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Saturday, 23 August 2014 00:00
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Revenue-sharing will prevent KGD6-type instances

The government’s decision to finally opt for revenue-sharing in oil contracts—a model contract has been put out for comments—in place of the current cost-recovery model is welcome as it will put an end to not just the KGD6-type allegations of cost-padding, it will also end the unending delays for clearing plans of developers. Indeed, this may have got done earlier had it not been for the Kelkar panel rooting for status quo after the Rangarajan panel had voted for revenue-sharing. As in the case of telecom, once the government gets a revenue share, it is no longer interested in whether costs have been gold-plated—the original charge against Reliance Industries—and so the developer is free to go about its business.

Given that just 40% of the fields offered in the last exploration round got awarded, and that just seven of India’s 26 sedimentary basins are producing oil/gas, it is important that India get its strategy right, and the government keeping out of the day-to-day running of an oil company’s business is the first step. The question, though, is whether oil firms will bid under revenue-sharing since, as Kelkar points out, full cost-recoveries help de-risk the business. It is important to point out that, at a basic level, both systems are as risky. Consider a situation in which a firm spends $200 million in exploring under cost-recovery but finds nothing. It does not get this money back in either of the models. Now, say it does find oil and is able to extract $50 million of oil each year for 10 years. In the cost-recovery or profit-share model, the company won’t pay the government anything for the first 4 years and then, once it has recovered its money, it starts giving the government a share of the profits. In the revenue-share model, where a 20%, say, rate has been bid, it will take the company 5 years to recover its money since it has to pay the government $10 million each year. So, all that the company needs to do is to bid a lower revenue-share as compared to the profit-share to take into account this longer recovery period. And given it has not been allowed cost-recovery of $2.4 billion under the supposed cost-recovery method, Reliance will tell you it is not quite as sure shot a thing as is made out.

Were companies to know how oil-rich an area was—say, the Rajasthan basin being explored by Cairn India right now—they would certainly be more willing to come in and bid even under a system which returns their money with a delay. This is where the government needs to be proactive and spend money to have India properly mapped from an oil industry point of view. It has collected R1.04 lakh crore by way of the oil industry cess since 1975, but used just R900 crore for the industry. Using just one year’s contribution, at the current costs of 3D seismic surveys, will help get complete data for around 1 million sq km, which makes it much easier for companies to decide on whether or not to participate. Given India’s total energy imports are projected to rise to 50% of demand by 2030, up from 30% right now, it is important to do everything to get more players into oil and other exploration.

 

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