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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 sale) is kept low to avoid the government’s revenue share going up. In the case of Reliance Industries operated KG D6 block, the government and the company got embroiled in a dispute as gas production levels declined despite an enhancement in capital investment. The oil ministry under Jaipal Reddy moved to recover over $1 billion from the company by disallowing cost recovery. The dispute delayed approval for RIL’s exploration of certain satellite fields as consent for more spending would only further delay the government’s profit share inching up if production did not dramatically increase.

“I want to upgrade the exploration policy on CBM to possibly make it on revenue share basis as in gas exploration. I will also come out soon with a shale gas policy which incentivises big investments,” the minister said.

The ministry intends to carve out shale blocks and hold roadshows for the auction before the end of this year. It has broadly identified blocks in basins such as Cambay, Assam-Arakan, Gondawana, KG onshore, Cauvery onshore and the Indo-Gangetic basins.

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