Year that saw oil, gas production switch to revenue-sharing mode (2017 in Retrospect)

By Sarkaritel December 31, 2017 13:34

By Biswajit Choudhury (13:06) 

New Delhi, Dec 31  While the strategic petroleum sector, including oil and gas, continues to remain outside the new GST indirect tax regime that replaced a 70-year-old system, the industry did manage in 2017 to switch over to a new exploration regime that gives producers marketing and pricing freedom.

The petroleum industry has been pushing for its inclusion in the Goods and Services Tax (GST) structure so as not to be deprived of the benefits of input credit — a novel feature whereby goods and service providers get the benefit of input tax credit for the goods used, effectively making the real incidence of taxation lower than the headline rate.

The Centre is keen to bring under GST products like petrol and diesel that generate considerable reveue for the states, which they are loathe to surrender. Finance Minister Arun Jaitley provided this remarkable insight about the functioning of the Council that he heads.
“Everything has been achieved by consensus in the best spirit of cooperative federalism. There has been no politics, even from states which are controlled by opposition parties,” he told a gathering of industry leaders here.

During the course of the year on the other hand, India conducted its first auctions and, consequently, awarded the first licences for hydrocarbons exploration under a new revenue-sharing model, as opposed to the previous profit-sharing one, and the successful bidders had complete marketing and pricing freedom.

In the early part of the year, the government approved 31 contracts for exploration of small oil and gas contract areas under the Discovered Small Fields (DSF) Bid Round. As many as 46 contract areas designated for 67 discovered small fields across nine sedimentary basins were on offer, bids for which came in from majors like Cairn India and Hindustan Oil Exploration Co, along with from five smaller foreign firms.

The auction was held under the new Hydrocarbon Exploration and Licensing Policy (HELP) approved last year to replace the controversial production-sharing contracts (PSC) that had governed the bidding in nine earlier New Exploration Licensing Policy (NELP) rounds.

The PSC regime, which allows operators to recover all investments made from sale of oil and gas before profits are shared with the government, was criticised by India’s official auditor, who said it encouraged companies to keep inflating costs to postpone the sharing of profits.

The Open Acreage Licensing Policy (OALP) launched by the government in July allowed oil and gas companies to select exploration blocks on their own, without waiting for a formal bid round from the government. It replaced the old system of the government carving out areas for bidding them out.

As a necessary complement to the OALP, the country’s first national data repository (NDR) was also launched which allows explorers to access seismic data on the sedimentary basin before making their bids.

As many as 51 proposals seeking around 60,000 sq km of area for oil and gas exploration have been bid for in the maiden auction under the OALP, bidding for which is slated to be held twice a year.

“In the new model, the government will not micromanage, micro monitor with producers. Government will only share revenue,” Petroleum Minister Dharmendra Pradhan said while announcing the OALP. The bidder offering the maximum share of oil or gas produced from the selected area would be awarded the block.

India’s domestic crude oil production of 36.95 million tonnes in 2015-16 barely met 20 per cent of its oil needs. Natural gas output at 32.249 billion cubic metres meets less than half of its needs.

The reforms in the sector in a bid to raise output comes in the current difficult context for the global oil industry caused by crude prices falling sharply from the highs of over $120 a barrel that prevailed two years ago.

Which leads to the other story of the year, whereby oil regained the $60 a barrel level, from lows of around $25, after the Organisation of the Petroleum Exporting Countries (OPEC), along with non-OPEC producers, put in place output cuts from January 1 to counter the fall in prices caused by a supply glut.

With prices hardening, India’s oil imports during October shot up by 27.89 per cent to $9.29 billion, from $7.26 billion in the same month last year. It forced the government to cut excise duty on transport fuels by Rs 2 a litre after the petrol price had progressively risen to over Rs 79 per litre in Mumbai, recording the highest since the coming of the Modi government.

In the major corporate move of the year in the sector in June, Reliance Industries and British energy major BP annnouced the creation of a joint venture energy vertical to work across the entire value chain, involving investment of $6 billion, or Rs 40,000 crore. This would also develop their existing deep-water gas fields in India’s eastern offshore to bring to fresh production of one billion cubic feet per day by 2022.

By Sarkaritel December 31, 2017 13:34

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