PSC is Passé, Revenue Sharing Model will come in force in E&P
Government is also going for Open Acreage system
Just to omit the ambiguity in the Oil and Gas exploration, the Government is all set to introduce improved model of Revenue Sharing Contract model (RSC) in place of the old and controversial Production Sharing Contract (PSC) that has led to various litigations between government and private sector explorers like Reliance. The Government is also planning to do away with the cumbersome bidding process under NELP and planning to introduce the open acreage system under Uniform Licensing Policy (ULP) that would ease the flow of investment into oil and gas exploration space. Minister of State (I/C) for Petroleum & Natural Gas Shri Dharmendra Pradhan informed the Rajya Sabha in a written reply that the Government is planning to introduce its Revenue Sharing Contract model soon.
Importantly, the PSC model had come under severe criticism by various quarters owing to an inherent lacuna consisting of inadequate incentives for the private operator to limit its cost. Fact of the matter is that under PSC, the company undertake all the cost for the exploration and development of the field and if oil comes from the well, company is allowed to recover the cost of exploration and development activity selling oil, known as “cost oil.” After recovery of cost, the profit will be divided among the company and government at an agreed percentage.
Some major issues in PSC are that it requires constant & micro monitoring by the government to protect the government’s stake leading to procedural delays and arbitrations and assessment of recoverable costs leads to dispute between the government and contractor. “Comptroller and Auditor-General (C&AG) has observed that the present PSC does not provide adequate incentives to private contractors to reduce capital expenditure so as to enhance the Investment Multiple,” the Minister said. Considering this RSC seems much more viable model for both government and company as it explains the sharing of revenue between both parties.
On the other hand, the government is also planning to introduce Open Acreage System for giving out exploration licenses. Unlike under NELP under this system a continuous process will be implemented for bidding for oil and gas blocks. For this system there would a national data depository (NDR) which will hold all the data about blocks. So investors don’t need to bid in a cyclical manner as under NELP but it can chose any time during the year, as to where they want to carry the exploration on the basis of data they find in NDR. Experts are of the opinion that this is quite a clear and advance process and will benefit the oil and gas sector of the country in a big way as more investments would come into this sector.