DGH drafts new policy on exploitation of shale gas

In the wake of the CAG’s strictures against the Directorate General of Hydrocarbons and the Petroleum Ministry on violations in the KG-D6 contract the DGH

Written by Amitav Ranjan | New Delhi | Published: May 4, 2012 12:58:20 am

In the wake of the CAG’s strictures against the Directorate General of Hydrocarbons (DGH) and the Petroleum Ministry on violations in the KG-D6 contract the DGH has now drafted a safe but encouraging policy on exploitation of shale gas. Shale gas is seen as the new hope for fuelling India’s burgeoning appetite for hydrocarbons.

The draft policy,submitted to the ministry last month,does not permit cost recovery and hence profit sharing — the two features that came under criticism by the CAG in its audit report. Instead,it banks on production-linked payment (PLP) as the Centre’s share from the discovery.

“PLP would be a fixed percentage of revenue receipts from the shale gas or shale oil sold from the contract area,net of royalty on a monthly basis,” the revised draft says. Royalty would be in line with what has been prescribed in the Oilfields (Regulation & Development) act,it adds.

The PLP quoted at the time of the bidding for blocks assumes significance as it would carry the maximum 60 per cent weight for deciding the award of the block. The total investment quoted for completing the promised minimum work programme would get 40 per cent weightage.

As a fiscal incentive,the contractor will be exempt from PLP payment for the first five years from the start of commercial production or from the date of entering the development and production phase,whichever is earlier.

“It implies that the maximum period of PLP exemption would be 10 years from the date of signing of the contract and will not be extended under any circumstance since it is an incentive for faster development,” says the draft policy which was submitted to the ministry.

A study by US Energy International Agency estimates India’s shale gas reserves at about 290 trillion cubic feet (TCF),of which 63 TCF could be recovered. This volume would help bridge the domestic gas demand,tagged at 391 million standard cubic metres per day by 2025-26.

The policy advocates that the explorer be given the freedom to market shale gas “within India” on an arm’s length basis,with shale oil marketing following the prevailing norms of the New Exploration Licensing Policy. The other incentive proposed is customs duty exemption on the import of goods and materials for exploration and exploitation of shale gas or oil.

The blocks would be awarded through open international competitive bidding with up to 100 per cent equity participation by foreign companies. The operating firm in a consortium would be the one which has minimum 25 per cent equity. The contract would be for 30 years with the first five years kept for exploration,appraisal and evaluation of the prospect and its feasibility. “Contractor will be allowed to retain only the development area,as approved by the Steering Committee,at the end of Phase I.”

Relinquishment of contract area was another concern that was raised in the CAG report. “Phase II will be the development and production phase for a duration of 25 years plus the time saved in Phase I,if any,” says the draft,which introduces a government-contractor Steering Committee headed by government nominee to decide on project issues. Addressing environment concerns,the policy insists that the used water with dissolved solids,contaminants and chemical residue must be treated before discharge.

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