Production Sharing Contract v.

Revenue Sharing Contract: Sustainable Development Perspective

Project

For

Oil & Gas Law

TOPIC- “PRODUCTION SHARING CONTRACT V REVENUE SHARING CONTRACT: Which

is the best way forward for sustainable development of India?”
 Production Sharing Contract v. Revenue Sharing Contract: Sustainable Development Perspective

CONTENTS

S. no Chapterisation Pg no

1. Nuclear Liability: An introduction

2. Nuclear Liability Principles

3. International Framework

4. Civil liability for nuclear damage: Comparative

analysis of international treaties

5. US Framework

6. Comparative Study

7. Conclusion

8. Bibliography
 Production Sharing Contract v. Revenue Sharing Contract: Sustainable Development Perspective

PRODUCTION SHARING CONTRACT V REVENUE SHARING CONTRACT:

Which is the best way forward for sustainable development of India?

Introduction

New Exploration Licensing Policy (NELP) was formulated by the Government of India in 1997-98, to
provide a level playing field to both public and private sector companies in the exploration and
production of hydrocarbons. This has been a landmark event in the growth of the upstream Oil sector
in India. So far, GOI has concluded nine bidding rounds under NELP where 360 blocks were offered
and for 247 blocks Production sharing Contracts (PSCs) have been signed.

PSC is a contractual regime entered into by the GoI and the Contractor for the purpose of Exploration
& Production of hydrocarbon resources, viz. crude oil and natural gas where Contractor bears all
exploration risks, production and development costs in return for its stipulated share of production
resulting from these activities.

Some of the key issues that have arisen in respect of existing PSCs are as follows:

The existing formula on sharing profit petroleum is dependent on cost recovery by the Contractor.
Under this system, a close scrutiny of costs becomes critical for the Government since there is
incentive for contractors to book as costs expenses that do not reflect the true economic cost to the
contractor (e.g., through transfer pricing).

Decision-making with regards to contractual provisions is done by Management Committee (MC)

which consists of representatives of the Government & the Contractor. Proposals after the approval of
the Operating Committee (on which Government is not represented) are put up to the MC. These
proposals when deliberated in detail by Government representatives especially financial/ budget
proposals are often perceived as interference in commercial decision-making or micromanagement of
field operations by contractors. As a result decisions get delayed and execution under the contract is
hampered.

This system had come in for criticism from national auditor CAG and had asked the Petroleum
Ministry to carry out a comprehensive review of the PSCs to protect the interests of the Government.

RANGRAJAN COMMITTEE

Rangarajan Committee report on production sharing contract (PSC) (for E&P

blocks) mechanism and gas pricing was submitted in December 2012. Major
recommendations such as moving to revenue sharing model from current cost
recovery in order to reduce continuous cost monitoring by the government, setting
up of inter-ministerial committee for fast decision making, new gas pricing
formulae for linking domestic gas price with international gas prices were made.
 Production Sharing Contract v. Revenue Sharing Contract: Sustainable Development Perspective

Committee Formation

The Government of India constituted this committee under the chairpersonship of Dr C. Rangarajan,
Chairman, Economic Advisory Council to the Prime Minister, to

a) review and recommend adequate mechanism for domestic E&P blocks' PSCs; and
b) provide guidelines/formula to determine the domestic gas pricing.

Terms of reference for the Committee

1. Review existing PSCs, including the current profit-sharing mechanism, with Pre-Tax
Investment Multiple (PTIMi) as the base parameter.
2. Explore various contract models to minimize monitoring of contractor's expenditure
3. A suitable mechanism for managing the contract implementation of PSCs, which is being
handled at present by the representation of regulator/government nominee
4. Suitable governmental mechanisms to monitor and audit Government of India's share of profit
from petroleum.
5. Structure and elements of the guidelines to determine the basis or formula for price of
domestically produced gas

The committee has submitted its report in Dec’12 to the Prime Minister and made the following
recommendations given in Table 1.

Reference Recommendations

To scrap cost recovery model, and shift to post-royalty-

payment revenue-sharing (without setting off any costs).

