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Rangarajan panel favours new mechanism for profit sharing between government and oil explorers

The expert panel chaired by prime minister's Economic Advisory Council chairman C Rangarajan is in favour of a new simplified mechanism of sharing profits between the government and oil explorers.

, ET Bureau|
Updated: Oct 30, 2012, 06.32 AM IST
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NEW DELHI: The expert panel chaired by prime minister's Economic Advisory Council chairman C Rangarajan is in favour of a new simplified mechanism of sharing profits between the government and oil explorers in place of the controversial system in which companies recover their costs before sharing the income.

In a draft note, the committee, set up during the tenure of former oil minister Jaipal Reddy, has also recommended that the government should retain the power to approve gas prices. The existing system of cost-recovery has generated several controversies such as allegations of costs being inflated to reduce government's share of profit, delays in approvals and micromanagement of oil and gas fields by bureaucrats.

"In short, cost-recovery is going to remain a major bottleneck in the running production sharing contracts (PSC) and is mother of all current issues facing upstream hydrocarbon sector," the committee said in the draft note.

The committee's final report is expected this week. The oil ministry would take a view on the recommendations and send its proposal to Cabinet, officials said. However, private companies are strongly in favour of the current regime. They argue that the proposed system will deter investments. The officials, however, disagree.

In the present fiscal model of production sharing contract (PSC), the government's profit is sensitive to exploration, production, and development, service and administrative costs. The benefits of the proposed new system include: eliminating allegations of overstating costs; government to get its share of profit from the first day and faster clearances.

"The proposed fiscal model also addresses the issue of windfall profits to the contractor in case of price surge ... The government will also be able to share the windfall profits in the event of a price surge or geological surprise by way of a huge hydrocarbon find," it said.

"It may be seen that once the declaration of commerciality (DOC) has been made, any further investments by the contractor loads the existing discovery and reduces the government take. Thus, if the development costs and further exploration costs after DOC of hydrocarbons discovery are not monitored by the government, commercial interest of the government will take a hit," the draft note said.

The draft said due to sensitivity of government's take on all aspects of costs, the government representative, involved in management of oil and gas fields operated by private contractors, has to get involved in the nitty-gritty of day-to-day business operations of the contractor through examination and monitoring of budget, procurements, costs, allocation of costs and accounts by reviewing and approving them in the management committee (MC).

The note said that a change in the fiscal regime would end day-to-day monitoring of oil and gas fields by the government and would not require CAG to audit accounts of private firms. "There are many crucial cost-related functions vested in the MC which require timely approvals. As cost aspects are internal to the company, their monitoring and auditing required lengthy correspondences and interactions of the government and the contractor, thereby crippling the decision making process," the note said.

The oil ministry and the Director General of Hydrocarbons (DGH) had also favoured the proposed model where energy explorers would share profits with the government from the day they start production, instead of first recovering their expenditure before sharing profit.

Earlier this month, DGH Rajiv Nayan Choubey had said that in future, oil firms would have to pay the government an agreed amount depending on the level of output, not the investment in the exploration block. A production-linked payment (PLP) system would be more transparent and requires minimal bureaucratic intervention in routine exploration and development activities of private companies, he said.

"Cost recovery as a mechanism in PSC (production sharing contracts) is a difficult proposition. We think that in the prospective PSCs it should be replaced with production-linked payment," Choubey told reporters at the Petrotech conference.

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