Friday, 5 June 2020

Big Bang Reforms

Updated: March 23, 2016 1:24 pm

The Modi government scripted a new chapter by unveiling a series of initiatives last week so as to infuse vigour into the petroleum and hydrocarbon sector. The Union Cabinet and the Cabinet Committee on Economic Affairs approved the Hydrocarbon Exploration and Licensing Policy (HELP). The present policy regime for exploration and production of oil and gas, known as New Exploration Licensing Policy (NELP), has been in existence for 18 years. Over the years, various problems and issues have arisen. Presently, there are separate policies and licenses for different hydrocarbons. There are separate policy regimes for conventional oil and gas, coal-bed methane, shale oil and gas and gas hydrates. Different fiscal terms are also in force for allocation of acreages for exploration for different hydrocarbons. In practice, there is overlapping of resources between different contracts. But HELP will enhance domestic oil & gas production, bring substantial investment in the sector and generate sizable employment. The policy is also aimed at enhancing transparency and reducing administrative discretion. The uniform licence will enable the contractor to explore conventional as well as unconventional oil and gas resources including CBM, shale gas/oil, tight gas and gas hydrates under a single license. The concept of Open Acreage Policy will enable E&P companies choose the blocks from the designated area. Present fiscal system of production sharing based on investment multiple and cost recovery /production linked payment will be replaced by an easy to administer revenue sharing model. The earlier contracts were based on the concept of profit sharing where profits are shared between the government and the contractor after recovery of cost. Under the profit sharing methodology, it became necessary for the government to scrutinise cost details of private participants and this led to many delays and disputes. 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. This is in tune with government’s policy of “Ease of Doing Business”. What is more, recognising the higher risks and costs involved in exploration and production from offshore areas, lower royalty rates for such areas have been provided as compared to NELP royalty rates to encourage exploration and production. Here it is worth mentioning that the country currently faces a situation where oil and gas constitutes a major and increasing share of total imports. Oil production has stagnated while gas production has declined. There is a need for concerted policy measures to stimulate domestic production. Against this backdrop, HELP will put the gas and oil sector on growth trajectory.

The other key policy adopted is grant of extension to the production sharing contracts (PSC) for small and medium sized discovered fields. The government share of profit petroleum during the extended period of contract shall be 10 per cent higher for both small and medium sized fields, than the share as calculated using the normal PSC provisions in any year during the extended period and hence will vary from year to year based on Investment Multiple (IM) /Post Tax Rate of Return (PTRR). For many of these fields the recoverable reserves are not likely to be produced within the remaining duration of contract. Further, in certain fields where additional recovery of hydrocarbons can be obtained only through capital intensive enhanced oil recovery/improved oil recovery (EOR/IOR) projects, the payback period would extend beyond the current duration of the contract. A uniform and transparent policy for extension of the remaining reserves is required to be put in place to enable the contractors to take investment decisions for exploitation of the remaining reserves. It is expected to expedite decision making, enable timely planning by the contractors, and lead to increased oil and gas production. The policy for PSC extension will lead to production of hydrocarbons beyond the present term of PSC. The reserves which are likely to get monetized during the extended period are of the order of 15.7 MMT of oil and 20.6 MMT of oil equivalent of gas. The reserves associated with this field would lead to monetization of reserves worth USD 8.25 billion (around 53,000 crore). The monetization of these reserves would require an additional investment of USD 3 to 4 billion. The extension of these contracts is expected to bring extra investments in the fields and would generate both direct (related to field operations) and indirect employment (related to service industry associated with these fields). Furthermore, the Cabinet Committee on Economic Affairs also approved Pradhan Mantri Ujjwala Yojana–a scheme for providing free LPG connections to women from BPL households. Under the scheme, Rs 8000 crore has been earmarked for providing five crore LPG connections to BPL households. The scheme provides a financial support of Rs 1600 for each LPG connection to the BPL households. This is the first time in the history of the country that the Ministry of Petroleum and Natural Gas would implement a welfare scheme benefitting crores of women belonging to the poorest households. Providing LPG connections to BPL households will ensure universal coverage of cooking gas in the country. This measure will empower women and protect their health. It will reduce drudgery and the time spent on cooking. It will also provide employment for rural youth in the supply chain of cooking gas. Hence, it cannot be gainsaid that this is what we call big bang reforms and one hopes there will be no lethargy in implementing these policies so that the economy could scale the new heights.

Deepak Kumar Rath

Deepak Kumar Rath

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