Govt proposes to free gas pricing, start revenue sharing for exploration

New Delhi: With current rates considered too low to support exploration and production cost, the government today proposed to free natural gas pricing as well as to replace the controversial Production Sharing Contract (PSC) with simpler revenue-sharing regime for all future field auctions. [caption id=“attachment_2508356” align=“alignleft” width=“380”]  Reuters[/caption] In September, the government had allowed pricing freedom for the gas produced from 69 small and marginal fields it plans to auction shortly. “In the recently announced marginal field policy, the government has provided pricing and marketing freedom for the natural gas. On similar lines, it is proposed to provide pricing and marketing freedom for the natural gas to be produced from the areas to be awarded under the new contractual and fiscal regime in order to incentivise production from these areas,” the Oil Ministry said today. Seeking to revive interest in oil and gas exploration by simplifying rules, the ministry today invited comments from stakeholders on a consultation paper on new fiscal and contractual regime for award of hydrocarbon acreages. International players like BP and private operators including Reliance Industries as well as state-owned Oil and Natural Gas Corp (ONGC) have been seeking pricing freedom as the current rates make new investments unviable. The BJP-led government had in October last year approved a new pricing formula for all domestically produced natural gas. As a result, rates rose by about 33 percent to $5.61 per million British thermal unit for a period up to March 31 from the long-standing price of $4.2. The rates, on net calorific value (NCV) basis, dropped to $5.05 per mmBtu for six month period beginning April 1, 2015. From October 1 rates fell to $4.24. “Government of India has been reviewing policies from time to time for exploration activity and investment there in. Over the years, there has been a shift in the E&P policy, from nomination acreage to competitive bidding… Recently government has approved policy for auctioning of 69 marginal fields of ONGC/OIL. Government has attempted many reforms in the E&P management through this policy in tune with government’s goal of ’ease of doing business’,” the notice said. The ministry proposed a Uniform Licensing Policy that will allow exploitation of all forms of hydrocarbons - conventional oil and gas as well as unconventional shale oil and gas and coal-bed methane (CBM) under one permit. At present, conventional oil and gas exploration is covered by the New Exploration Licensing Policy (NELP) while CBM exploration and production is governed by a separate regime. There is no licensing regime for shale oil and gas. It also proposed Open Acreage Licensing Policy (OALP) allowing companies to choose the area for exploration rather than government identifying blocks and offering them in bid rounds. Importantly, it proposed to replace the present fiscal system of production sharing based on Pre-Tax Investment Multiple (PTIM) and cost recovery /production linked payment with a revenue sharing model. The new model will replace the current practice of companies getting blocks by bidding the maximum work programme and then recovering all of their investment before sharing profits with the government. This model was criticised by CAG, which said it encouraged companies to keep raising cost so as to postpone higher share of profits to the government. In the new regime, the companies will have to indicate the quantity of oil and gas they will share with the government at different stages of production as well as at different rates. This will protect government interest and minimise scrutiny and delays. “In this model it is proposed that the bidders will bid the percentage of revenue that they will share with the Government against two revenue scenarios i) when revenue is less than or equal to the Lower Revenue point and ii) when revenue is more than or equal to Higher Revenue point. “The percentage Government Revenue Share at revenue points falling between the lower and higher Revenue points will be interpolated on a linear scale. Revenue, net of royalty (as applicable) will be shared between the Contractor and the Central Government based on revenue accrued for oil and gas on a monthly basis,” the paper said.. The move towards market determined pricing is significant as lifting restrictions would help attract new investments. The recent cut in natural gas prices prevented energy explorers and producers from undertaking new capital expenditure, Standard & Poor’s Ratings Services said on October 1. “The gas price reduction will likely discourage capital expenditure in exploration and development of gas reserves in India, where most large finds are in deep water zones”. Moody’s had stated that the 18 per cent cut in natural gas prices will discourage further investments in exploring and developing new gas reserves. India relies on natural gas imports to meet its energy needs. Imports accounted for 36 per cent of the total natural gas consumption in India for fiscal 2015 and 39 per cent for the five months between April 1 and August 30, 2015. “Imports will continue to increase as low international gas prices stimulate demand for natural gas and low domestic prices discourage further investments by upstream players to explore and develop new gas reserves,” Moody’s had said. “When oil prices are low, upstream players cannot economically produce from difficult terrains such as deep water, where costs are substantially higher,” it further added. As per the new gas pricing formula approved in October 2014, the domestically produced natural gas price is revised every six months. Gas prices in India are determined by taking a volume-weighted annual average of the prices prevailing in Henry Hub (US), National Balancing Point (UK excluding Russia), Alberta (Canada) and Russia. Prices are calculated on the trailing 12-month data with a lag of one quarter. PTI