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The Union government will auction marginal oil & gas fields where discoveries could not be monetised by state-owned explorers ONGC and Oil India because of difficult geology and small size of blocks. With this, the government has introduced a revenue-sharing mechanism in oil & gas production.
Under the new policy, 69 fields, with 89 million tonnes of reserves, worth Rs 70,000 crore at current prices, will be bid out in three months. “It is a step towards increasing our hydrocarbon production, to reduce our import dependence by 10 per cent by 2022,” Petroleum Minister Dharmendra Pradhan said while briefing the media after a Cabinet meeting on Wednesday.
The changed policy with favourable contracts, including a shift from production sharing based on cost-recovery to revenue sharing, market-linked pricing and marketing freedom to developers would bring these fields into production, Pradhan said.
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Former ONGC Chairman R S Sharma said bidding for marginal fields would revive sentiment in oil & gas exploration. “There was a lot of interest shown by many small companies when ONGC was trying to auction its marginal fields in 2005, but the government said it would carry out the auctions itself,” he said.
The 69 fields to be bid out include 63 relinquished by ONGC and six by Oil India. Thirty-six fields are offshore and the rest onshore discoveries.
In production-sharing contracts, companies win blocks by quoting the highest minimum work programme and recover their investment before sharing profits with the government. “This model was criticised by the Comptroller and Auditor General and also by a few government-appointed committees. We have now set up a long-term transparent regime of revenue sharing,” Pradhan said.
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SHARING OF BENEFITS Bidding models for various natural resources |
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A panel under economist Vijay Kelkar has, however, argued that production sharing is more suited to attract investment.
“The committee has reservations against accepting the biddable revenue-sharing contract model due to the inherently misaligned risk-return structure which leads either (i) to lower levels of production due to resultant reduced exploration efforts and lower recovery ratio, or (ii) to high windfall gains to operators, encouraging contract instability due to political economy factors,” the panel had said in a report to the government.
Under the marginal field policy, companies will have to indicate the revenue they will share with the government at different stages of production and under different price scenarios. An oil ministry official clarified the government’s revenue share would be worked out based on whichever of the two prices – the price discovered as a result of the bidding process and the Indian basket price – was higher.
Pradhan said the 69 fields would be classified cluster-wise, their viability would be tested, and stakeholders consulted before the bidding. An oil ministry official clarified ONGC and Oil India would be allowed to bid for these blocks. “The book value of the assets will be decided upfront and reimbursed to ONGC and Oil India,” he said.
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Asked whether the auctions would attract bidders when crude oil prices were so low, the official said oilfield service costs for explorers, including the cost of procuring equipment, had become competitive because of the low price of oil.
“Given the current low oil price, a round of New Exploration Licensing Policy auction might not attract much investor interest. It is prudent on the part of the government to first carry out the bid process for marginal fields which will provide an opportunity to try out the revenue-sharing model,” said Debasish Mishra, senior director at consultancy firm Deloitte.
The new bidding system will also mark a change in favour of a unified licensing regime that the government has been working on. Licences will cover all hydrocarbons found in the field, including oil, gas and shale.
The new policy also stipulates winning bidders will be exempted from paying cess on crude oil and gas production to the Centre. Oil companies are now required to pay Rs 4,500 as cess on every tonne of output from nomination blocks. The Centre collected Rs 15,934 crore as cess on crude oil from explorers in 2014-15.
However, the royalty rates applicable to these fields will be the same as those applied under the New Exploration and Licensing Policy (Nelp): 12.5 per cent for onshore blocks, 10 per cent for shallow discoveries, and five per cent for deep-water blocks in case of oil. Royalty rates for gas production will be 10 per cent for onshore blocks, 10 per cent for shallow water, and five per cent for deep-water blocks.
