New profit-sharing plan for oil blocks this week
Tuesday, 29 May 2012 | 00:00
The government is set to replace the existing profit-sharing formula for oil and gas blocks with a simpler and more foolproof one this week. The idea is to prevent exploration companies from wrongly maximizing their profit share at the expense of the exchequer.
At the same time, given the stagnation in domestic gas production and the risks associated with oil and gas exploration, the government wants to make the system more viable and pragmatic.
The new formula, which will be based on suggestions made by the Ashok Chawla panel on natural resources and the Comptroller and Auditor General of India, is likely to either abandon or significantly alter the current way of dividing the profits based on variables like investment multiples how many times earnings from a block are to the investments made.
Both the CAG and the Chawla panel had said that the floating ratio of profit-sharing being used at present, which changes in favour of the government when returns from the project outweigh the investments by a specified multiple, is prone to manipulation. They had, therefore, recommended that in future, the bidding norm should be a fixed percentage of profits that the investor is willing to share with the government.
Sources said that the oil ministry will hold an internal meeting on Monday to give a final shape to the formula for sharing profits between the government and the contractor.
The fast-tracking of the policy changes follows a meeting of key ministries on Friday chaired by Prime Minister Manmohan Singh, where 69 Chawla panel recommendations were cleared for implementation, leaving the remaining 11 to be pursued subsequently.
While finalising the profit-sharing formula, the oil ministry is expected to keep in mind that the new regime should be simple, less prone to interpretation and, at the same time, would not be so stingy that potential investors are discouraged. Policymakers are acutely aware that India’s hydrocarbon assets, despite the recent successes in Rajasthan and Western Offshore, are not on the priority of global exploration majors due to the moderate success rate. Besides, oil exploration is undertaken to ensure the country’s energy security and to reduce import dependence, not merely to collect revenue from a successful investor in a block.
Blocks are now awarded to investors who can find the maximum profit to share with the government before as well as after recovering their cost. As per this, the government’s share is expected to go up substantially after the full cost recovery. The CAG and the Chawla panel noted that although this method helps contractors offering a high profit share to government win the blocks, it is susceptible to manipulation so that the point when the state’s share would go up manifold is never reached.
Both the agencies suggested that instead, investors be asked to bid for hydrocarbon blocks in future on the basis of a single profit-sharing percentage. There is a royalty component in the profits to be divided between the developer and the government even now, but the bulk of the government’s share comes from profit petroleum as determined by the return on investment. (Royalty from onshore blocks goes to the states, while the same from offshore fields goes to the central government.)
The ministry has said last week that since similar suggestions were given by two independent agencies about the adverse impact of the existing profit-sharing formula designed in the late 1990s, there seems ground enough to revisit the formula. “In view of the fact that, albeit by hindsight, we have gained the knowledge now, there is need to conclusively address this issue in respect of future production sharing contracts,” the ministry said in its annual report released on Friday.
Source: Financial Express
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