Likely in 2014: Royalty break, tax holiday in mega oil push

Amitav Ranjan Posted online: Tuesday, Dec 31, 2013 at 0000 hrs
Newdelhi : The new year could usher in the biggest reform in India’s hunt for oil and gas on the high seas: exemption from paying royalty, re-introduction of the seven-year tax holiday with an extra three years for blocks in ultra-deep areas, and a longer exploration period.

In a proposal sent to the Cabinet Committee on Economic Affairs, the petroleum ministry has recommended a shift to revenue-sharing from the current, controversial, production-sharing contract (PSC), where the explorer is allowed to recover its cost from commercial discoveries before sharing the leftover profit with the government.

The PSC under the existing New Exploration Licensing Policy (NELP) had come under severe criticism from the CAG during the audit of KG-D6 block operated by Reliance Industries. There were allegations of cost inflation to bring down the profit share of the government.

The contents of the cabinet note on new Uniform Licensing Policy (ULP) — to be implemented from the next round of awarding of hydrocarbon blocks — would be applicable to all sources, including coal bed methane, shale gas and gas hydrates, where “revenue sharing will not be subject to cost recovery, monitoring will be simple, and the government share will accrue immediately on production”.

This would ensure the government gets its share of revenue from day one, unlike in the cost recovery method, where the contractor first claims its costs before splitting leftover profits, if any.

Besides introducing simplicity, it incentivizes exploration in offshore blocks by doing away the 10 per cent royalty payment. It proposes “allowing zero per cent royalty for offshore blocks, replacing the existing provision of 10 per cent royalty in case of shallow water and 5 per cent royalty in first seven years and 10 per cent thereafter for deep water blocks”, as these are highly cost-intensive.

Royalty from on-land blocks — payable to the state in which the block lies — would continue. This has been suggested to avoid delays in introducing the new policy, as any change would require consultations with state governments.

The ULP also plans to bring back the seven-year tax holiday that was available for all blocks awarded before March 2011, but was stopped by the Finance Bill of 2011. And for blocks falling under new, difficult, ultra deep water and in frontier areas, “the period of tax holiday is proposed for 10 years” to spur investments.

The ULP would also not differentiate between crude oil and natural gas producers on tax holidays, unlike in the pre-2011 period, when gas producers were not exempted from paying income-tax.

The ULP would extend the exploration period to eight years for on-land and shallow water blocks from the present seven years, and would give three more years for exploring deep water and ultra deep water blocks.

Other incentives such as customs duty exemption on import of equipment and non-levy of cess on crude oil that are provided under NELP are proposed to be retained under the ULP.

Alongside the incentives, the ULP introduces stiff financial penalties for defaults by the contractor, unlike in the NELP where the government can only terminate a contract if the operator harms the public interest.

The ministry’s rationale for the required impetus is that nine rounds of NELP since 1999 had “limited success in terms of commercial discoveries and their monetization”. Of the 254 blocks auctioned, commercial production had started in three blocks with total production of 0.4 million tonnes of crude oil and 26.11 million standard cubic metres of gas per day.