Govt tweaks production sharing contracts mid-way, oil and gas reform hit

New Delhi: In a severe jolt to ambitious plans of reducing crude oil imports by 10 per cent by 2022 by enhancing indigenous production of petroleum products, the government has decided to change the terms of oil and gas contracts mid-way for higher earnings for itself while delaying cost recovery for oil companies.

The move invited immediate reactions from the industry with companies, including Cairn India, Reliance, BP, Focus Energy and Hindustan Oil Exploration Company (HOEC), delaying signing of work contracts for current year (FY19), putting investments worth billions of dollars on hold.

Sources said the management committee, which approves investment and work programmes for contractors of oil and gas blocks, has changed the terms of several existing production sharing contracts (PSCs) starting FY19. The changed terms have fixed a floor for government’s share of profit petroleum in running contracts, irrespective of the investment multiple -- the basis of sharing revenues from oil and gas blocks between the operators and the government.

Under the PSC regime, oil companies are allowed to recover their cost first before earnings from blocks is shared with the government. In this system, government’s share or profit petroleum is decided on the basis of pre-tax investment multiple (PTIM is the ratio of cumulative net cash income to the cumulative exploration and development cost).

So as the PTIM starts going up with increased cash generation and lower cost recovery, government’s share of profits also increases. “The industry has received a jolt (changed contract terms) for this year’s work programmes proposed for Cairn’s Ravva oil and gas field in Krishna Godavari basin and Reliance Industries (RIL) and partner BP oil and gas block at Gujarat’s Cambay basin. The expectation is that all other oil and gas contracts would be approved on similar terms. This would delay investments with few companies even dropping additional production plan,” said an industry source privy to the development.

Mails send to Cairn India remained unanswered while RIL could not be contacted. Sources, however, indicated that companies have already flagged the issue with the government and want immediate action. Government sources said they were studying the development. For Vedanta’s oil and gas vertical Cairn India, the fear is that changed terms would adversely impact its investment plan in Rajasthan’s Barmer block, country’s most prolific oil and gas field.
Cairn is planning to invest Rs 37,000 crore over next few years to ramp up crude production at its Barmer oil fields, where the company will achieve production target of 5 lakh barrels oil per day (BOPD).

What has peeved the industry is government’s double talk on attracting investments in the oil and gas sector. While on one hand big reforms has been carried through introduction of industry friendly open acreage licencing policy (OALP) and freedom of pricing and marketing for small and difficult fields, existing investors who have pumped in billions of dollars to enhance domestic production have been offered unattractive contract terms, which has also been changed mid-way.

“This will surely not help to attract companies to invest more in the sector. Government should not change the rules of the game mid way of a contract cycle. Already over 70 per vent of revenue from oil and gas fields flow to the government,” said an official of private sector oil and gas explorer.

At present, out of, 310 exploration blocks awarded so far under various bidding rounds (Discovered Field, Pre-NELP & NELP), 189 blocks/fields are operational.

All the operation blocks face the issue where annual work programmes could have to be reworked to provide higher profit petroleum to the Centre while increasing cost for companies reducing their margins. Interestingly, the government has already approved a policy for extending the term of Pre-NELP oil and gas production contracts (signed prior to 1999) in a bid to bolster energy security. The policy enables contractors to extract additional reserves from existing blocks. But they will have to pay a higher share of profits to the government during the extension period. The government’s share of profit petroleum during the extended period of contract would be 10 per cent than existing share applicable for these fields.