Revenue sharing for marginal fields will increase operators' risks: ICRA

However, the revenue sharing model will allow greater transparency and lower room for government interference, says the ratings agency

The revenue sharing model of development to be used for the auction of 69 marginal oil and gas fields with Rs 77,000 crore worth of reserves will help address the national auditor's earlier concern over gold-plating of costs by operators but increase their risks, research and ratings agency ICRA has said.

"While the revenue-sharing model addresses the criticism of the Comptroller and Auditor General of India (CAG), it also increases the risks for the operators in terms of de-linking profit sharing from the recovery of capital expenditure incurred by the operator," ICRA has said in its latest report on the proposed auction of marginal fields.

However, the revenue sharing model will allow greater transparency and lower room for government interference. The new model also safeguards the government's interests in case of any windfall gains arising out of any quantum jump in production arising out of unexpected finds and steep hike in realisations, ICRA said.

The Union cabinet chaired by Prime Minister Narendra Modi earlier this month approved the Marginal Fields Policy laying the groundwork for the historic auction. Through this, India will auction 89 million tonne of precious hydrocarbon reserves -- earlier relinquished by state-run Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) as they were found to be commercially unviable -- to global firms.

The revenue-share model was criticized by the private sector at the proposal stage stating it will not encourage maximization of production and will misalign risk-reward structure. "Given that initial response, the private sector's appetite for investment in the upstream sector under this regime will be tested. In case the response to the auction is encouraging the government may adopt the model for future NELP rounds as well," ICRA said.

The winning bidders will be given a uniform licence to explore conventional and non-conventional sources of hydrocarbon including oil, gas, shale oil, shale gas and coal bed methane (CBM). According to the ratings agency, while the uniform licensing policy allows for exploitation of shale oil or gas and CBM, no material upside is expected in the foreseeable future from their production due to the challenges associated with the exploitation of these unconventional resources in Indian basins.

The new regime allows successful explorers to sell gas at market price with marketing freedom. Also, while royalty is payable as per the prevailing rates there would be no cess on crude oil production. Under the current regime, exploration is allowed only till the initial exploration phase but the new system allows exploration for the marginal blocks for the duration of the license period.

ICRA, however, noted there is lack of clarity on final contours of the clauses of the revenue sharing model -- whether the revenue share would be different at different production levels or the same across all production levels and, if the actual capex turns out to be much higher than envisaged initially, would there be any adjustments for revenue share subsequently.