While presenting Budget 2013-14 on Thursday, when finance minister P Chidambaram announced the move from the profit-sharing model to one of revenue-sharing for companies involved in oil and gas production, he merely dispelled the confusion that the government itself had created in the first place, said experts.
On Friday, companies and analysts scrutinised the new model, which will be applicable to all new exploration and producing (E&P) blocks.
There was near consensus: the new model, they said, will be “slightly” negative for E&P companies in the near term.
But, they hastened to add, the companies will likely benefit in the long run, after all, as revenue-sharing will reduce delays and overcome systemic bureaucracy.
However, the alternative model will not help in any way to attract foreign players who had been shying away from the Indian hydrocarbon sector for various reasons, said experts.
“The profit-sharing model is where all the confusion arises as it’s always linked to cost recovery. And this leads to involvement of the DGH (Directorate General of Hydrocarbons, the upstream regulator) and CAG (Comptroller and Auditor General, who has discretionary powers to audit performances of companies working with the government). We’ve seen this in the last one year and a half,” said an oil and gas veteran who had worked at Reliance and IndianOil.
Gagan Dixit, senior analyst at brokerage Quant, said that under the profit-sharing model, the government allows companies to recover their cost of capital expenditure (capex) by 2.5 times, post which the latter have to share part of their profits with the government.
Cairn India’s Barmer oilfields in Rajasthan and Reliance Industries’s KG D6 are two of the many examples which share their profit with the government at approximately 50% and 20% respectively.
“In the profit-sharing model, the DGH has to get involved in approving the capex of a company and then make an estimate of how much of the profits will be shared with the government. And if there is a discrepancy in what is reported by the company and the DGH, the CAG would get involved,” said Dixit.
All this leads to bureaucratic delays and, sometimes, litigation, thereby hurting production in the long run, he said.
On the other hand, the revenue-sharing model is expected to be more transparent as there is always a discussion or debate on which costs to include or exclude, said Dixit.
Agreed Rahool Panandiker, principal at The Boston Consulting Group.“I feel companies would like this model, given that many cost-related issues have arisen in the recent past.”
In case of positive surges in price, government can “avail” of the windfall too, he said.