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Economy Dec 17, 2012

Rangarajan panel proposes sweeping changes in oil and gas contracts

New Delhi: 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 would share with the government.

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

The panel was appointed to suggest changes in existing oil & gas exploration contracts with energy firms . Reuters

The new contractual system would 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 encourages operators to keep increasing cost so that government take is deferred.

Sources said the committee felt that in the existing Production Sharing Contract (PSC) system with liberal cost recovery provisions, the government take comes at a relatively later stage of production with the Government 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 may be addressed since revenue-sharing of hydrocarbons would commence with the onset of production in the field.

Also, the new model would ensure the sharing by the government of the economic rents 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 oil & gas exploration 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 national auditor, favoured private energy firms.

Sources said the six-member Committee, headed by Prime Minister's Economic Advisory Council Chairman C Rangarajan is likely to present its report on changes in the regime governing oil and gas exploration contracts as well as pricing of natural gas this week.

Sources said the committee will also suggest structure and basis for pricing of natural gas. The report would come at a time when Reliance Industries is locked in a bitter battle with the Oil Ministry on the price of gas that will apply when its present $4.2 per million British thermal unit rate for KG-D6 expires on March 31, 2014.

PTI


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