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An experts’ panel on petroleum reforms, headed by Vijay C Kelkar, former Union finance and petroleum secretary, has recommended continuing with the existing production-sharing contract (PSC) regime in the hydrocarbon sector, opposing the Rangarajan-proposed revenue-sharing contract (RSC) model.
The panel’s report, Road map for reduction in import dependency in the hydrocarbon sector by 2030, has made a total of 52 recommendations, based on 30 meetings held over 18 months. It was set up in 2013 and gave its first report in January this year. The final report follows a consultation paper in August, seeking comments from stakeholders.
Its suggestions, the panel says, have the potential to bring down India’s annual oil import bill by $70-80 billion, around half the present total.
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“The committee has reservations against accepting the biddable RSC model, due to the inherently misaligned risk-return structure, which leads either to lower levels of production due to resultant reduced exploration efforts and lower recovery ratios or to high windfall gains to operators, encouraging contract instability due to political economy factors,” the panel said.
Under the PSC regime, oil companies can recover their costs from the sale proceeds of oil and gas before sharing the profit with the government. The Comptroller and Auditor General of India had criticised this approach, arguing it encourages companies to unnecessarily increase capital expenditure. Under an RSC model, companies state upfront the amount of oil or gas they will share with the government from the first day of production.
Kelkar told Business Standard the committee had recommended two variants of a PSC regime, based on the feedback received from stakeholders. Either one linked to an investment multiple, with a modified contract administration, including self-certification of costs by the contractors or a PSC with biddable supernormal profits tax.
The panel has suggested making Rs 7,000 crore available to the Directorate General of Hydrocarbons (DGH) for creation of a national data bank on domestic basins; delegating quasi-judicial power to DGH, on the lines of the Securities and Exchange Board of India; introducing an Open Acreage Licensing Policy by 2016; offering equity participation to foreign firms in nomination fields; exempting oil firms’ production from mature fields from subsidy sharing; ensuring absence of retrospective changes to contracts, to boost investor sentiment; encouraging coal gasification and shale gas exploration; and developing petroleum clusters of oilfield service providers on the east and west coasts.
The panel recommended market-linked gas pricing, a decision the new government has taken. The petroleum ministry has raised natural gas prices by 33 per cent to $5.61 a unit, based on an average of global well-head prices. The panel also pitched for contract extension up to the economic life of a block, a key demand of Vedanta Resources subsidiary, Cairn, which operates the Barmer block in Rajasthan. Kelkar has also made out a case for fiscal reform such as including oil and gas under the proposed national goods and services tax framework and waiving of customs duty on import of liquefied natural gas for all purposes.
PANEL RECOMMENDATIONS
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Implement PSC (profit-sharing contract) linked to investment multiple with modified contract administration or PSC with biddable super-normal profits tax
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Make Rs 7,000 crore available to DGH for creation of a national databank on domestic basins, delegate quasi-judicial power to DGH on the lines of Sebi
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Introduce open acreage licensing policy by 2016
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Offer equity participation to foreign firms in nomination fields
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Exempt oil firms’ output from mature fields from subsidy sharing
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Ensure absence of retrospective changes to contracts for boosting investor sentiment
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Encourage coal gasification and shale gas exploration
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Develop petroleum clusters of oilfield service providers on the east and west coasts
