The C Rangarajan panel, which is likely to give its report on the licensing of oil and gas fields in a week, is expected to favour production-linked payment for profit-sharing between the government and oil explorers, replacing the existing system of linking it to investments.
Currently, producers can decide whether and how to recover their investments before starting to share profits with the state. “The new contractual provision is being proposed to overcome the difficulties in managing the existing model based on the pre- tax investment multiple methodology and cost recovery mechanism,” the report has said.
“However, existing production sharing contracts (PSCs) will continue with the current fiscal model, putting at rest contractors’ apprehensions regarding sanctity of contracts,” it added. The proposed framework will also be applicable for coal bed methane (CBM) contracts.
The panel also suggests that the government will be able to share the windfall profits in the event of a price surge or a geological surprise by way of huge hydrocarbon finds.
The Comptroller and Auditor General (CAG) has criticised the existing system as it allows an incentive to front-load capital expenditure and delay the government’s share of profits. The CAG had said that Reliance Industries’ increase in capital expenditure in the K G basin from $2.39 billion to $8.8 billion “casts doubts on the robustness of data and assumptions underlying the development plan.”
Sources also indicated that to encourage investment in exploration and production in rich deep-water blocks, the panel has proposed an income-tax holiday of 10 years from the current 7 years. In the last and ninth auction of fields under NELP, the government had said that taxation of profits from the blocks under auction will depend on the tax policy prevailing from time to time.
The Director General of Hydrocarbons (DGH), the upstream regulator, had also sought a change in the way the government is paid by explorers.