The Hindu Business Line : The New Exploration Licensing Policy

It is hoped that NELP V will witness increased participation from players. Here are a few last-minute pointers for bidders to arrive at a well-balanced work commitment programme.

THE new Exploration Licensing Policy - fifth round (NELP V) has so far received an enthusiastic response from both Indian and niche international players, due to the recent finds of oil and gas and the aggressive pursuit by the government of the much needed capital for exploration.

With May 31, the last date of putting in the bids, fast approaching, bidders are busy analysing geological and geophysical data and working on several options, to arrive at a well-balanced work commitment programme and for a fair share in the profit oil split and cost recoverability.

In this interplay of numbers, one of the challenges is to quantify the fiscal impact . In the following paragraphs, some of the fiscal considerations that need to factor in the bidding price are highlighted.

Service tax, with its ever increasing net and its wide application in the exploration/prospecting stage, is one item that could significantly influence the costing for procurement of services. At first glance it may appear to be a cost recoverable item.

However, if no oil is found, the whole amount would add on to the sunk cost and that at the rate of 10.2 per cent, that could be a substantial sum.

Similarly, the likely impact of fringe benefit tax also needs to be factored in. Next is the tax holiday accorded to exploration projects.

Related to this are two important issues — the definition of the term `undertaking' and the applicability of Minimum Alternate Tax (MAT) even during the seven-year tax holiday period. The bidder, given the business dynamics, needs to take a position on what could constitute `an undertaking' (one well, a certain set of wells with common production facilities, a block and so on) and the extent of tax holiday available for that position.

On MAT, though the introduction of credit dilutes the MAT impact; the restrictions in getting credit need to be appropriately factored, specifically to account for the timing difference. Finally, there is the issue relating to treatment of `unsuccessful exploration cost' in the absence of clarity in the Model Production Sharing Contract (PSC).

Specifically, for companies having interest in several acreages including producing field, it is advisable to discuss modification of Article 17.2.2 of the Model PSC to provide for determination of `unsuccessful' cost on an annual basis. A related modification would be to allow exploration costs to be set off against income from other businesses. This assumes specific importance for companies having other non-E&P source of incomes.

Given that the domestic tax laws provide for similar set off, the government may be open to such modifications.

These are some of the key points that prospective bidders should consider while bidding for the blocks being offered under NELP V.

The expectation from NELP V is high and one hopes that this round will not only witness increased participation from existing players but also be successful in attracting new players.

(The authors are senior tax professionals, Ernst & Young.)

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