The Telegraph
Monday , December 17 , 2012
Since 1st March, 1999
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Bidding rules in oil & gas to change

New Delhi, Dec. 16 (PTI): The Prime Minister-appointed Rangarajan Committee may this week suggest sweeping changes in future oil and gas contracts by asking explorers to bid for a percentage of output they will share with the government.

Sources said the panel might ask the government to move to a production-linked payment regime where explorers would be required to bid for the government share of production after royalty. The firm offering the maximum would win a block or area.

The new contractual system will overcome the logjam created by the existing model based on the cost recovery mechanism, wherein explorers are first allowed to recover their entire investment before sharing profits from oil or gas production with the government.

This system had been criticised by the Comptroller and Auditor General (CAG), which said it encouraged operators to keep increasing cost to defer the government take.

Sources said the committee felt that in the existing production sharing contract system with liberal cost recovery provisions, the government take comes at a relatively later stage of production with the Centre bearing a major production of the “cost risks” during the project lifecycle.

In many cases with the creative use of costs and investments by the operators, the profit petroleum and associated economic rent to the government may be delayed, it felt adding in the new model this might be addressed since revenue-sharing of hydrocarbons would commence with the onset of production in the field.

The new model will also ensure the sharing of the economic rents by the government arising in the form of windfall profits in the event of a hydrocarbon price surge or a geological surprise by way of a huge find.

The panel was appointed to suggest changes in existing contracts with energy firms to minimise monitoring of expenditure, fix system to determine domestically produced natural gas price and modify existing profit-sharing mechanism, which, according to the CAG, favoured private firms.

Sources said the six-member committee, headed by Prime Minister’s economic advisory council chairman C. Rangarajan, was likely to present its report on oil and gas contracts as well as pricing of natural gas this week.