India considering changes to production-sharing contract

By OGJ editors

The Indian government is considering changes to its production-sharing contract, including a new mechanism for determining the price of natural gas.

The possible changes appear in a report by a committee led by C. Rangarajan, chairman of the Economic Advisory Council to Prime Minister Manmohan Singh.

They emerge while the country reviews the allure of its fiscal terms for oil and gas investments on several fronts.

In a speech in March, M. Veerappa Moily, minister of petroleum and natural gas, said a government committee is conducting an assessment of the country’s hydrocarbon potential and exploring ways to reduce bureaucratic impediments to industry work (OGJ Online, Mar. 25, 2012).

Last year, government officials said the Directorate General of Hydrocarbons, part of the petroleum ministry, began work toward replacing bidding-round licensing with an open-acreage system (OGJ Online, Aug. 28, 2012).


Committee recommendations

The committee chaired by Rangarajan recommended:

Replacement of cost recovery with total revenue sharing determined by bids. The committee cited past disputes over contractor costs as a reason to change. Under the recommendation a bidder would offer different revenue shares for different levels of production and price.

Extension of a tax holiday for drilling in offshore blocks with water depths exceeding 1,500 m to 10 years from 7 years.

Extending the exploration term for frontier licenses in more than 400 m of water and licenses in ultradeep water (more than 1,500 m) to 10 years from 8 years.

Establishing government committees to address policy disputes and delays in exploration.

Making lists of blocks available to the Comptroller and Auditor General from which to select targets of audits. The focus would be on blocks in exploration and development phases, when costs are higher. CAG audits have triggered disputes over costs for recovery under current PSCs.

Determining natural gas prices under PSCs on the basis of international proxies. The Indian PSC calls for “arm’s-length” pricing, but lack of development of the domestic gas market makes that difficult. The recommendation is for pricing based on an average of producer netbacks for gas imported by India and netback values derived from prices at hubs in the US, UK, and Japan.

In a report to the Indian parliament of the committee’s recommendations, Panabaaka Lakshmi, minister of state for petroleum and natural gas, said current sales prices of natural gas in Indian PSCs now range from $2.67/MMbtu to $6.79/MMbtu.

Under the country’s administered price mechanism (APM), gas prices are $2.52-4.20/MMbtu, and non-APM gas prices are $4.20-5.25/MMbtu.




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