration, development and production (EDP) costs, quantum of hydrocarbon extractable and market prices.

The report said under the new policy, the developers will have to consider an overall EDP cost along with volume and price estimates as these would be the key variables to ensure a reasonable internal rate of return.

On pricing, the report expects the market-linked prices to be closer to the lower of the spot or term liquefied natural gas landed prices, which should be 1.5-2 times the current domestic gas price of USD 4.66/mmbtu.

Volume offtake at these prices should not pose a challenge and gas is likely to see demand from fertiliser, refinery and city gas sectors, the report noted.

Announcing the new oil and gas policy last week, the government decided to calculate its share of profit from hydrocarbons produced from the 69 marginal fields as a percentage share of gross revenue.

This is in contrast to the earlier production sharing contracts (PSC) which comprised two main elements, cost recovery and sharing of profits based on pre-tax investment multiples.

Under the existing policy, exploration and development costs are pass-through and first recoverable for developers and under PSC, government’s profit share rises gradually till ED costs are recovered.

As per the existing PSC, developers like Reliance have been accused of gold-plating of costs (by the CAG and the Oil Ministry), as government’s profit share is calculated post-cost recovery by the developer on ED.

The MFP is applicable for the development of hydrocarbon discoveries made by national oil companies – ONGC and Oil India.

These discoveries could not be monetised earlier due to reasons such as isolated locations, small size of reserves, high development costs, technological constraints, fiscal regime etc.

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