Gov­ern­ment tweaks pro­duc­tion shar­ing con­tracts mid-way, oil & gas re­form hit

Com­pa­nies put in­vest­ments worth bil­lions of dol­lars on hold

Financial Chronicle - - FRONT PAGE - SUB­HASH NARAYAN

IN a se­vere jolt to am­bi­tious plans of re­duc­ing crude oil im­ports by 10 per cent by 2022 by en­hanc­ing indige­nous pro­duc­tion of petroleum prod­ucts, the gov­ern­ment has de­cided to change the terms of oil and gas con­tracts mid-way for higher earn­ings for it­self while de­lay­ing cost re­cov­ery for oil com­pa­nies.

The move in­vited im­me­di­ate re­ac­tions from the in­dus­try with com­pa­nies, in­clud­ing Cairn In­dia, Reliance, BP, Fo­cus En­ergy and Hin­dus­tan Oil Ex­plo­ration Com­pany (HOEC), de­lay­ing sign­ing of work con­tracts for cur­rent year (FY19), putting in­vest­ments worth bil­lions of dol­lars on hold.

Sources said the man­age­ment com­mit­tee, which ap­proves in­vest­ment and work pro­grammes for con­trac­tors of oil and gas blocks, has changed the terms of sev­eral ex­ist­ing pro­duc­tion shar­ing con­tracts (PSCs) start­ing FY19. The changed terms have fixed a floor for gov­ern­ment’s share of profit petroleum in run­ning con­tracts, ir­re­spec­tive of the in­vest­ment mul­ti­ple -- the ba­sis of shar­ing rev­enues from oil and gas blocks be­tween the op­er­a­tors and the gov­ern­ment.

Un­der the PSC regime, oil com­pa­nies are al­lowed to re­cover their cost first be­fore earn­ings from blocks is shared with the gov­ern­ment. In this sys­tem, gov­ern­ment’s share or profit petroleum is de­cided on the ba­sis of pre-tax in­vest­ment mul­ti­ple (PTIM is the ra­tio of cu­mu­la­tive net cash in­come to the cu­mu­la­tive ex­plo­ration and de­vel­op­ment cost).

So as the PTIM starts go­ing up with in­creased cash gen­er­a­tion and lower cost re­cov­ery, gov­ern­ment’s share of prof­its also in­creases. “The in­dus­try has re­ceived a jolt (changed con­tract terms) for this year’s work pro­grammes pro­posed for Cairn’s Ravva oil and gas field in Kr­ishna Go­davari basin and Reliance In­dus­tries (RIL) and part­ner BP oil and gas block at Gu­jarat’s Cam­bay basin. The ex­pec­ta­tion is that all other oil and gas con­tracts would be ap­proved on sim­i­lar terms. This would de­lay in­vest­ments with few com­pa­nies even drop­ping ad­di­tional pro­duc­tion plan,” said an in­dus­try source privy to the de­vel­op­ment.

Mails send to Cairn In­dia re­mained unan­swered while RIL could not be con­tacted. Sources, how­ever, in­di­cated that com­pa­nies have al­ready flagged the is­sue with the gov­ern­ment and want im­me­di­ate ac­tion. Gov­ern­ment sources said they were study­ing the de­vel­op­ment. For Vedanta’s oil and gas ver­ti­cal Cairn In­dia, the fear is that changed terms would ad­versely im­pact its in­vest­ment plan in Ra­jasthan’s Barmer block, coun­try’s most pro­lific oil and gas field.

Cairn is plan­ning to in­vest `37,000 crore over next few years to ramp up crude pro­duc­tion at its Barmer oil fields, where the com­pany will achieve pro­duc­tion tar­get of 5 lakh bar­rels oil per day (BOPD).

What has peeved the in­dus­try is gov­ern­ment’s dou­ble talk on at­tract­ing in­vest­ments in the oil and gas sec­tor. While on one hand big re­forms has been car­ried through in­tro­duc­tion of in­dus­try friendly open acreage li­cenc­ing pol­icy (OALP) and free­dom of pric­ing and mar­ket­ing for small and dif­fi­cult fields, ex­ist­ing in­vestors who have pumped in bil­lions of dol­lars to en­hance do­mes­tic pro­duc­tion have been of­fered unattrac­tive con­tract terms, which has also been changed mid-way.

“This will surely not help to at­tract com­pa­nies to in­vest more in the sec­tor. Gov­ern­ment should not change the rules of the game mid way of a con­tract cy­cle. Al­ready over 70 per vent of rev­enue from oil and gas fields flow to the gov­ern­ment,” said an of­fi­cial of pri­vate sec­tor oil and gas ex­plorer.

At present, out of, 310 ex­plo­ration blocks awarded so far un­der var­i­ous bid­ding rounds (Dis­cov­ered Field, Pre-NELP & NELP), 189 blocks/fields are op­er­a­tional.

All the op­er­a­tion blocks face the is­sue where an­nual work pro­grammes could have to be re­worked to pro­vide higher profit petroleum to the Cen­tre while in­creas­ing cost for com­pa­nies re­duc­ing their mar­gins. In­ter­est­ingly, the gov­ern­ment has al­ready ap­proved a pol­icy for ex­tend­ing the term of PreNELP oil and gas pro­duc­tion con­tracts (signed prior to 1999) in a bid to bol­ster en­ergy se­cu­rity. The pol­icy en­ables con­trac­tors to ex­tract ad­di­tional re­serves from ex­ist­ing blocks. But they will have to pay a higher share of prof­its to the gov­ern­ment dur­ing the ex­ten­sion pe­riod. The gov­ern­ment’s share of profit petroleum dur­ing the ex­tended pe­riod of con­tract would be 10 per cent than ex­ist­ing share ap­pli­ca­ble for these fields.

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