New gas pricing model

The Centre on November 16 proposed to free natural gas pricing as well as replace the controversial Production Sharing Contract (PSC) with simpler revenue-sharing regime for all future field auctions.This acquires significance in view of the September decision of the government, as per the recommendation of

Dr C Rangarajan Committee, to allow pricing freedom for the auction of 69 small and marginal oil fields. A month later in October, the government okayed a new pricing formula for all domestically produced natural gas. As a result, rates rose by about 33 per cent to $5.61 per million British thermal unit from the long-standing price of $4.2.

Oil companies pleaded that current gas price makes new investments unviable. Under the PSC, a contractor first recovers expenditure before sharing his profit with the government. This model was criticised by the Comptroller and Auditor General (CAG) also. The

CAG observed that the PSC was allowing companies to raise costs so they can delay paying a higher share of profits to the government. Companies have to invest all capital, taking huge risks. Hence, profit margin is larger. Upon discovery of oil, they first recover all their expenses before working out a profit to be shared with the government. PSC objective is encourage more investments as India is yet to tap hydrocarbon resources of over 120 billion barrels.

It also suits the fund-starved governments. ONGC Videsh followed this model in its investments in Bangladesh and Vietnam. However, the CAG alleged gold-plating by the project awardees i.e., inflating of costs through overspending on the projects. Hence, the Rangarajan Committee’s recommendation to shift to revenue sharing model under the new oil and gas exploration policy.

Under the revenue-sharing contract, revenue will be shared between the government and the company from the first batch of production of the oil and gas itself. Not only chances of gold plating will be minimised under this model, the government will also get to earn any windfall due to price surge or a surprise geological find.

Also, all the sales revenues have to be kept in an escrow account which is a temporary account held by a third party. A disadvantage of the revenue-sharing model is said to be prospects of penalties on the explorer if the actual production varies from the forecast by 25 per cent.