)
The FM today proposed moving away from profit sharing model to revenue sharing model in oil and gas exploration contracts. This, the industry said will multiply the risk profile of the exploration and production players.
"A new oil and gas exploration policy will move from profit-sharing to revenue-sharing contracts," Chidambaram said in his Budget 2013 speech today.
As per the current production sharing contracts (PSCs), under a specific formula, explorers are first allowed to recover the capital and operating expenditure from oil and gas revenues before sharing profits with the government.
"The measures announced were expected and are as per the Rangarajan Committee recommendation. However, for more risk to be taken its better to have a cost sharing basis, as whatever we spend on exploration we can get it back if a discovery is made. However, here the risk is that whatever we spend may not be totally recovered and will be linked to revenue sharing," said Ananth Kumar, Director Finance, Oil India.
Following the announcement, scrip of the exploration and production companies declined on the Bombay Stock Exchange. While Reliance Industries was down 1.99 per cent at Rs 814.65, ONGC was down 0.59 per cent at Rs 313.3 and Oil India was down 0.71 per cent at Rs 528.10.
“Revenue share replacing profit share will help investors not get subjected to cost scrutiny and likes of CAG audits. However, withdrawal of cost recovery mechanism exposes investors to more risks of investments, and that may dissuade large oil companies from India,” said Deepak Mahurkar, Leader Oil and Gas, PricewaterhouseCoopers.
Chidambaram also announced that the pricing of natural gas will be reviewed to remove the "uncertainties" on the issue.
“We eagerly await more clarity on natural gas pricing policy as well as the shale gas policy. We were hopeful that the Finance Minister would view our request for removing service tax on service providers to exploration and production companies favourably, since that drains away a substantial part of the funds committed for exploration,” said L K Gupta, MD& CEO, Essar Oil.
Currently, gas pricing is determined under the New Exploration Licensing Policy (NELP). If recommendations of the Rangarajan committee are accepted, domestic gas prices are expected to be in the range of $7-8 per million British thermal unit. The committee recently recently submitted its report on gas pricing.
Sashi Mukundan, Regional President and Head of Country, BP India said, “We welcome the focus on regulatory and pricing clarity for. A key next step should be the transition of prices of domestic natural gas to import parity in the next three years, similar to the diesel price reforms.”
Companies said, an increase in fee for technical services; withholding tax rate for royalty and increase in surcharge rates would push up overall cost for oil and gas companies.
"As regards subsidy for the public sector oil marketing companies, adequate provision seems to have been made as seen as by provision of Rs 96,891 Crore for 2012-13, which should account for around 60 per cent of gross under recoveries of the industry. The balance 40 per cent should be manageable with upstream companies largely bearing the same and a small share to be borne by the companies themselves," K Ravichandran, senior VP, Co-head corporate sector rating, ICRA Ltd
The industry has been seeking--- tax holiday for exploration and production activities relating to natural gas including coal bed methane (CBM); extension of the benefit under section 80-IB(9) of the Income Tax Act from seven years to 10 years to companies engaged in production of mineral oil and natural gas and benefit under section 80-IB(9) of the Act not to be restricted only to blocks licensed under a contract awarded till March 31, 2011 and the period March 31, 2011 and be extended till March 31, 2017.
