Each discovery in oil block to be treated as separate cost centre
Govt may notify an E&P policy disallowing companies to deduct as expenses, exploration costs in areas where discoveries are under development
In a major revamp of oil and gas exploration, the government is likely to notify a policy disallowing companies to deduct as expenses, exploration costs in areas where earlier discoveries are under development or production. It is expected to create a regime whereby each discovery will be treated separately for the purpose.
Such “ring fencing” will be applicable once the companies seek separate approval from the oversight committee for each block to avail of the new dispensation that will allow exploration to be carried out simultaneously with production and development. The companies will, however, continue to be bound by the production sharing contracts (PSCs) signed originally with the government, said a government official who did not want to be identified.
The policy will be circulated among other ministries for their comments before it is put up for the approval of Cabinet Committee on Economic Affairs (CCEA). The ministry of petroleum and natural gas has drafted the policy based on the recommendations of the directorate general of hydrocarbons, the regulator for oil and gas production in the country.
The current dispensation does not make any distinction among exploration, development and production costs in a block when it comes to calculating government share in oil and gas produced from a block. “A block is taken as a whole when cost deductions are made at the end of each year,” said a senior executive in one of the major oil producing companies. Oil companies pass through broadly three phases. They first explore a block to establish a discovery, move to do development and then production from that area.
Though the proposed cost recovery norm is being criticized by oil companies, the draft norm on extension of lease for a block could work to their favour. In the case of ring fenced discoveries under this policy where techno-economic viability is possible after extension of the lease period, the oversight committee would be empowered to approve such an extension.
The draft policy also proposes that in cases where production from different ring-fenced reservoirs happens through a single well, the contractor will be required to put a mechanism in place for separation in costs.
The PSC period is divided into phases. At the time of award of block, the joint venture commits a minimum work programme and has to complete it within a time frame. Once this phase is over, the explore portion of the block remains with the joint venture only if a discovery is made. The remaining area has to be relinquished in order to prevent squatting. “Everywhere in the world exploration continues to happen in the development area because it is not a very fine science. We want to explore more with the availability of more data,” he added. But with the proposed cost recovery structure, these companies will find themselves in a bind.