India to proceed with revenue sharing model for auctioned oil & gas blocks

SLQ07 July 2014, KOLKATA – India’s Petroleum & Natural Gas Ministry has decided to pursue a revenue-sharing model for contracts with the successful bidders of future auctioned oil and gas blocks.

According to a Ministry official, the tenth round of bidding for oil and gas blocks under India’s New Exploration and Licensing Policy, NELP, would be based on revenue-sharing contracts with operators in the auction of both on-shore and off-shore blocks.

The decision comes on the heels of the Finance Ministry turning down its plea for the granting of a ‘10-year tax holiday’ and exemption from payment of royalties by successful bidders for offshore oil and gas blocks at the forthcoming auctions.

The Finance Ministry, while turning down the request, argued that the ‘double benefit’ of a tax holiday and exemption from royalty could not be considered. Simultaneously, a uniform tax holiday was unjustifiable as investment needs differed from block to block depending on geological difficulties in operating each oil and gas block.

As for revenue sharing, the proposal had been finalised by the Petroleum & Natural Gas Ministry and would shortly be forwarded to the Cabinet Committee for Economic Affairs, the government’s apex investment and policy decision-making body, the official said.

The Ministry claimed that the revenue-sharing model was more transparent as it would protect government’s interest in the case of higher-than-forecast production or unexpected finds during the exploration stage.

Existing production sharing agreements (PSCs) with operators of previously auctioned oil and gas blocks stipulated that the latter could recover all costs of exploration, in the case of successful and unsuccessful blocks, and subsequently share profits with the government.

This regime had often led to conflicts between operators and government over the inflating of exploration cost and capital expenditure and, at same time, the under declaration of production to lower government’s share of profits, the officials added.

In fact, the national auditor, the Comptroller and Auditor General’s office, in 2012 passed adverse comments and advised the government to change the PSC-based cost recovery method, claiming that operators were inflating costs to increase profits.

The previous Indian government had failed to follow through the tenth round of auction under NELP, declining to invite bids for 56 oil and gas blocks by February 2014, owing to a lack of consensus on PSC versus revenue sharing.

Two committees appointed by the previous government had given diametrically opposing recommendations. One advocated the PSC model while the other recommended revenue sharing between operators and government, putting government in a quandary and placing the auction process on the back burner.
*Ajoy K Das –

About the Author