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Cabinet approves new pricing policy for hard-to-reach, deep sea gas fields

The government approved the new formula for undeveloped gas discoveries.

March 10, 2016 11:00 pm | Updated December 04, 2021 10:54 pm IST

The Union Cabinet on Thursday approved a new pricing formula for gas discoveries made in difficult-to-access areas. The formula will be based on a weighted one-year average of prices of fuel oil, naptha and imported coal.

“Since the rate is not enough to incentivise exploration, the government approved the new price formula for undeveloped gas discoveries in deep-sea, ultra-deep sea and high-temperature, high-pressure areas using average of landed price of naphtha, fuel oil and liquefied natural gas (LNG),” Minister of Petroleum and Natural Gas Dharmendra Pradhan told reporters. The decision follows Finance Minister Arun Jaitley’s comments during his Budget speech about the government’s plans to incentivise gas production from deep-water, ultra deep-water,high-pressure and high-temperature areas.

“A proposal is under consideration for new discoveries and areas which are yet to commence production, first, to provide calibrated marketing freedom and second, to do so at a pre-determined ceiling price to be discovered on the principle of landed price of alternative fuels,” Mr Jaitley had said.“This will definitely be positive for upstream companies since the new pricing will be applicable to existing as well as future discoveries. This will lead to prices rising by about 70-80 per cent of their current levels and will enable companies to begin work on their new discoveries in these difficult areas,” K. Ravichandran, Senior Vice President and Co-Head, Corporate Sector Rating at ICRA told The Hindu .

The landed price-based ceiling will be calculated once in six months and applied prospectively for the next six months, Mr. Pradhan said.

The new price will apply to underdeveloped gas discoveries and not currently producing fields.

The Cabinet also approved the Hydrocarbon Exploration and Licensing Policy (HELP). The highlights of the new policy involve granting explorers a uniform license for exploration and production of all forms of hydrocarbons. The previous policy required a separate license for each type of hydrocarbon.

“Again, this is positive from the long-term perspective. It may not result in immediate benefits but will give flexibility to the companies and is in line with global trends,” Mr. Ravichandran said.

The new policy also incorporates an open acreage policy wherein exploration and production companies will be allowed to choose the blocks they want to use from the designated area. In addition, the policy moves towards an easier revenue-sharing mechanism from the current profit-sharing mechanism.

“The earlier contracts were based on the concept of profit-sharing where profits are shared between 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,” according to a statement from the government. “This revenue-sharing model is more controversial. A production-sharing contract will be better for Indian blocks since the risk level is higher. Now, right from day one companies will have to share revenue with the government, which will mean that they will have to start projects with a much higher amount of capex since earlier they had to share only after costs were incorporated,” Mr. Ravichandran explained.

Under this new policy, the government also extended the terms of production-sharing contracts for 28 small and marginal fields. The new contracts have been extended till the life of the assets. Notably, this decision did not include Cairn India’s fields in Rajasthan for which the company has been asking for a license extension for a while now.

The Cabinet approved the Pradhan Mantri Ujjwala Yojana , a scheme announced by Mr. Jaitley in the Budget, wherein free LPG connections will be provided to women from BPL households.

“Under the scheme, Rs.8,000 crore has been earmarked for providing five crore LPG connections to BPL households. The scheme provides a financial support of Rs. 1,600 for each LPG connection to the BPL households. The identification of eligible BPL families will be made in consultation with the state governments and the union territories,” according to the statement. The scheme would be implemented over three years.

The Cabinet also decided to award the medium-sized fields of Ratna and R-Series to ONGC. The fields, off the Mumbai coast, were previously awarded to Essar Oil but the contract could not be signed.

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