Home ECONOMY ‘New oil, gas policy for small fields shifts risks to developers’

‘New oil, gas policy for small fields shifts risks to developers’


Mumbai, Sep 7:

The government approval last week of the marginal fields policy (MFP) for 69 oil and gas fields, proposing a revenue sharing mechanism and market prices for output, would shift the key risks to developers, India Ratings and Research (Ind Ra) said on Monday.


“Developers will need to consider an overall exploration, development and production (EDP) cost along with volume and price estimates, as these would be the key variables for ensuring a reasonable internal rate of return on the projects,” it said in a report.

Approving a landmark change in India’s hydrocarbons exploration regime, the Cabinet Committee on Economic Affairs (CCEA) on last Wednesday sanctioned the auction of 69 small and marginal oil fields of state-owned ONGC and Oil India to private and foreign firms.

Speaking to reporters after the cabinet meeting, Petroleum Minister Dharmendra Pradhan said that for the first time, a revenue-sharing model is being approved in place of production-sharing contract and for these 69 fields, the produce can be sold at the prevailing market rates by oil companies, while there will be no allocation constraints.

Ind Ra said on Monday that the new policy is also likely to result in simplifying the method to calculate the government’s share.

“This pre-supposes prudence on the part of developers while bidding as the biddable parameter is likely to be the revenue share of the government,” the agency said.

India Ra expects market-linked prices for this gas to be closer to the lower of the liquefied natural gas landed spot prices, with these alternatives being available to key end-user industries.

“Thus, market-linked price from these marginal gas fields could be in the range of 1.5 times-2 times of the current domestic gas price of $4.66/mbtu (million British thermal units),” it said.

Volume of off-take at these prices should not pose a challenge and the gas is likely to see demand from consumers in the fertiliser, refinery and city gas industries, the report said.

Noting that the methodology for the calculation of the government’s share of the hydrocarbons produced from these marginal fields has been shifted to the percentage share of gross revenue, Ind Ra said: “This is in stark contrast to the earlier production sharing contracts (PSC), which comprised two main elements-cost recovery and sharing of profits based on pre-tax investment multiple.”

“The prior methodology outlined in PSC meant lower risks for developers as it allowed them to first recover the costs incurred, followed by the sharing of profits with the government.”

Under the new bidding process, companies offering the maximum revenue share or percentage of oil and gas to the government will win the field.

Stressing that with this move, producers will be spared of day-to-day government interference in their production activities, Pradhan said the central government was unlocking 89 million tonnes of untapped hydrocarbon reserves worth Rs.70,000 crore.

“By revenue-sharing, the government’s income is protected with a minimum benchmark price, and profits over and above would come to us through revenue-sharing, royalty and taxes,” he said.

India Ratings said extant profit maximisation strategies often led to allegations of gold plating of such costs.

“Also, there were differences over gold plating of costs given that government’s share of profit was calculated post the recovery of costs incurred by developers on ED (exploration and ,
development),” said the Fitch group subsidiary.

State-run explorers Oil and Natural Gas Corporation (ONGC) and Oil India have surrendered 63 and six oil and gas fields, respectively, which they found uneconomical to develop in view of small reserve size and high economic cost. (IANS)