New auction policy for coal, shale gas

Bids invited based on production-linked multiple; company quoting the highest multiple to become preferred bidder

Amid controversy surrounding the allocation of coal blocks to private companies, the Union Cabinet on Tuesday gave its approval for new allocation policies that would govern the auctioning of coal reserves and shale gas acreages in the future.

The Cabinet Committee on Economic Affairs (CCEA) approved a coal ministry proposal for competitive bidding of blocks under production-linked revenue-sharing method and a petroleum ministry proposal for allocation of shale gas reserves on nomination basis.

The methodology approved by the Prime Minister Manmohan Singh-headed panel would form the basis of allocation of 2.7 billion tonnes of coal reserves in 22 acreages to private companies, apart from shale deposits in 176 nomination blocks to state-owned firms, shortly.

“The methodology provides for production-linked payment on rupees a  tonne basis, plus a basic upfront payment equal to 10 per cent of the intrinsic value of the coal block,” said a coal ministry release. The intrinsic value would be derived from the average selling price of the past five years based on free on board (FoB) prices from published indices of Platts or Argus, providers of energy price assessments.

Under the approved policy, bids would be invited based on a production-linked multiple and a company quoting the highest multiple would become the preferred bidder.

The method minimises risks for the developer as against the upfront payment method.

However, for the power sector, where output prices are regulated, coal blocks would be available at a 90 per cent discount on the intrinsic value for tariff-based bidding. “This methodology would help in rationalising the power tariff,” the ministry said. The 90 per cent discount is in line with the power ministry’s recommendation.

The official release was silent on the contentious proposal of granting preliminary environment and forest clearances to the winning bidder before the commencement of mining operations. The environment ministry had been opposing the proposal arguing there is no extant policy to allow such approvals.

However, in order to ensure companies stick to timelines for development of blocks, the new policy provides for asking the companies to commit to a Minimum Works Program. “There would be development stage obligations for milestones such as getting mining lease and obtaining forest clearances. The bidder would have to give performance guarantee during the development period,” the release stated.

Petroleum minister M Veerappa Moily said the new shale gas allocation policy would allow allotment of shale reserves initially only to national oil companies on nomination. The move comes on the back of studies showing 176 blocks have shale deposits.

India is estimated to possess total shale gas reserves of 96 trillion cubic feet. Shale gas refers to natural gas that is found trapped within shale formations below the earth surface. The government is planning to put at least 100 blocks for bidding in the next level in Cambay (Khambhat), Krishna Godavari and Ranigunj.