Government may tweak oilfield profit-sharing formula

The government is considering changing profit-sharing mechanism for oilfield contracts before launching the next round of bidding for oil and gas blocks in line with the national auditor’s view that the current system gives private operators no incentive to cut capital expenditure.

“There are some reservations regarding profit-sharing mechanism. Investment Multiple principle also creates its own sets of problems… In future this formula can be fine tuned,” oil minister Jaipal Reddy said after the government signed 13 contracts with energy firms for blocks awarded under the ninth round of new exploration licensing policy ( Nelp-IX).

In September last year, the comptroller and auditor general (CAG) had strongly opposed the prevailing profit-sharing mechanism (also known as Investment Multiple or IM) as it provided “substantial incentive” to private contractors to increase capital expenditure at the beginning of the project.

In blocks auctioned so far under the Nelp regime, the contract is designed in a manner that reduces government share of profit if capital expenditure increases, according to the CAG. The Ashok Chawla committee on allocation of natural resources also made a similar observation.

Reddy ruled out any immediate possibility to offer oil and gas blocks under “open acreage” system that would allow firms to bid for blocks any time unlike Nelp, which is a periodic auction round. He said a national data repository was a precondition for shifting to the new auction system. “We want to go in for the tenth (Nelp) round as quickly as possible. Unless we have a national data repository, we can’t go in for open-acreage licensing,” Reddy added.

Reddy evaded the question of fuel price hike due to surging international crude oil prices, hovering around $125 a barrel. “Crude is at $125, which is a matter of concern. … FM ( Pranab Mukherjee) has spoken at length on this aspect, I don’t think I can add on this,” he said. Officials in the government ruled out any immediate hike in diesel, kerosene and cooking gas price till the finance bill was passed.

Senior executives of state refining firm say that want to raise petrol prices by at least Rs 5 a litre from next month, but would wait for informal nod from the oil ministry. The government decontrolled petrol prices in June 2010, but state firms raise the fuel price only after informal consultation with the government.

–ET

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