Business Standard

States To Be Compensated For Oil Royalty Losses

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Pradeep Puri BSCAL

The ministry for petroleum and natural gas has worked out a new financial package to compensate state governments for any loss in revenue because of the fixed royalty to be charged from 26 exploration blocks and 12 discovered oilfields for which awards have already been made.

Under the new package, which is being vetted by the finance and law ministries, the loss in revenue to state government on account of the fixed royalty would be made good by the central government by taking out the similar amount from the cess on oil production.

As per the Oilfields (regulation and development) Act 1948, the rate of royalty paid by the producer is revised every three years. While the royalty from offshore fields goes to the central kitty, royalty from onshore fields goes to the government of the state in which the oilfield is located. The entire cess amount, however, goes to the central government.

 

While inviting bids for these exploration blocks and discovered oilfields, the government had committed that the royalty amount would remain fixed for the entire duration of the production from the field. This meant that even if the royalty rates were revised as per the Act, it would not be applicable for these fields.

The state governments in which these fields are located took strong objection to this and demanded adequate compensation for the loss in revenue in case of revision in royalty rates. This forced the central government to think of alternative methods of compensating state governments and work out the system under which the loss to state governments would be made good from the cess collection.

Petroleum ministry is hopeful that the finance ministry would not object to the new financial package since the latter had itself approved of the terms and conditions of the award of the contracts. The package, however, would require the approval of the Cabinet as well as an amendment in the Act.

On October 20, 1997, the group of ministers, constituted by Prime Minister to review pending production-sharing contracts for oil exploration and production, had given the go-ahead to the petroleum ministry to finalise and sign the contracts for the 26 blocks for which awards had already been made.

The group of ministers had also decided to recommend to the Cabinet approval for the award of one medium-sized and 11 small discovered oilfields to private consortia for development.

The delay in the finalisation of the financial package regarding the royalty payment has held back the signing of the production-sharing contracts.

Once signed, these would catalyse about $ 100 million worth of investment in oil exploration and would double the exploration acreage under joint ventures to about 180,000 square km.

The production from the 12 discovered is expected to be about 1.3 million tonnes per annum. Investment in these fields is likely to be of the order of around $ 300 million.

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First Published: Jan 21 1998 | 12:00 AM IST

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