Finance Ministry asks Petroleum Ministry to move inter-Ministerial note on revenue sharing formula for oil and gas sector.

The Finance Ministry has asked the Petroleum and Natural Gas Ministry to urgently formulate a proposal for inter-Ministerial consultations for moving to revenue sharing arrangement for the oil and gas sector from the present profit sharing contracts.

“The Ministry of Petroleum and Natural Gas is requested to urgently formulate a proposal on the recommendations of the Rangarajan Committee of moving to a revenue sharing arrangement with gas producers and circulate the same for inter-Ministerial consultations,’’ a recent note by the Finance Ministry said.

It may be recalled that the Finance Minister, P. Chidambaram had during his 2013 budget speech stated that oil and gas exploration contracts will now be awarded on a revenue-sharing basis, shifting from the current profit-sharing one. “A new oil and gas exploration policy will move from profit-sharing to revenue-sharing contracts,’’ he had stated in Parliament.

The Comptroller and Auditor General (CAG) in its report in 2012 had strongly pitched for shifting to revenue sharing formula for the oil and gas sector stating that the current Production Sharing Contracts (PSCs) provide for explorers to first recover all of their capital and operating expenditure from oil and gas revenues before sharing profits with the government under a specific formula. However, the gas producers have strongly opposed shifting to the new formula but the Finance Ministry is keen that the new formula should be adopted for offering oil and gas blocks under New Exploration Licensing Policy (NELP) round X expected early next year.

The CAG had in its report criticised the Petroleum Ministry and the Directorate-General of Hydrocarbons (DGH) for having failed to protect the government's financial interests and had called for complete structural changes in the present PSCs for the management of hydrocarbon exploration and production involving the private sector.

“The Petroleum Ministry is actively looking into the Rangarajan Committee recommendations on this issue and is expecting to complete the exercise shortly. The focus under the new regime will be on monitoring costs incurred by the company rather than increasing energy security,’’ a senior Petroleum Ministry official stated.

The Rangarajan committee had recommended a shift from the profit-sharing model, in which explorers are allowed to recover capital and operating costs before sharing profits with the government under a specific formula. Under the revenue- sharing model, there is no element of cost-recovery and the government and operator will share revenues according to a pre-determined formula. Developed economies, such as the US, Britain and Norway, adopt a revenue-sharing model.

Officials said the Finance Ministry was keen that the Petroleum Ministry wrap up the inter-Ministerial consultations at the earliest so that the exercise putting in place a new regime before the NELP X is completed by seeking the formal approval of the Cabinet at the earliest.

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