State-run oil explorer ONGC has sought reimbursement of large amounts paid by it as royalty and cess on behalf of its exploration partners for the pre-New Hydrocarbon Licensing Policy (NELP) blocks, according to an official source. The move comes on the heels of the Union Cabinet decision in July that these taxes will now be paid by all contractors as per their participating interests (PIs) in blocks signed before 1999.
In the 1990s, the government awarded some discovered oil and gas fields to private companies in order to attract investments in the hydrocarbon sector. As an incentive, however, the liability of payment of royalty and cess was put on state-run explorers (ONGC and Oil India) and they were made the licensees of the blocks. While ONGC and Oil India had the option to take PIs of of 30-40% in the blocks or just remain the licensees without any stake, they were required to pay 100% of the statutory levies. Seven such pre-NELP blocks are operational but these haven’t seen much fresh investments and one of the reasons for this is seen to be the onerous levies on the state-run explorers.
The duo’s partners in these blocks include Joshi Oil and Gas, Vedanta and Hindustan Oil Exploration Company.
A government official requesting not to be named told FE that the ministry of petroleum and natural gas won’t intervene in the matter and ONGC will have to talk to the respective partners in these blocks to sort out the issue. “The policy has been framed to increase domestic hydrocarbon production and bring in investments in these blocks, which are quite sizeable, wherein investments were not coming in. The matter of reimbursement is between the PI holders and they have to take a call,” said the official.
Before the current policy was framed, a similar arrangement was put in place in 2010 when Vedanta bought Cairn Energy’s 70% stake in the prolific Barmer Basin oil block in Rajasthan. ONGC, which holds 30% in the block, insisted and approved the deal only when Vedanta agreed that it would pay royalty and cess as per its 70% PI in the block.
The government official quoted above added that the recent policy was announced to streamline all such fields having such agreements. “The idea was to have the same set of rules for all such fields,” said the official.
Meanwhile, the outgo on account of linking royalty and cess to PI has been made cost-recoverable with prospective effect.
The government has signed production-sharing contracts for 26 discovered blocks, 28 exploration blocks under pre-NELP and 254 blocks under NELP. It 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. While these fields are yet to be awarded, 41 such fields are likely to be awarded to Vedanta.