Finance minister P Chidambaram has reiterated the government’s resolve to move to a revenue-sharing mechanism for exploration and production of oil and natural gas. The move is in line with the recommendations of the C Rangarajan Committee, which was entrusted the task to review fiscal terms under the existing production-sharing contracts. The current practice of profit sharing allows contractors to recover costs before sharing revenue with the government and is likely to remain ‘controversial’, especially if cost escalation is high.
Procurement of materials and services by contractors from group companies is very common in the exploration sector, but this practice can easily attract transfer pricing charges if cost escalation is high (as was seen in the case of RIL’s KG-D6 block). Ascertaining facts in such cases is not easy, even as private contractors are not comfortable with the government audit of their accounts.
A shift to the new mechanism would enable the government to get a predetermined share of revenue from oil and gas production contracts. The share would depend on the level of oil and gas output and their sale price.
The government has also reaffirmed its commitment to further clarify the existing natural gas pricing policy. The PSCs provide for arm’s length pricing for gas production. But that is not easy to implement given the domestic market is still in nascent stage and there is a big difference between the prices of domestically produced gas and imported liquefied natural gas (LNG). Lack of supporting infrastructure like LNG terminals, storage and transportation pipelines further complicate the things.
The Budget has promised to come out with a policy on harnessing domestic shale gas reserves. But the industry, which was expecting some action, has been left disappointed.
The Budget has retained the income-tax exemption under Section 80(I)A to attract investment in the power sector. The tax sop was scheduled for March-end expiry, but has been extended by another year. Any power generation, transmission and distribution project that starts operations next fiscal would get the benefit. Even power plants undertaking renovation projects will be eligible for the sop if they resume operation in the year.