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DGH proposes tougher norms for extending oilfield contracts of private firms

DGH has proposed stringent norms for extending oilfield contracts of private firms, demanding they should raise the state's share of profit by 5%.

, ET Bureau|
Updated: Jan 10, 2014, 05.16 AM IST
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DGH has proposed stringent norms for extending oilfield contracts of private firms, demanding they should raise the state's share of profit by 5%
DGH has proposed stringent norms for extending oilfield contracts of private firms, demanding they should raise the state's share of profit by 5%
NEW DELHI: The Directorate General of Hydrocarbons (DGH) has proposed stringent norms for extending oilfield contracts of private firms, demanding they should raise the state's share of profit by 5%, they should not be prone to litigation and have a track record of excellent performance including meeting output targets.

This would have an immediate impact on at least three major oil and gas contracts involving Cairn India and BG Plc, and Reliance Industries at a later stage, government and industry officials said. Contracts for the Ravva and Rajasthan fields operated by Cairn and the Panna-Mukta and Tapti fields operated by BG will expire in the next five to six years. Reliance's contract for the controversial KG-D6 block, which has been embroiled in disputes, controversies and arbitration, will be due for renewal in 2025.

PROPOSALS HARSH, SAYS INDUSTRY

The government blames RIL for the drastic fall in output and has imposed a penalty, but Reliance has initiated arbitration, arguing that output fell because of geological reasons.

Oil industry executives said the DGH's proposals are harsh and anti-investment but government officials said some clauses of old contracts need to be revised in line with global practices. Both views will be considered when the government finalises its policy on extending oilfield contracts.
DGH proposes tougher norms for extending oilfield contracts of private firms
Executives of oil companies say they need to know well in advance about renewal of contracts to help them make investment decisions in these blocks. Cairn India, for istance, wants to invest $6 billion to boost output from India' largest onshore oilfield in Rajasthan, but extension of the contract is vital for the investment decision.

The government signs production sharing contracts with explorers for 20-25 years, which can be extended with or without fresh conditions. Industry executives say the proposed conditions are very harsh.

DGH, which advises the oil ministry on technical matters, has cautioned the government not to extend contractual terms of litigant companies with questionable track record and transfer the oil and gas fields from such operators to state-run explorers such as ONGC, said officials with direct knowledge of the matter.

The directorate said an energy firm must apply for extension at least two years before the expiry of the contract. The government should not entertain such applications if submitted more than five years in advance, it said.

It, however, fixed a timeline to convey the government's decision to the applicant. "The DGH will examine and convey its views to the oil ministry on the technical aspects within eight months of receipt of the application and the government will take a final call within four months as per the Cabinet approved extension policy," an official in the directorate said requesting anonymity.
 
According to DGH, the government must get commitments from companies that they would bear entire expenses of site restoration before extending their contracts. "There are some contracts where the site restoration clause is not explicit," the official said.

Energy firms criticised DGH's views as "harsh conditions". "These are old and ageing fields where more investments are required to extract remaining oil and gas. Such harsh conditions would deter investments," an executive working for a private energy firm said.

DGH officials said many contracts were signed more than 20 years ago and their several clauses need to be revised before extending licences. "This is a global practice. Nothing comes for free. Companies will seek extension only after assessing potential of the block," the official said. Oil ministry officials said DGH's views are important, but not final. "

A committee under AS&FA (additional secretary & financial advisor of the oil ministry) is preparing an extension policy, which will take a final view after consulting opinion of all stakeholders," a senior oil ministry official said, requesting anonymity.

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