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Streamlining oil contracts PDF Print E-mail
Tuesday, 14 January 2014 01:26
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Revenue-sharing is the only way to free up oilcos

The Kelkar panel has done well to reiterate the need for a friendly tax policy if companies are going to be investing in exploring for hydrocarbons, more so given the way India has been implementing policies in the sector over the past few years. If it wasn’t bad enough that the tax holiday was suddenly removed for natural gas some years ago, the other problem has been the selective way in which the production sharing contract has been implemented since, as per the contract, both oil and gas are to be sold at free-market prices, not those fixed by the government.

In recommending that the government restrict is oversight to the technical dimensions of the production sharing contract—in other words, it should not look at the costs of production declared by the field operator—the panel is on weaker ground. Though the cost-recovery system may be the best for operators, the Indian system being what it is, it is unlikely the DGH or the CAG for that matter, is going to simply pass all bills. The only way to ensure this happens is to move to, as has been done for airports and telecom for instance, a revenue-sharing model where the only thing that matters is an operator’s revenues, not how much it spends on a rig or a tug. The argument that this discourages investment is incorrect. Even in the cost-recovery model, no money can be recovered if no oil/gas is found. If, on the other hand, oil/gas is found, the operator gets its money first and the government gets its share after all the expenses have been recovered—in the case of revenue-sharing, therefore, the recovery period gets extended. The easy way to fix that is to offer lower revenue-sharing to the government—so, while Cairn offers the government a 20% profit-sharing right now, this could fall to, say, 5% in the revenue-sharing model. The advantage of revenue-sharing, however, is that the DGH will then restrict itself, as does Trai, to simply looking at the technical part of the contracting. If there was an easy solution to restrict oversight, as the Kelkar panel believes, it would have been implemented a long time ago for PSUs which would no longer have to suffer the crippling delays they have to today.

 

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