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E&P players say new exploration model raises risks

Friday, 22 August 2014 - 7:05am IST | Place: Mumbai | Agency: dna

Under the new revenue sharing model the E&P player would stare at a loss if costs are higher

After around a year of speculation, the government on Thursday presented a draft model for future oil contracts that will follow the revenue sharing model instead of the current cost recovery model.

Under the new revenue sharing model, the contractor will have to bid upfront the quantity of oil and gas they will share with the government for winning an exploration acreage.

Under the existing cost sharing, explorers are first allowed to recover capital and operating expenditure under a specific formula before sharing profits with the government.

Revenue sharing model was originally suggested by a committee headed by chief economic advisor C Rangarajan. The ministry, accepting these suggestions, on Thursday shared a model revenue sharing contract (MRSC) that the government will enter into with companies with an exploration acreage and sought comments from the industry on it.

The ministry sought comments by September 10 on MRSC.

"The government's revenue share of crude oil and/or natural gas shall be determined based on a two dimensional production-price matrix, where government's revenue share with the contractor (s) shall be linked to the average daily production in a month and average oil and gas prices in a month," the MSRC said.

The contractor's share of revenue from petroleum produced and saved shall be the amount of revenue for the relevant month remaining after deducting the government's revenue share 'production–price matrix' for crude oil and natural gas would be separate for onland, shallow water, deep water areas, and CBM.

The different price levels enumerated in MSRC for crude oil were less than $100 per barrel, $100-125, $125-150 and more than $150 per barrel, and for gas bands included less than $6 per million metric British thermal unit (mmBtu) rate, $6-10, $10-14 and more than $14 per mmBtu.

The government's sole aim to come up with this method is to avoid the several litigations and controversies attached to the cost-recovery method.

"The government is in favour of the revenue sharing model as it is easy to administer and would also help it to avoid CAG and CBI audits and other hassles," a partner looking at oil and gas sector in an audit firm said.

"For revenue sharing, an E&P player has to pay the government irrespective of the costs. The cost of exploration could be lower or higher than expected; if it's higher, the E&P player concerned would stare at a loss," he said.

"In case of deep water regime, revenue sharing model will be highly risky for contractors," a senior official from Reliance Industries said. He said that Indian geology was far riskier and uncertain in comparison to place like Saudi Arabia, where revenue sharing model have been successfully utilised.

Another E&P expert who has been closely involved in drafting the MSRC told dna that under the revenue sharing model, the government will not look into any financial aspects like cost of production, field commerciality and profitability. "It may, however, have some technical parameters like reserve assessment, production profile, etc."

Brushing aside the cost recovery concerns of contractors, this expert said that the government recognises that contractor would be at higher risk as the cost-recovery is denied under this new model; but a contractor can overcome this by bidding less profit petroleum at the outset. For example, under the current PSC if contractor had bid Rs 100 crore as profit petroleum for government, in the new revenue sharing model it can bid Rs 50 crore at the outset to compensate for cost recovery.

Indian E&P space includes state-owned companies like ONGC, OIL India, private players like Reliance Industries and Cairn India and foreign players like BP, Hardy Oil and Gas and Niko Resources, Shell, etc.

Under the new contracts, the E&P player will be required to create an escrow account with a bank acceptable by the government where it should deposit revenue.

The revenue was defined by MSRC as "all amounts accrued in relation to Petroleum Produced and Saved in a month (remaining after deducting Royalty payments required to be made by the Contractor, in the relevant month) could be taken into account for determining the Revenue." Marketing margin could be taken into account towards determining this revenue, as per the new model.

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