Even as it fast-tracked the proposal to link domestically produced natural gas with international market discovered price from April next, the Petroleum and Natural Gas Ministry has been sitting on the recommendations of the Comptroller and Auditor-General and the Rangarajan panel for overhaul of the flawed Production Sharing Contracts (PSCs) that led to undue benefits and gain to private companies at the expense of the government exchequer.

In its 2011 report, tabled in Parliament, the CAG identified the flawed PSC structure for oil and gas as the prime reason for the failure of the Ministry and the Directorate-General of Hydrocarbons to protect the government’s financial interests, and called for a shift from the profit sharing to revenue sharing formula.

“The government has been very swift in moving ahead with the agenda to raise gas prices and almost double them. However, there is no movement on overhauling the PSCs and tame the oil and gas contractors as suggested by CAG and the Prime Minister-appointed panel. The files dealing with issue gather dust in the corridors of power,” a senior Petroleum Ministry official rued.

Soon after the CAG report was submitted, Prime Minister Manmohan Singh constituted the Rangarajan panel, which in its report early this year suggested sweeping changes in future oil and gas contracts and asked the government to move to a production-linked payment regime in which explorers will be required to bid for the government share of production after royalty.

With oil and gas firms terming the present cost recovery mechanism the root cause of all problems, the Rangarajan panel suggested sharing of the overall revenues of the contractor without setting off costs. The firm offering the maximum would win a block or area. The new contract system, according to the recommendations, would break the log-jam created by the existing model in which contractors are allowed to recover their entire investment before sharing profits from oil or gas production with the government. This system, the CAG said, encouraged operators to keep increasing cost so that government take was deferred.

“... the profit-sharing mechanism [linked to investment multiple] incorporated in the current PSC structure is unsuitable for protecting the government’s financial interests. In the vast majority of cases, there is virtually no chance of the government’s profit-sharing ratio reaching the highest slab, except in few cases at the fag end of the contract period when production is likely to show a declining trend,” the CAG said.

It recommended replacement of the profit-sharing formula based on IM [investment multiple] with a royalty formula based on either quantity or ad valorem with a sliding scale linked to different slabs of production of hydrocarbons.

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