Government notifies incentives to state-owned oil firms in pre-NELP blocks; new rule applies to 11 fields

The government has notified a new policy requiring state-owned Oil and Natural Gas Corp Ltd (ONGC) and Oil India Ltd (OIL) to pay royalty and cess tax only to the extent of their equity holding in certain pre-1999 oil and gas fields. The ‘Policy Framework for Streamlining the Working of Production Sharing Contracts in respect of Pre-NELP and NELP Blocks’ was notified in the Gazette of India on Tuesday. Till now, ONGC and OIL had to pay  a 100 percent royalty and a cess tax on 11 pre-New Exploration Licensing Policy (NELP) fields that were given to private firms prior to 1999. The government had awarded some discovered oil and gas fields to private firms in the 1990s with a view to attracting investments in the country. To incentivise such investments, the liability of payment of statutory levies like royalty and cess was put on state-owned firms, who were made licensees of the blocks. ONGC and Oil India Ltd were allowed right to back in or take an interest of 30-40 percent in the fields, but were liable to pay 100 percent of the statutory levies. [caption id=“attachment_4487107” align=“alignleft” width=“380”] Representational image. Reuters[/caption] The new rule, approved by the Cabinet last month, will apply to 11 fields like the Dholka field in Gujarat that is operated by Joshi Oil and Gas. It will also apply to the Hindustan Oil Exploration Company (HOEC)-operated PY-1 field in the Cauvery basin. “In pre-NELP exploration blocks, the National Oil Companies, as Licensee are liable for payment of royalty, cess and other statutory charges on entire production of oil and gas. “To facilitate further investments, the Government has decided that the contractors in pre-NELP exploration blocks will be allowed to share the liability of the statutory levies including royalty, cess and any other charges in proportion to their respective participating interests (PIs) in the block,” the notification said. All the constituents of the blocks would become licensees and payments made towards such statutory levies shall be eligible for cost recovery. It means that like capital and operating expense, the statutory levies can now be first recovered from the sale of hydrocarbons before sharing the profits with the government. These are the same conditions that ONGC had insisted upon in 2010 when Vedanta bought Cairn Energy Plc’s 70 percent stake in the prolific Barmer basin oil block in Rajasthan. ONGC, which held a 30 percent stake in the block, gave approval to the deal only when Vedanta agreed to pay a royalty and cess on its 70 percent share. Royalty for an on-land block is presently 20 percent. An equivalent amount of cess is also levied. Also, the notification extended the time period given to oil and gas companies to develop hydrocarbon blocks in the northeast. Production from these blocks will be linked to market prices of natural gas. It also extended tax benefits under Section 42 of Income Tax, 1961 prospectively to operational blocks under pre-NELP discovered fields for the extended period of the contract. Section 42 of Income Tax allows the companies to claim 100 per cent of expenditure incurred under a production sharing contract (PSC) as tax deductible for computing taxable income in the same year. While signing PSC of pre-NELP discovered fields, 13 contracts out of 28 contracts did not have provision for tax benefit under Section 42 of Income-tax Act. Now, this will bring uniformity and consistency in PSCs and provide an incentive to the contractor to make an additional investment during the extended period of PSC, it said. The approvals given are expected to help in ensuring the expeditious development of hydrocarbon resources.