Revenue share to be determined by competitive bidding for

1. Review of existing PSCs future PSCs.

Bids will be made in a bid matrix, in which the bidder will offer
different percentage revenue shares for different levels of
production and price levels. The bids will have to be progressive
with respect to both volume of production and price level.

MC not to be involved in budget approval/ procurement.

2. Exploring various contract Role of the Government nominees on the MC will be largely
models to minimize the related to monitoring and control of technical aspects. The
monitoring of expenditure functions pertaining to approval of annual budgets, audited
accounts and auditors will not be required.

Two mechanisms proposed for improving progress -

For policy related issues, setting up of an Inter-Ministerial

Committee to suggest policy solutions to MoP&NG

This Inter-Ministerial Committee may have representatives from

the MoP&NG, MoEF, Defence, Finance, and Law & Justice. For
issues pertaining to Coal-Bed Methane (CBM), a representative
from the Ministry of Coal may be co-opted
3. Mechanism for managing the
contract implementation of PSCs For issues on delay, mandate of existing Empowered
 Production Sharing Contract v. Revenue Sharing Contract: Sustainable Development Perspective

Committee of Secretaries (ECS) can be expanded.

ECS can be invested with powers to consider extension of other

timelines prescribed in the PSC. As the Ministries of Law and
Finance are represented on this committee, a comprehensive
government view can emerge. This arrangement can resolve the
anxieties of government staff dealing with the contract and ease
decision-making.

CAG to choose blocks for direct audit on basis of financial

materiality.

CAG-empanelled auditors to audit other blocks.

4. Monitor and audit Government of CAG to perform the audit within 2 years of the financial year
India’s share of under audit. Also, for PSCs beyond a high financial
Profit Petroleum threshold, a concurrent audit mechanism may be considered.

Issues currently being raised in audit would no longer arise under

the proposed fiscal regime for new PSCs. Apart from this, it has
been recommended that the list of blocks be periodically made
available to the CAG for selecting those that it would directly
audit.

To take trailing 12-month average of -

5. Determining the basis/formula for
domestically produced gas
a. volume-weighted net-back pricing at well-head for
gas producers and
b. volume weighted price of US's Henry Hub, UK's
NBP and Japan’s JCC linked price.
Based on the Rangarajan Committee gas price formula, analysts
are estimating gas price in the range of 6.5-8.5 USD /mmbtu with
an assumption of -
a. Qatar FOB1 pricing at March 2014 – Long Term (12.5
USD/mmbtu), Short Term ( 14 USD/mmbtu)
b. Henry Hub/NBP/JCC gas price is assumed at 4/7/10.5
USD/mmbtu

The suggested formula will apply to pricing decisions made in

future, and can be reviewed after five years when the possibility of
pricing based on direct gas-on-gas competition may be assessed.

Observation: If the recommendations are accepted by the

government, domestic producers will be benefited, as the price
based on the committee formulae will be more than current prices
which domestic producers are is getting in the country. However,
the price would be less than the international spot price of LNG
that private domestic producers has been asking.

1
Free on Board (or Freight on Board). This basically means that the cost of delivering the goods to the nearest
port is included but YOU, as the buyer, are responsible for the shipping from there and all other fees
associated with getting the goods to your country/address.
 Production Sharing Contract v. Revenue Sharing Contract: Sustainable Development Perspective

Advantages of RSC are as follows:

 Government need to audit only the production and revenue by the exploring company

 There is no need for micro-management or control over budget and expenditure of the
exploration company

 Hence, there is minimum regulatory burden and ease of doing business

 There is significant reduction in administrative discretion while granting greater freedom to

the operator.

NELP mechanism of profit-sharing was such where explorers first recovered their costs and then
shared profits with the Government of India. HELP introduces revenue-sharing mechanism which
replaced the profit sharing model under NELP. Where the government would not micro-manage
the costs incurred, and would instead concentrate on receiving a share of the gross revenue.
Revenue sharing will not be subject to cost recovery, monitoring will be simple, and the
government share will acquire immediately on production, unlike in cost-recovery, monitoring
will be simple, and the government share will accrue immediately on production