REVENUE SHARING MODEL FOR OIL EXPLORATION IN INDIA

INTRODUCTION:-

 The government has initiated a new approach in the licensing and proceeds-sharing mechanisms with respect to the unutilized natural resources locked away in the 69 small and marginal oilfields lying with the state-owned exploration agencies.

Production Sharing Contract- 

Production sharing contract (PSC) framework allows for cost recovery by exploration and production (E&P) companies before they pay the government its share of revenue. It encouraged investors to take higher exploration risks, and in the event of success, the costs could be recovered.

According to this provision, the government had to audit the various costs incurred by the private companies, which often led to delays, disputes and loss of revenue for government and this promted gov. to  go for new Revenue sharing Model 

NEED

• The recent oil field discoveries could not be monetized for many years due to various reasons such as isolated locations, small size of reserves, high development costs, technological constraints, fiscal regime etc. 
• Around 70% of Indian basins remaining largely under-explored. Even response to the new exploration licensing policy (Nelp) has been tepid.

NEW PROVISIONS

 This policy is based on sharing revenue instead of profits and giving out unified licences for all
hydrocarbons in the field instead of a license for each.

 The move is consistent with the observation of the Comptroller and Auditor General (CAG) that the PSC “does not provide adequate incentives to private contractors to reduce capital expenditure”.

 Under the new regime, the Government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc.

 Another change that the policy brings about is that the license granted to the successful bidder will cover all hydrocarbons found in the field. Earlier, it was limited to one, and a separate license was required if any other hydrocarbon, such as gas, was discovered and exploited.

 The new policy for the marginal fields also allows the successful bidder to sell at the prevailing market price of gas, rather than at an administered price.

BENEFITS

 This is more transparent and market-oriented regime for hydrocarbon exploration and production.

 The revenue-sharing approach is simpler, and is likely to earn the government more money.

 Companies will be allowed to sell crude oil or natural gas at market prices, without any interference from the government. The revenue and royalty-sharing mechanism will be pegged at this market rate. If companies are forced to sell at below-market prices, then the government will still get a royalty share pegged at the market rate.

 If, however, the company manages to sell at higher-than-market prices, then the sharing mechanism will be pegged to this higher price. That’s a win-win for the government: less oversight and an assured minimum income.