Whether the Rangarajan Committee is able to offer solace to companies in India’s oil and gas exploration and production (E&P) is yet to be seen. But, what the companies involved in the country’s hydrocarbons hunt seek is consistency in policy implementation.
More than the ‘Policy Regime’, the unexpected tinkering has proved a deterrent for upstream companies – both public and private – the industry players unanimously say.
The Contract
Though India offers one of the best production sharing contract (PSCs) regimes, the tampering bothers the industry and has kept many big players at bay. Critics say that the constant ‘nagging’ has also resulted in the existing players in the domestic scene to look overseas.
The Government in May constituted a committee headed by C. Rangarajan, Chairman Prime Minister’s Economic Advisory Council, to review the PSCs. The terms of reference included review of the existing PSCs – current profit sharing mechanism with the pre-tax investment multiples as the base parameters. The Committee was to also explore various contract models with a view to minimise the monitoring of expenditure of the contractor without compromising, firstly on hydrocarbon output across time and, secondly, on the Government’s stake.
Hydrocarbon Hunt
E&P is a long-term business, which requires fiscal stability to ensure reasonable returns and to encourage investments, an industry observer said.
While agreeing that the existing PSC regime is appropriate, the industry felt that multiple issues related to contract administration, which have cropped up over the past 4-5 years, need to be sorted out.
The recent past has seen instances of violation of contract sanctity and long delays in standard approvals. Incremental investment in additional projects becomes more difficult as returns come down and the fiscal outlook is uncertain, an oil company official said.
For example, recently the Government increased the cess on domestic crude oil production from Rs 2,500 to Rs 4,500 a tonne. This was applicable to producers who have got the blocks prior to New Exploration Licensing Policy (NELP). These include Cairn India’s premium Rajasthan fields. Production from NELP blocks is exempt from cess payment.
Cairn is the only private company which is paying cess as a contractor under a pre-NELP block. In other blocks where cess is applicable, mostly national oil companies are the licensees and have a lower rate of Rs 900 a tonne.
According to industry, before imposing any additional taxes or levies a due consultation should take place.
The Committee
Reports have said that Rangarajan Committee is in favour of simplified mechanism of sharing profits between the Government and the contractor.
The Directorate General of Hydrocarbons had reportedly advocated a production-linked payment system, where oil companies would have to pay the Government an agreed amount depending on the level of output, and not on the investment in the exploration block. In the present fiscal model, the contractor first recovers its expenditure before sharing profit.
The production linked payment is said to be more transparent and will have less intervention in routine exploration and development activities.
A senior official of an international oil major said, in the absence of a stable policy investors will seek other geographies with a better risk-reward balance.
“What is needed is to have a clear policy without unpredictable changes,” the official said.
In fact, the Association of Oil & Gas Operators (AOGO) in its submission before the Committee had said despite favourable global circumstances and persistent high oil prices, the E&P industry has failed to take off in India after the brief success in 2002- 05.
India’s production and reserves are virtually static, as the operational administration of PSCs seems to have lost sight, AOGO felt.