Column: Poor terms, poor timing

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Published: October 6, 2015 12:41:48 AM

If the provisions of the draft revenue sharing contract apply in toto, bidding may not even take off

“Those who cannot remember the past are condemned to repeat it”. This quote of George Santayana aptly fits the recent decision of the government of India to offer 69 small oilfields for development through an international bidding process. The controversies with Reliance over the R-6 field development led the UPA government to constitute the Rangarajan Committee to suggest an appropriate contractual framework for petroleum exploration and production in India. Based on its recommendations, the present NDA government has given the green signal to the adoption of a revenue-sharing model for all upstream petroleum contracts. In my opinion, India
is landing itself in a cul de sac, with serious adverse implications for the healthy growth of the Indian
upstream petroleum sector.

India, as a major petroleum importer, has very few major successes to show in the exploitation of its petroleum reserves over the past 25 years. Such successes as have been there, have been due to the efforts of private investors; the national oil companies have had virtually no significant petroleum discoveries to show for their exploration investments. The petroleum ministry is now trying to paint the offer of these small oilfields as an attractive bait to private investors when, by its own admission, these fields were not monetised by ONGC and OIL “due to their isolated location, limited reserve, high development cost, technological constraints and fiscal regime”. At a time when oil prices are on a downward path, marginal discoveries are unlikely to attract any significant private investment, all the more so if the contractual terms offered are less than appetising.

The revenue sharing model militates against private risk-taking in that it transfers the entire risk burden to the investor. With royalty and a share of gross revenue (net of royalty) having to be paid upfront to the government, private companies will find the risk-weighted returns skewed against them, especially in an era of low oil prices. The government offer notice also requires successful companies to compensate ONGC/OIL for past costs incurred on book value basis, adding another upfront payment by companies which will eat into their profit margins. At the present moment, it is not clear if the provisions of the Draft Revenue Sharing Contract (DRSC), which were circulated last year for comments, are going to apply to the present offer in toto. If they do, the entire bidding process may well prove to be a non-starter. Penalising companies for failure to reach committed production levels goes against the very grain of best petroleum industry practice, given the uncertain behaviour of petroleum reservoirs.

Requiring companies to channel all revenues, in the first instance, into an escrow account will delay revenue accruals to them; it will also affect their ability to raise funds from financial institutions, which will be uncertain about disbursals in time to companies to enable them to meet their debt payment commitments. The provision for treating revenues earned from assignment of participating interest as liable for sharing with the government flies in the face of international oil industry principles: this will inhibit participation of small companies which hope to develop the reservoir and then sell their participating interest to larger companies which are better placed to exploit the reserves.

The absence of a contractual stability provision in the DRSC will raise apprehensions in private companies, given the government’s track record in compelling Vedanta to meet royalty payments at the time of approval of its acquisition of Cairn India’s interests. Nor has the bureaucratic footprint in approving decisions on field appraisal and development reduced in any manner. In fact, there is no bold departure at all from the past, with petroleum ministry bureaucrats and the officials of the directorate general of hydrocarbons continuing to have a major say in all aspects of operations of the contractor. Given the less-than-pleasant experience of companies with this system in the past, it would be highly optimistic to expect dynamic decision making aimed at cutting delays in
giving approvals.

It all finally boils down to the comfort levels between investing companies and the government in doing business with one another. Viewing company motives with suspicion is not the best advertisement for encouraging private investment in a high-risk sector. Mexico’s recent experience in failing to enthuse private investors to bid for its shallow-water exploration blocks is a timely reminder of the consequences of low government credibility in the eyes of investors. Venezuela and Brazil are also paying the price for their past reluctance to engage with private oil companies. That such major producers face lukewarm investor response is a wake-up call to a far smaller player in the oil production market like India. Unless geologically attractive areas are offered, contractual terms meet investor expectations and the operating environment is efficient and hassle-free, petro dollars will not pour into India. As of now, the prognosis for the current oilfields offer is, I am afraid, rather pessimistic.

The writer, a former bureaucrat, worked on exploration and production contracts in the ministry of petroleum and natural gas

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