The petroleum ministry has rejected the Comptroller and Auditor General of India’s (CAG) suggestion that bidding for oil and gas blocks should be on the basis of a single profit sharing percentage, instead of the floating rate mechanism being followed at present.

While the CAG feels that there would be no incentive for companies to overstate expenditure if a fixed rate for profit sharing is announced, the ministry reckons that such a regime would be unattractive to investors.

Currently, profit is shared between the producer and the government at ratios discovered through competitive bidding. The ratios are decided taking into account how many multiples the earnings are of investments made. When this crucial parameter of investment multiple (IM) is less than a threshold (which means the project is more capital intensive), the producer gets a larger share of the profit, say, up to 90%. As the IM increases, the government’s share

of profit rises.

The CAG had recommended the fixed rate formula in its audit report on Reliance Industries-operated KG D6 block following allegations that the company had gold-plated capital expenditure, leading to lower profits for the government. Reliance denies the charges.

The CAG’s performance audit of production-sharing contracts of KG D6 and some other oil/gas blocks was tabled in Parliament on September 8. The auditor observed that the the current formula allows producers to make undue gains by increasing or ?front-ending? expenditure, which would prolong the period of higher profit share for them. In fact, the existing formula is such that a higher capital expenditure to some extent would lead to higher profits for the producer although the overall profits to be shared comes down, the CAG argued. ?There does seem enough ground to revisit the formula,? the CAG had said.

Sources said the petroleum ministry endorsed the CAG proposal that the profit-sharing formula could be revisited, but was averse to the idea of bidding based on a fixed rate for profit sharing with the government.

?Making the biddable profit sharing criteria a single percentage will make the offer of hydrocarbon blocks less attractive to oil and gas producers,? said a government official, who asked not to be named. Besides, investment into exploration is sought from a strategic point of view. ?If we are not able to produce oil and gas from our fields, we would become even more import dependent, which is not desirable,? said the official.

The ministry will, however, examine if the checks

and balances in the policy are adequate to prevent companies from manipulating the profit sharing formula and, if needed, will introduce changes, said another official.

Such changes would be adopted before blocks are offered in the next round of auction. The ministry is clearly for strengthening the safeguards against abuse of provisions rather than making the policy less attractive to prospective bidders.