Cabinet tweaks pre-NELP oil blocks, reduces ONGC burden

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New Delhi | Published: July 19, 2018 5:10 AM

To increase domestic hydrocarbon production, the Cabinet on Wednesday streamlined the existing production sharing contracts (PSCs) with four key changes in the policy framework.

While royalty and cess will now be paid by contractors as per their participating interest (PI) in blocks signed under the pre-New Exploration Licensing Policy (NELP), gas produced in the north-east region will enjoy pricing freedom — if sold at arm’s length — in case production hasn’t started as on July 1, 2018. (Reuters)

To increase domestic hydrocarbon production, the Cabinet on Wednesday streamlined the existing production sharing contracts (PSCs) with four key changes in the policy framework.

While royalty and cess will now be paid by contractors as per their participating interest (PI) in blocks signed under the pre-New Exploration Licensing Policy (NELP), gas produced in the north-east region will enjoy pricing freedom — if sold at arm’s length — in case production hasn’t started as on July 1, 2018.

The proposal to share royalty and cess as per PI, which will be applicable on seven blocks – will help ONGC and Oil India as they were liable to pay 100% of the two taxes, irrespective of their PIs in the pre-NELP blocks.

The exploration period has also been increased by two years and the appraisal period by one year for north-eastern hydrocarbon fields.

In addition, tax benefits under Section 42 of the Income Tax Act, 1961 will now be applicable prospectively to operational blocks under pre-NELP discovered fields for the extended period of contract under the PSC extension policy of 2016. “Section 42 of Income Tax (Act) allows companies to claim 100% of expenditure incurred under a PSC as tax deductible for computing taxable income in the same year. While signing PSC of pre-NELP discovered fields, 13 out of 28 contracts did not have provision for tax benefit under Section 42 of Income Tax Act,” said a government release.

In case of force majure wherein exploration or production needs to be stopped due to external factors, the notifying period for explorers has been increased to 15 days from seven days.

Announcing the new policies, petroleum minister Dharmendra Pradhan said these steps will help increase revenue to states. “We had been continuously improving the PSC model to help the ease of doing business. Today’s decisions will help to boost production in pre-NELP regime and also the north-east region.”

FE had in June reported that the Ministry of Petroleum and Natural Gas was working on these proposals which are expected to improve ease of doing business by reducing delays and discretionary powers.

The current changes come with the view that current PSCs are very rigid in terms of time lines and there are ambiguities in several provisions affecting hydrocarbon exploration and production activities.

The outgo on account of linking royalty and cess to PI has been made cost-recoverable with prospective effect. “This will benefit pre-NELP exploration blocks in which fresh investment for additional development and production activities is expected as sharing of royalty and cess, and cost recoverability of same will help in making additional investment commercially viable for licensee company – ONGC, Oil India,” noted the release.

The government has signed PSCs for 26 discovered blocks, 28 exploration blocks under pre-NELP and 254 blocks under NELP. The government has now moved to the revenue-sharing mechanism under the Hydrocarbon Exploration Licensing Policy regime. The first round of auction of hydrocarbon fields under the new regime saw explorers showing interest and bidding for 55 fields. The fields are yet to be awarded.

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