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Getting it together on oil PDF Print E-mail
Thursday, 02 January 2014 02:25
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Tax holidays and cutting royalty payments a good idea

Given the dramatically lowered interest in bidding for gas/oil blocks in every NELP round—from 52 blocks in NELP VI in 2006, just 41, 32 and 14 blocks were awarded in the next three rounds—the government has done well to do what it can to augment interest. Part of this has been taken care of by putting in the kitty the areas relinquished by both Cairn and RIL as part of the policy where a certain area reverts to the government over a period of time—both companies have already said they are interested in bidding for these areas. The other good news, that the Cabinet has to take a call on, is to remove royalty payments for offshore blocks. This is critical since, as was seen in the case of the dispute between Cairn and ONGC over the Barmer oilfields, the royalty payments can be so high, they can make the venture unviable—though ONGC was contractually bound to pay the entire royalty, its complaint was this was leaving it out of pocket. While ONGC's case was different in that it was paying all the royalty while it had just a 30% share in the JV, the larger point is that with exploration costs very high and the Rangarajan formula to apply till 2017, few will bid unless their costs are reduced. In any case, as compared to the $7-8 per mmBtu that Rangarajan is promising, oil companies have made it clear much of the deep and ultra-deep offshore is not viable at under $10 and $12, respectively—of the 91 tcf of gas that India has available to develop/find, 26 tcf is in deep-water and 27 tcf in ultra-deep-water blocks.

Removing uncertainty over tax holidays is also critical for lowering costs. Indeed, it was unfortunate that, a few years ago, the promised tax holiday was removed for natural gas while it was retained for crude oil. Whether bigger oil companies will bid depends on whether or not they are convinced about the government's sincerity—not only was the gas holiday removed arbitrarily, under the original production sharing contracts that companies signed, even natural gas was to be priced at free-market rates. The government control over natural gas prices, ironic given how it is affecting RIL, was a fallout from the fight between the Ambani brothers—producers of crude oil get global prices.

The one area where there is a difference in opinion, though, is on the proposed revenue-share mechanism in place of the current cost-recovery mechanism. While this newspaper's view has been revenue-sharing ensures the government no longer interferes with the business of exploration—under the cost-recovery system, it has to clear each expenditure—some oil companies have argued cost-recovery gives them more certainty. But given even cost-recovery is of little help if no oil/gas is found, in the ultimate analysis, revenue-shares are quite similar to cost-recoveries, except the rates offered for profit-sharing with the government naturally have to be lower for the former. The success, or the lack thereof, of the next round of oil/gas bids will offer greater clarity on this.

 

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