Bidding of blocks based on exploration work, no revenue sharing in most caseshttps://indianexpress.com/article/business/high-level-committee-proposes-bidding-of-blocks-based-on-exploration-work-no-revenue-sharing-in-most-cases-5572787/

Bidding of blocks based on exploration work, no revenue sharing in most cases

While referring to the committee’s report, Finance Minister Piyush Goyal in his Budget 2019 speech said that his Government was in the process of implementing these recommendations.

Piyush Goyal, budget 2019, oil and gas producers, crude oil price, business news
Operators in these areas would also get more concessions to expedite production from the contract date. Another advantage would be reduced royalty if production commences within four years.

A high level Inter-Ministerial committee has proposed doing away with the current revenue sharing model between the oil and gas producers and the government from lesser unexplored basins in Category II (known to hold hydrocarbons but no commercial production yet) and Category III (hydrocarbon shows indicating geologically prospective), unless a discovery in either of these two categories yields annual revenue of $2.5 billion.

This marks a departure from the profit sharing regime that was followed earlier under the production-sharing contract, which was then followed by the sharing of revenue – irrespective of the costs booked by the operator to avoid gold plating — and picking of the bidder giving maximum money to the government.

According to the panel’s recommendations, blocks in these basins would now be bid out “exclusively based on exploration work programme” with “no revenue/production sharing other than payment of statutory levies (including royalties)”, says the committee’s recommendations. “However, in case of windfall gains defined as revenue more than $2.5 billion in a financial year from the block, then there would be 50 percent sharing of incremental revenue above $2.5 billion,” it stipulates. Operators in these virgin areas would also get more concessions to expedite production from the contract date. One major advantage would be reduced royalty if production commences within four years in onland/shallow water blocks and within five years in deepwater/ultra-deepwater blocks.

“Royalty would be nil for deepwater/ultra-deepwater fields and seven percent for onland areas,” said sources. “In case commercial production is not commenced in the time period above mentioned, then royalty at normal rates will be applicable,” says the report. Currently, a royalty of 5 per cent and 2 per cent respectively kicks in after seven years of production in deepwater and ultra-deepwater blocks. In onland blocks, royalty is charged at 12.5 percent for crude oil and 10 percent for natural gas from the start of production. For shallow water, it’s a flat 7.5 percent.

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For Category I basins (where commercial production is already established), the Committee has proposed that the maximum share of the government be capped at 50 percent to encourage more and more explorers to hunt for crude oil and natural gas in unexplored basins. It has suggested that bidding for blocks in Category I basins be based on exploration-cum-revenue sharing basis with “revenue sharing ceiling to be set at 50 percent”.

While there would be no low revenue point for sharing, the high revenue point (where the bidder will have to quote a government share) has been kept at $7 million of revenue per day as is in the existing Open Acreage Licensing Policy (OLAP). In a major change, the committee has suggested that the tenure for completing the minimum work programme (MWP) in blocks of Category I basins be fixed instead of leaving it at the mercy of the contracts.

“Timeline for completion of committed MWP would be three years for onland/shallow water blocks and four years for deepwater/ultra-deepwater blocks. There would be no bar for additional exploration work/activities beyond the MWP,” it said. The MWP has been given more weightage in the committee’s proposal at 70 percent instead of 45 percent under the OALP while revenue sharing importance has been brought down to 30 percent from OALP’s 50 percent.

Within the MWP, there is more emphasis on drilling exploration wells at 80 percent while seismic survey has been given a back seat at 20 percent. In the OALP, seismic surveys had considerable importance with more weights to three-dimensional surveys. Concessional royalty would also be available to such blocks with rates reduced by 10 percent for early production. However, they will have to adhere to the timeline of starting production within four years in onland/shallow water blocks and within five years in deepwater/ultra-deepwater blocks.

Discoveries in all these three categories would also get full marketing and pricing freedom of their produce at arm’s length basis through competitive bidding process. “There would be no allocation (of crude oil and gas) by the government. No exports would be allowed,” says the report.

There would be “liberal freedom to transfer or exit the blocks” provided the MWP has been adhered to. The operators would also get the flexibility to change the field development plan, with the concurrence of Directorate General of Hydrocarbons (DGH), even after initial drilling of wells.

The Committee’s recommendations follow a review meeting taken by Prime Minister Narendra Modi on October 12 where it was suggested that smaller fields be handed over to private firms allowing the NOCs to concentrate on the big ones. It also delved on steps to improve India’s oil and gas production from uncharted basins. A six-member committee under Niti Aayog CEO Amitabh Kant was set up which included Cabinet Secretary P K Sinha; Aayog vice chairman Rajiv Kumar; Petroleum Secretary M M Kutty; DGH Director General V P Joy and ONGC chairman and managing director Shashi Shanker.

While referring to the committee’s report, Finance Minister Piyush Goyal in his Budget 2019 speech said that his Government was in the process of implementing these recommendations.