New pricing formula for gas finds in difficult areas

In a bid to attract investments in oil and gas sector, the government today announced a new pricing formula for undeveloped gas discoveries in difficult areas that would result in 85 per cent jump in rates and help monetise Rs 1.80 lakh crore of inert finds.
While giving nod to pricing freedom subject to a cap for gas produced from High Pressure High Temperature, deepwater and ultra deepsea areas, the Cabinet also approved replacing the controversial Production Sharing Contract (PSC) with simpler revenue-sharing regime for all future field auctions.
Also, the Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, approved a policy for grant of licence extension to small and medium sized discovered fields like Panna/Mukta Tapti of BG Group of UK by 10 years on revised terms. The policy, however, kept out extension of Cairn India's prolific Rajastan block.

Under the new pricing formula, all undeveloped finds - 28 in all with known reserves and 10 other potential one of firms like state-owned ONGC, Reliance Industries and GSPC, as well as future discoveries would be priced at a maximum of one-year average price of alternate fuels like fuel oil, naphtha or imported LNG and coal.
Oil Minister Dharmendra Pradhan said the pricing and marketing freedom is being given to undeveloped gas finds in difficult areas but subject to a ceiling rate.
This ceiling price would be the lowest of imported cost of fuel oil, or landed price of liquefied natural gas (LNG) or weighted average of imported price of coal, fuel oil and naphtha.

Based on average price in 2015, this cap comes to USD 7.08 per million British thermal unit.

This rate compares to USD 3.82 pre mmBtu rate based on a formula approved by the BJP government in November 2014. Price as per this formula is slated to drop to USD 3.15 in April, a rate considered too low to meet cost of exploration.
Pradhan said caps would be revised six monthly based on one year rolling average with a lag of one quarter. So the price cap for April to September would be based on average rate in 2015.
"Today's decision is expected to improve the viability of some of the discoveries already made in such areas and also would lead to monetisation of future discoveries as well."

Pradhan said the Cabinet also approved a Uniform
Licensing Policy that will allow exploitation of all forms of hydrocarbons - conventional oil and gas as well as unconventional shale oil and gas and coal-bed methane (CBM) under one permit.
At present, conventional oil and gas exploration is covered by the New Exploration Licensing Policy (NELP) while CBM exploration and production is governed by a separate regime. There is no licensing regime for shale oil and gas.
Also, Open Acreage Licensing Policy (OALP) allowing companies to choose the area for exploration rather than government identifying blocks and offering them in bid rounds has been approved, he said, adding full pricing and marketing freedom would be given for oil and gas discovered made from the blocks won in OALP.

Seeking to revive interest in oil and gas exploration by simplifying rules, the Cabinet approved a new fiscal and contractual regime for award of hydrocarbon acreages.
(REOPEN DEL40)
Reliance has about a dozen undeveloped discoveries in its KG-D6 block while ONGC has about 6-7 gas finds in neighbouring KG-DWN-98/2 or KG-D5 area. GSPC's block KG-OSN-2001/3 too has few gas discoveries which are awaiting beginning commercial production.
"This policy is aimed at bringing transparency and bears of out the moto Minimum Government and Maximum Governance," Pradhan said, adding the government will not interfere in the price fixation for every block and provision of ceiling rate would balance the requirements of consuming sectors.

Pradhan said of small- and medium-sized discovered fields whose contracts will be extended, 27 fields were awarded as a result of two rounds of bidding during 1991 to 1993, and one (PY-3) was separately put to bidding as discovered field.
For many of these fields the recoverable reserves are not likely to be produced within the remaining duration of contract period of these PSCs.
"The government share of Profit Petroleum during the extended period of contract shall be 10 per cent higher for both small and medium sized fields, than the share as calculated using the normal PSC provisions," he said.

During the extended period of Contract, the royalty and cess shall be payable at prevailing rates (of nomination regime). Royalty and cess will be payable by all the contractors in proportion to their participating interest.
This will lead to additional government revenue of Rs 2,890 crore on account of additional royalty and cess as compared to present concessional regime in these blocks.
The policy for PSC extension will lead to production of hydrocarbons beyond the present term of PSC.
As much as 15.7 million tons of oil reserves and 20.6 million tons of oil equivalent gas reserves would be monetised during the extended period. These reserves are worth USD 8.25 billion (around Rs 53000 crore).

The extension would come with an increase in royalty as
well as the government's profit share from the fields. Oil companies pay royalty at prevailing rate as against Rs 481 per tonnes they currently pay.
Also, it wanted the government's share of oil and gas to be increased by 10 percentage points - to 60 per cent in fields like Panna/Mukta where it is currently at 50 per cent and to 65 per cent in fields where it's at 55 per cent.
Royalty rates for blocks offered under the New Exploration Licensing Policy (NELP) since 1999 are 10 per cent of the wellhead value of gas. For oil, it is 12.5 per cent of the price for onland areas and 10 per cent for offshore areas.

For the 28 small and marginal fields, which were offered prior to the advent of NELP, the royalty was fixed at Rs 481 per tonne for crude oil and 10 per cent of the well-head value of gas.
The PSC for the block RJ-ON-90/1 expires in May 2020 and Cairn is seeking an extension of 10 years.
"Cairn block is not included in this policy," Pradhan said.
Sources said the terms for Cairn's Rajasthan block extension cannot be very different from the small and marginal fields. However, no decision on terms of extension of Cairn's block has so far been taken, they said.