Crude crash effect: Govt to sweeten oil and gas production sharing contracts, forms panel

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Published: May 11, 2020 4:00 AM

With domestic crude production becoming increasingly unviable in the low global oil price regime, the government has decided to revise production sharing contracts (PSC) of private oil producers to spur investments.

Ministry of Petroleum and Natural Gas has formed a committee which will “suggest ways of attracting investment in exploration, enhancing production and eliminating obstacles

With domestic crude production becoming increasingly unviable in the low global oil price regime, the government has decided to revise production sharing contracts (PSC) of private oil producers to spur investments. In this regard, the Ministry of Petroleum and Natural Gas has formed a committee which will “suggest ways of attracting investment in exploration, enhancing production and eliminating obstacles”.

As FE recently reported, the profit of private domestic crude oil producers from PSC fields has dwindled to as low as 20 cents per barrel. When crude ruled at $60 per barrel in January, these producers used to make a profit of around $6/barrel. “The scope of the committee would include to review existing PSCs, suggest methodology for increased exploration and production activities and changes required in existing policies/guidelines on implementation of these contracts,” the ministry’s order, reviewed by FE, said.

According to sources, the industry has requested the government to defer and reduce the royalty, cess and profit it receives from domestic crude oil producers under the PSC regime. They also want PSCs, slated to be renewed in September, to be extended till FY21-end.

Other demands include removal of the ceiling on gas price for deep water, ultra-deep water and high-pressure-high-temperature (HPHT) fields and zero GST on exploration and development activities. Apart from Cairn Oil and Gas, a key player, other private firms engaged in domestic crude production include Selan Oil, Hindustan Oil Exploration Company and Sun Petrochemicals.

Oil and gas minister Dharmendra Pradhan recently said after the coronavirus crisis, global energy companies are likely to shift their focus of supply chain to the areas of demand, wherein they will try to explore and tap locally available resources. “We have opened up to policy reform our domestic sector,” Pradhan told IHS Markit vice-chairman Daniel Yergin, adding that “I am confident that when there is a resurgence in demand, domestic production will get priority and we are expecting a good amount of investment in that area due to our progressive policy.”

Indigenous crude oil production caters to about 15% of the country’s requirements, while for natural gas, 51% of required volume is imported. PSC fields contribute about 26% of the country’s crude oil production. Domestic natural gas output fell 2.8% year-on-year to 31,168.4 million metric standard cubic metre in FY20, reversing the growth trend recorded since FY18. Also, 32.2 metric tonne of crude oil produced in the country in the fiscal was 0.9% lower than a year ago.

The Centre, in February 2019, reformed the oil exploration and licensing policy to enhance exploration activities, attract domestic and foreign investment and accelerate domestic production of oil and gas from existing fields. However, domestic production has been falling with the ageing of existing fields and muted response from the industry to take up new projects, mainly due to lack of incentives.

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