If government levies lowered for HELP round, why not lower it for Enhanced Oil Recovery schemes to boost output
In the initial rounds of bidding for oil/gas, including the time when the government simply gave oilfields to oilcos under “nomination”, the government’s take was typically around 50% of the revenues—this takes into account the royalty and cess that is paid as a share of revenues and the profit petroleum that is paid as a share of profits. This fell to around 40% of revenues in the case of the NELP rounds. In the case of the latest Hydrocarbon Exploration and Licensing Policy (HELP), however, the revenue shares fell even more, to around 30%. That oilcos should bid a lower revenue-share for HELP rounds is not surprising. For one, the government had worked to lower this burden on oilcos in successive rounds of bidding. Two, till the HELP round, the government allowed oilcos to fully recover their costs and, only after that, was the profit-petroleum divided with the government. In that sense, the lower revenue shares under HELP are a clear indicator of the fact that, with cost recovery no longer allowed, oilcos felt the new round is riskier, and are therefore willing to part with less. Revenue-share-based contracts, of course, are better in that there will no longer be any controversy over ‘cost-padding’ as happened in the case of RIL’s KG Basin. As an interesting aside, ONGC offered lower revenue-shares than the private players who were clearly more bullish.
But, now that the initial rounds of bidding have been done, and awarded, the government has to consider the lessons from this. Considering that the bulk of India’s production comes from the pre-NELP rounds and that it will take at least 5-6 years to produce from the HELP fields, why not lower the government take from the other fields that are already producing oil/gas? The reason why that is not done, of course, is fairly straight forward. Since the government is already getting a certain revenue stream from these fields, what will it gain by lowering the cess/royalties? That, however, is static analysis. For one, if royalty/cess is lowered for Enhanced Oil Recovery (EOR) projects, they will become more viable and the government will also get more oil/gas production, in line with its plan to lower import dependence.
Equally, while it is difficult to argue the government must lower its royalty/cess in order to benefit oilcos, the fact is that the government has been raising this unnecessarily as well and, as a result of this, oilcos are paying royalty/cess that is much higher than it was when they won their contracts. The cess on oil used to be Rs 2,500 per metric tonne—that translated to 8-10% of the price of crude—between FY07 and FY12; this was suddenly jacked up to Rs 4,500 per metric tonne in FY13 and then to Rs 6,600 today, or a hike of 47%. Surely this cannot be the policy of a government that wants to increase domestic production of oil/gas?
And, as this newspaper has already pointed out earlier, while the new HELP was a good policy, the sliding revenue-share it proposed—the government’s share rose with production rising—was counter-productive since the oilco gained by keeping production low in order to maximize return on investment (bit.ly/2LvxS3p). Sooner, rather than later, the government needs to fix these problems in its policies if oil/gas production is to be incentivised.