According to the Committee headed by Vijay Kelkar, production sharing contract regime is more suited for Indian conditions rather than the revenue-sharing model as recommended by Rangarajan panel and adopted by UPA government

An expert panel headed by Vijay Kelkar has recommended the current production sharing regime for oil and gas exploration over the revenue-sharing model that is being considered for the next round of auction.

The 10-member Committee, headed by former petroleum and finance secretary Kelkar, said the production sharing contract (PSC) regime was more suited for Indian conditions rather than the revenue-sharing model based on the Rangarajan panel which was adopted by the previous United Progressive Alliance (UPA) government.

Under the present regime, oil companies can recover all costs — of successful and unsuccessful wells — from sales of oil and gas before sharing profit with the government.

The Comptroller and Auditor General of India (CAG) had criticised this approach on grounds that it encourages companies to increase capital expenditure and delay the government’s share.

Last year, a panel headed by the then Prime Minister’s Economic Advisory Council Chairman C Rangarajan had suggested moving to a revenue-sharing regime that requires companies to state upfront the quantum of oil or gas they will share with the government from the first day of production.

The Kelkar Committee, which was formed last year to suggest ‘Roadmap for Reduction in Import Dependency in Hydrocarbon Sector by 2030’, in its final report said PSC model was more suited to attract investments.

“The Committee has reservations against accepting the ’biddable’ revenue sharing contract (RSC) model due to the inherently misaligned risk-return structure which leads either (i) to lower levels of production due to resultant reduced exploration efforts and lower recovery ratio, or (ii) to high windfall gains to operators encouraging contract instability due to political economy factors,” it said.

It suggested two fiscal regimes — PSC linked to investment multiple with modified contract administration including self-certification of costs by the contractors, or PSC with biddable supernormal profits tax.

For boosting local production of oil and gas, the Kelkar committee has suggested improving contract stability and administration as also maintaining contract stability and sanctity and prevent retrospective contract changes.

It also favoured contract extension for perpetuity or up to the end of the economic life of the asset and empowering boards of state-owned oil companies for approving equity participation in fields they had got from the government on nomination basis.

“Increasing oil production from existing mature fields would require access to advanced global expertise and technologies. Hence, the government should empower board of national oil companies to offer equity participation by foreign and domestic private companies with access to such technologies,” it said.