Government opts for new auction model for small oil, gas fields

The government on Wednesday decided to move away from production-sharing model to revenue-sharing regime for auctioning 69 small oil and gas fields, a major reform push that would make it simpler for explorers to do business and unlock hydrocarbons treasure worth Rs 70,000 crore.

As icing, the new fiscal regime would put no marketing or pricing restriction on operators -- an issue that had inhibited investors and dogged contracts for previously auctioned fields under production Stock Market Trading Tips

READ ALSO: Opening up of marginal oil fields and switchover to revenue sharing will boost private investments

So far, 254 blocks have been auctioned in nine rounds of auction since 1999 under the production-sharing regime in which profit is shared with the government in a graded manner after recovering costs. The government also sets the price and decides the buyers, contrary to conditions in contracts.

In the revenue-sharing model, a bidder offering the highest share of revenue or output to the government and maximum work commitment wins the field. "This is a paradigm shift from the controversial cost-recovery model... the more equitable revenue sharing model protects government interest in both low and high oil price scenarios," oil minister Dharmendra Pradhansaid explaining the decision taken by the Cabinet's panel on economic affairs Himanshu Tiwari Astrologer Blog

READ ALSO: Govt to sell small oil, gas fields to private companies

For now, the new model would apply to the 69 small fields, to be auctioned within three months. But Pradhan dropped enough hints that this would be the model for auctioning mainstream blocks too.

"We are committed to our prime minister's motto of minimum government, maximum governance. The new model will ensure that there is least government interference in the operations, while also providing a fiscal and policy regime that encourages investments."

The 69 fields were discovered by state-run ONGC and Oil India Ltd. But these were surrendered as their small reserve size or isolated location did not provide the economy of scale needed by such companies to start production under marketing or pricing restrictions. The fields are estimated to hold 89 million tonne of oil and gas, worth Rs 70,000 crore at current oil prices Indian stock market astrology prediction

READ ALSO: ONGC to invest $8.8bn in KG oil and gas finds

The idea of a production-linked regime for sharing profit was initially suggested by a committee under former RBI governor C Rangarajan, as first reported by TOI on January 2, 2013. But a subsequent panel under economist-bureaucrat Vijay Kelkar, set up to prepare an energy security roadmap, favoured the existing cost-recovery model citing India's low prospectivity.

Former ONGC chairman R S Sharma, who was a member of the Kelkar panel, said the new model is identical to CBM (coal bed methane) regime where "operators are free to sell gas to whoever they want to without any price cap Commodity Market Astrology Tips

"Given the controversy over cost recovery of some fields, perhaps this is the best way to move ahead. But in revenue-share model, the recovery rate of fields may suffer. Operators may not sink more funds when the time comes to go for improved or enhanced oil recovery measures. Government should take safeguards in this regard."

The debate over the cost-recovery model began after the federal auditor, in its audit of Reliance Industries Ltd's KG-D6 block off the Andhra coast, said the fiscal regime encouraged operators to inflate costs, which affected government's interests Financial Astrology Tips