After the CAG, the high-level Ashok Chawla Committee has criticised the system of Production Sharing Contracts like the one Reliance Industries signed for the gas-rich KG-D6 block. The panel alleged that these contracts are designed to benefit private players at the government's expense.
However, the Oil Ministry rejected the criticism saying the New Exploration Licencing Policy, under which Reliance bagged the KG-D6 block, was designed by the BJP-led NDA government in 1999, and the terms being deplored now are ones vetted and signed by the then Atal Bihari Vajpayee government.
Reliance bagged the KG-DWN-98/3 block in the first round of NELP, which was pioneered by the NDA government, and signed the PSC for the block in 2000. "The Congress-led UPA government first came into power in May 2004. You don't expect contracts signed by sovereign governments to be reneged just because a different party has come into power," an official said.
The PSCs provides for the operator to recover all capital and operating expenditure become the government's share of profit from a field rises to as high as 85%.
This system gives "incentive to (an operator to) increase his investment, or front-end his work plan" in order to see that the threshold where government's profit take rises rapidly is not reached, the Chawla panel said in its report.
Oil Minister S Jaipal Reddy had yesterday indicated that the government will be open to accepting suggestions that can improve PSCs, but there are doubts if any chances in policy can be implemented with retrospective effect.
At the heart of the PSC lies the 'investment multiple', the ratio of net cash income to exploration and development costs. The investment multiple defines the share of profits that go to the government. The higher the expenditure, the lower the IM and hence, the government's share of profit.
Citing the example of KG-D6, the Chawla panel said, "The relationship between the pre-tax investment multiple (PTIM) and the share of contractor profit petroleum changes dramatically once the PTIM crosses 2.5, with the government's share increasing from 28% to 85%."
"It is useful to remember that this schedule is bid by the operator and not determined by the government," it said.
"A high share of some PTIM will help to win the bid, depending on the financial model of evaluation used, but it does raise concerns that such a radical change would provide very strong incentives for any operator to adopt all investment and strategies possible to ensure that the PTIM stays within the 2.5 limit," the panel report said.
The CAG, in a draft report on its audit of the KG-D6 accounts, had also criticised the current PSC structure saying it was "unsuitable for protecting the government of India's financial interests."
The Chawla panel said the NELP model is not an outright upfront bid model (often called a bonus model).
"Neither is it a standard royalty model as seen in mining systems, where revenue is shared regardless of profitability. Rather, it is a model that allows the operator to substantially recover his costs before the sharing of revenue," it said.
However, once these costs are recovered, the sharing with the government is often large.
"Private contractors have virtually no incentive to minimise capital expenditure and a substantial incentive to increase capital expenditure so as to retain the PTIM in the lower slabs, which would result in low/lowest share of profit petroleum for the government of India," the draft CAG report said.
The auditor said the Oil Ministry and its technical arm, the Directorate General of Hydrocarbons, "did not pay adequate attention to protecting the government's financial interest."
The report has been sent to the ministry for its comments.
