Crude oil regulation

Crude oil regulation

Subject :Economy

Section: External Sector

Context:

The Union Cabinet on Wednesday allowed firms like ONGC and Vedanta to sell locally produced crude oil to any Indian refinery for turning it into fuel.

Impact:

• The companies can sell their crude oil to any private company in the domestic market along with government companies.
• Boost production of domestic crude oil given India’s domestic crude production has been on a consistent decline.

Concept:

• Despite being the third-largest consumer of oil, the nation depends on imports to meet 85% of its needs.
• While contracts for oilfields awarded since 1999 gave producers the freedom to sell oil, the government fixed buyers for crude produced from older fields, such as Mumbai High of ONGC and Ravva of Vedanta.
• The condition in the production sharing contracts (PSCs) to sell crude oil to the government or its nominee or government companies will accordingly be waived off.

Production Sharing Contract (PSC)

It is a term used in the Hydrocarbon industry and refers to an agreement between Contractor and Government whereby Contractor bears all exploration risks, production and development costs in return for its stipulated share of (profit from) production resulting from this effort. The costs incurred by the contractor are recoverable in case of commercial discovery. Thus, PSC is a fiscal regime existing in the exploration and production of hydrocarbons.  

Production Sharing Contracts became widely adopted as part of the New Exploration and Licensing Policy (NELP) launched by the Government in 1997 for enhanced exploration of oil and gas resources in the country.

The Production Sharing Contracts (PSCs) under NELP are based on the principle of “profit sharing”.  When a contractor discovers oil or gas, he is expected to share with the Government the profit from his venture, as per the percentage given in his bid.  Until a profit is made, no share is given to the Government, other than royalties and cesses.

Thus, in production sharing contract (PSC), Government’s take depends on biddable share of profit petroleum/ gas after allowing for cost recovery. In other words, PSC allows the contractor to recover his cost, before giving the Government its share in the contractor’s revenues, in case there is commercial discovery leading to production (Not all drilling leads to discovery of oil/gas). Thus, a certain proportion of the balance revenues of the contractor are shared with the Government.

The PSC regime was changed with a revenue sharing contract model in 2016 through a Cabinet decision of the Government dated 10.03.2016.Government adopted a variant of the revenue sharing contract model on 10.03.2016 under the new fiscal regime for hydrocarbon exploration and production called, HELP or Hydrocarbon Exploration and Licensing Policy

Under the new regime, the Government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc. Bidders will be required to quote revenue share in their bids and this will be a key parameter for selecting the winning bid.