Rangarajan plan for profit sharing ready for Cabinet

Jan 22 2013, 03:53 IST
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SummaryPetroleum minister Veerapa Moily has prepared a Cabinet note, recommending a new formula suggested by the Rangarajan panel to split profits between the exchequer and fuel producers from oil and gas blocks to be awarded in the future to avoid disputes over timely payment of the state’s share of profits.

Petroleum minister Veerapa Moily has prepared a Cabinet note, recommending a new formula suggested by the Rangarajan panel to split profits between the exchequer and fuel producers from oil and gas blocks to be awarded in the future to avoid disputes over timely payment of the state’s share of profits. Moily has also decided to apply the new method to production of coal-bed methane, an unconventional form of gas that is at a nascent stage in India’s energy landscape. Moily told FE that his ministry was simultaneously working towards adoption of a new shale gas exploration policy that will “incentivise big investments”.

The minister wants to get the changes adopted at the earliest and is in the process of proposing these to the Cabinet for approval. “I want to ensure that like in China, we have big investments and new production of gas and oil flowing in five to six years. We can do it,” Moily told FE. “I want to quickly move to a transparent exploration process for future projects after 2014 based on a simple revenue-share formula suggested by the recent Rangarajan committee on the production-sharing contract mechanism in the petroleum industry,” Moily said.

Industry executives said they are not against the move as any prospective change in auctioning blocks will be taken into account while deciding how aggressively to bid.

The new formula enables the government to get a predetermined share of revenue from oil or gas production contracts without regard to whether the producer company has recovered its costs. The government’s predetermined share of revenue depends on the level of oil and gas output and the price at which these would be sold. A schedule of various scenarios covering these two variables is agreed at the time of awarding the exploration contract.

The Rangarajan panel was asked to review the complex investment-multiple based profit sharing between the state and the contractor used in present contracts after it was criticised by the Comptroller and Auditor General of India (CAG) that it could be manipulated to delay the government’s share of profits reaching a higher level. “I don’t want disputes and controversies arising out of interpretation problems in cost recovery based exploration as had happened in past,” Moily said.

The CAG criticised the existing formula as it was possible for companies to “front-end” expenditure so that the ‘investment multiple’ (which indicates how capital-intensive a project is in relation to revenue from hydrocarbon

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