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DEA suggests oil and gas profit sharing with home state

The suggestion is based on Andhra Pradash's demand that it should have a share in output from Reliance Industries-operated KG-D6 block, off the Andhra coast.

, ET Bureau|
Jan 15, 2014, 04.00 AM IST
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The suggestion is based on Andhra Pradash's demand that it should have a share in output from Reliance Industries-operated KG-D6 block, off the Andhra coast. 
The suggestion is based on Andhra Pradash's demand that it should have a share in output from Reliance Industries-operated KG-D6 block, off the Andhra coast. 
NEW DELHI: The Department of Economic Affairs (DEA) has proposed that the Centre should share oil and gas profits with the state where blocks are located to get critical local support, government officials said.

The suggestion is based on Andhra Pradash's demand that it should have a share in output from Reliance Industries-operated KG-D6 block, off the Andhra coast. According to the current policies, a state does not get any share in profit from oil and gas resources located in its territory. States only get royalty on oil and gas output from on-land fields, but they do not get royalty for output from offshore fields. DEA, which is an important arm of the finance ministry, feels that Cabinet should consider incentivizing states while finalizing the proposed new auction regime, officials said. "In order to incentivize state-support the merit of mandating a minimum share of the production from to the 'home state' could be included in the final note, an official with direct knowledge of the matter said requesting anonymity.

DEA's view will be compiled along with views of other departments such as revenue and expenditure, before a final consolidated comment of the finance ministry would be presented, officials said.​


DEA suggests oil and gas profit sharing with home state


The department has also endorsed the revenue-sharing model, which is proposed by the oil ministry in a draft Cabinet note last month, officials said. The oil ministry had circulated the note on Dec 20 to various government departments for their comments before the Cabinet would consider scrapping the existing 'cost recovery' regime, which allows companies to recover their entire expenditure from proceeds of oil and gas fields before sharing the profit with the government. The proposed revenue-sharing model is based on the Rangarajan committee's recommendations and it allows the government to take its share of profit from the day one.

DEA has also expressed its reservation on the oil ministry's proposal to accept any bid which offers to share more than zero revenue with the government, officials said. "In order to pre-empt later allegations of collusion to allow 'windfall profits' in blocks with high likelihood of deposits, (DEA proposes) to impose a minimum revenue share in the bid document," a DEA source said.

ET first reported about the oil ministry circulating the draft Cabinet note to change the controversial cost recovery system on Jan 1. In the note, the oil ministry has admitted that the existing new exploration licensing round (Nelp) could achieve "limited success" and it has proposed a non-controversial model for the launch of the 10th auction round of blocks this year with extended tax holidays, zero royalty payment and longer contract tenure to attract investors. But, a recent report of Vijay Kelkar committee criticized the revenue sharing model as less investor friendly and endorsed the existing cost-recovery model as lucrative for investors.

Oil ministry officials said, the Kelkar committee's views would also be conveyed to the Cabinet, which would take a final call. A senior oil ministry official said the government wanted to abolish the controversial cost-recovery system to avoid disputes with explorers such as those with Reliance Industries over inflation of costs and allegations of gas hoarding that vitiated the investment climate. The government has so far auctioned 254 blocks under nine Nelp rounds since 1999, but commercial production could start in only three blocks and major gas discoveries were marred by litigation and controversy, officials added.
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