Oil slick: Govt dilutes revenue sharing model for oil exploration

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Updated: Feb 23, 2019 7:27 AM

The Centre has also been concerned about contractors not opting for the unexplored blocks in category 2 and 3 basins where they need to explore and establish the prospects.

Hydrocarbon Revenue: Irrational offers prompt changesHydrocarbon Revenue: Irrational offers prompt changes

If the government has diluted the revenue-sharing model for hydrocarbon exploration two years after its launch, the reasons are not far to seek: In several cases, irrational bidding, quoting very high revenue share to the government, even above 90% at the peak production level during the contract period, had raised serious concerns of back-loading of production. It has been suspected that in case of category 1 fields with proven reserves, companies have aggressively bid on revenue share to get hold of the assets and then have gone slow on development plans, frustrating the government’s objective of stepping up domestic production of oil and gas.

The Centre has also been concerned about contractors not opting for the unexplored blocks in category 2 and 3 basins where they need to explore and establish the prospects.

“A lot of companies have won blocks by committing negligible minimum work programme (MWP) and offering very revenue share, even 99% in some cases,” said a source. On Tuesday, the Cabinet not only capped the revenue share at 50% but also reduced its weight to 30% from 50% earlier under the first three rounds of the Open Acreage Licensing Policy (OALP).

Also, the minimum work programme will now have a higher weight of 70%, compared with 50% earlier. In addition, contractors bidding for blocks in category 2 and 3 basins — which are unexplored and not much geo-scientific data are available — will not have to share any revenue unless windfall gains are made. They will pay only royalty and various statutory levies.

Among the winners of category 1 blocks under OALP-1 are Vedanta, ONGC, Oil India, GAIL (India), Bharat Petroresoures and HOEC.

India has 26 sedimentary basins divided into three categories: Seven in the first category where commercial productivity has been proven, whereas five in category II and 14 in category III don’t not have proven commercial productivity. Seven basins in category I have 35,511 million tonnes of oil equivalent (MTOE) of total in-place reserve out of the total 41,872 MTOE across 26 basins.

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Anish De, partner and head, energy and natural resources, at KPMG in India, said, “The government’s move on category II and III basins is indeed right because India’s hydrocarbon prospectivity is not very strong. The policy priority has to be on identifying hydrocarbons and taking them out. The new framework will inherently carry better incentives for prospectors.” He, however, said capping revenue share at 50% is a little tricky because there are other parameters too on which contractors earn points but added that it may help contain revenue share offers. “HELP’s (Hydrocarbon Exploration and Licensing Policy) framework is not in question here, the concern is about irrational bidding behaviour,” De said.

While the government in 2014 had announced that it would reduce the country’s oil import dependency by 10 percentage points by 2022, the dependence has been increasing every year since then. According to the Petroleum Planning and Analysis Cell data, oil’s import dependence increased from 78.3% in 2014-15 to 83.3% during April-September 2018 period. Even the import dependence of natural gas went up from 36.2% to 47.2% during the period. “The import dependency is increasing which is affecting foreign exchange reserves. So a debate arose that should we look at revenue maximising or increase production,” said an official.

“Even the revenue share is conditional and will not come till exploration activities are undertaken. A view was taken that the primary focus should be on increasing exploration activities so that there are more prospects of finding hydrocarbons, and attracting international capital,” added the official. No investor has shown interest in category II and III. Now at least the exploration will start,” said the source.

As reported earlier, the government has also decided to provide concession in royalty of 10% in category I basins, 20% in category II basins and 30% in category III basins if production is commenced within four years for onland and shallow water blocks and five years for deep and ultra-deep water blocks from the effective date of contract.

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