New Gas pricing policy : Natural gas price to be revised every six months based on rates in gas-surplus nations like US, Mexico, Canada and Russia.
Production Sharing vs Revenue Sharing
Both models have their own benefits and shortcomings.
In PSM companies first recover their investment and then the profit is shared between the govt and company based on pre agreed ratio. Thus the company is assured of the recovery of the investment made but simultaneously it should be ready for the intrusive inspection of balance sheets. This was the case of objection of Reliance KG D6.
In RSM from the first day of the production the company has to share the revenue based on the agreed ratio. The company is thus not assured of the return of investment as compared to PSM where it first recovers its investment. But here the inspection is less intrusive so the interest of company is secured.
Despite discovering many new fields, India could not increase oil and gas production. Examine the causes and measures taken by the government to address this problem. (200 Words)
Despite having huge potential of hydrocarbon and an equally pressing energy security need, India’s success in exploration and discovery of new fields is rather unsatisfactory. The main causes for this are:
- Production sharing model that have inherent incentive to hoard and artificially reduce production causes major fluctuation in output. For e.g. Reliance KG-D6 field controversy.
- CAG intrusive audits deter private developers as not only their malpractices but also they justified business interest may get exposed or leaked.
- Administered price mechanism, till recently, was causing huge under recovery thus effecting the profit and in turn the motivation to produce.
- Lack of finance, technology and managerial and technical ability on the part of government restrict its ability to develop fields on its own.
- Absence or dispute resolution and settlement mechanism further deters the private players.
Considering the dilapidated state of Hydrocarbon exploration and development affairs government appointed Rangarajan committee. On its recommendations government has taken multiple step to rekindle the sector. These measures are:
- Shift from PSM to revenue sharing model. This shift not only end the incentives to hoard or hold production but also encourages to continuously increase the production.
- A New unified exploration and production policy is being developed to club all explorations in a field under one licence rather than having different licences.
- Shift from administered price mechanism to market linked pricing to make the business profitable.
- Relaxation of custom duties for export of m/c for exploration and production.
With improved ease in doing business, less government interference and better facilitation due to the paradigm shift, India is at the cusp of a new hydrocarbon revolution that will change the fortunes of the nation in near future.
The revenue-sharing contract which seeks to replace the New Exploration Licensing Policy production-sharing contract regime for oil and gas exploration in India with a revenue-sharing model, reveals an attitude of extreme suspicion towards the private investor. Critically analyse. (200 Words)
Government has decided to move from the Production Sharing Contract in which the explorer recovers his expenditure first before sharing the profits with the government to Revenue Sharing Contract where the explorer shares revenue with the government from the first day itself. This was also suggested by Rangarajan Committee.
This step is being taken due to various criticism in the PSC method which includes:-
- Inflating the exploration expenditure added with under reporting of production to maximize the profits by the private sector that too for a longer time. Reliance was criticized on the same grounds for its exploration in KG Basin.
- Less revenues for the government.
- No continuous supply of oil and gas during the times of low oil prices.
- The method was also criticized by Ashok Chawla committee on pricing of natural resources of favoring the private sector at the cost of government. CAG report too highlighted about some irregularities.
Government adopting the RSC shows its inability to regulate/monitor the private companies accounts. Also making the private sector to put money in an escrow account under PSC shows the suspicion of the government towards the private sector and its intention to secure its revenues. But the government’s move overlooks its impact on the exploration by the private companies which will not have the motivation to take new projects because of the high risks and expenditure involved.
In a country like India where 2/3rd of the oil and gas blocks remains undiscovered/ underdeveloped moving to RSC is not a good idea as in such blocks PSC is preferred because of the high investment and risk involved. Instead government could have opted for the continuation of the older method along with strengthening regulations and monitoring over such projects and streamlining the blockades like red-tapism, weak contracts etc. in order to ensures adequate revenues along with continuous oil and gas supply.
Also Read Hydrocarbon Exploration Licensing Policy