Revenue sharing for PSCs on anvil

Written by Pranav Nambiar | New Delhi | Updated: Sep 28 2013, 09:02am hrs
The government is set to overhaul the production sharing contract (PSC) norms governing oil and gas exploration by shifting to a revenue-sharing model and relaxing the contract norms. The move could help unlock investments worth billions of dollars.

Sources say the timelines for exploration may be relaxed and greater flexibility may be given to firms in submission of declaration of commerciality (DoC) and field development plans (FDPs). Further swapping of 2D and 3D surveys, easier entry into the subsequent exploration phase, change of name of companies, etc, are also under consideration.

The new norms would also include ways to ensure that management committee (MC) decisions are as per contractual provisions, and resolutions are made quickly and signed on the date of the meeting itself.

If applicable to existing PSCs, this could help unlock several of the 250-odd NELP blocks with investments of over $20 billion.

A senior oil ministry said the government might move away from the cost-sharing model in time for the tenth round of NELP auctions, wherein the focus will be on monitoring costs incurred by the company rather than increasing energy security.

A panel headed by C Rangarajan, chairman of the economic advisory council to the Prime Minister, has recommended a shift from the cost-sharing model, in which explorers are allowed to recover capital and operating costs before sharing profits with the government under a specific formula. Under the revenue- sharing model, there is no element of cost-recovery and the government and operator will share revenues according to a pre-determined formula. Developed economies, such as the US, UK and Norway, adopt a revenue-sharing model.

DGH officials, however, said that though the oil ministry and the DGH are in favour of shifting to the revenue-sharing model, a final decision will be a complex one requiring a cabinet nod. Thats because operators are opposed to the move as the risks associated with investments will increase appreciably. Though government scrutiny will reduce our costs, risks would go up appreciably, said a private sector operator.

The oil ministry in consultation with DGH is preparing a note to relax the stringent contractual norms that have hit oil and gas exploration in the country. We are working on a cabinet note on introducing relaxations for production sharing contracts (PSCs). It will become applicable to all future contracts, but is also likely to be applicable on existing PSCs as well, an oil ministry official said.

Operators say only 3 NELP blocks are producing assets as many blocks have been held back by regulatory hurdles and stringent conditions in the PSCs. Relaxations could also help pre-NELP blocks, such as Cairn India's oil-rich Barmer block, having a PSC.

The association of oil and natural gas operators (AOGO) recently made a presentation to the oil ministry seeking faster clearance of work programme and budget approvals during the development and operations stage. They also pointed to the delays in the appointment of auditors, some of which have been pending for years and lead to delay in submission of audited accounts.

Operators have also sought enhancement of the exploration period, particularly in case of frontier deep water blocks and ultra deep water blocks. Also, operators say that stringent deadlines and conditions for submission of documents like DOCs have stalled the progress of several projects. In the existing PSCs, the exploration period is restricted to seven/eight years. Also, the issue of exploration in the block/field, beyond the exploration period stipulated in the PSC, is not clearly spelt out.

Bob Fryklund, chief upstream analyst at global information company, IHS, said that regulatory hurdles have slowed down projects and hit production numbers. Multiple clearances at various levels and files stuck with babus have led to numerous delays.

According to an exploration company official, head of DGH, RN Choubey, and petroleum secretary Vivek Rae met industry officials and assured them of positive measures that would improve the prevailing environment. The oil ministry intends to issue numerous circulars/guidelines that would help both the operators and the ministry administering the contracts, the official added.

Over the last few months, the oil ministry has cleared around 200 pending management committee (MC) resolutions involving oil and gas blocks operated by both public and private companies, from as far back as 2004. In April alone, around 88 pending MC resolutions were cleared. In February, the ministry permitted exploration in already producing oil and gas fields to help companies augment production. Also, domestic gas prices have been revised effective FY14 to better reflect the global hub prices.