Revenue-sharing model to replace production contracts in new petroleum agreements

The Ministry of Petroleum and Natural Gas is plannig at replacing the controversial production sharing contracts (PSCs) with a revenue-sharing regime or production-linked contracts.

In a bid to attract more private and foreign players into the country’s exploration business, the ministry on Thursday floated a model revenue sharing contract (MRSC) on its website seeking comments from the industry on the same till September 10. The C Rangarajan committee had earlier suggested that the government should graduate to a revenue-sharing model.

A production-linked contract is said to be more transparent than the existing PSCs, where the contractor first recovers his expenditure before sharing profit with the government. This model was criticised by the comptroller and auditor general (CAG).

CAG had earlier said PSCs encouraged companies to raise cost so as to postpone a higher share of profits to the government. Under the MRSC regime, companies would have to indicate the quantity of oil and gas they would share with the government at different stages of production as well as at different rates.

The MRSC clarified that to calculate revenue “... under this contract, shall be undertaken by the contractor on an accrual basis irrespective of the date when such amount is either billed or received by the contractor; all amounts accrued in relation to petroleum produced and saved in a month (remaining after deducting royalty payments required to be made by the contractor, in the relevant month) shall be taken into account for determining the revenue; amounts attributable to ‘marketing margin’ (as and when determined and made applicable under applicable law) shall be taken into account towards determining the revenue; all amounts accruing from any monetisation of the petroleum in the reservoir, or any amounts received from any transaction relating to monetisation of the potential  of a contract area, shall also be taken into account towards determining the revenue...”

The contract also said the contractor shall, within certain (but not specified) days of execution of the contract, open and establish an escrow account with a bank acceptable to the government. “The government’s revenue share of crude oil and/or natural gas shall be determined based on a two dimensional production-price matrix, where government’s revenue share with the contractor(s) shall be linked to the average daily production in a month and average oil and gas prices in a month,” the MRSC said.

The government’s revenue share shall be determined separately for crude oil and natural gas in accordance with the production — price matrix by reference to the applicable price  band and production tranche.

The production levels for onland, shallow offshore and deepwater have been proposed at different tranches. Besides quoting the quantity they will share with the with government at different levels of production, the companies would also quote the quantum at different price levels — less than $100 per barrel, $100-125, $125-150 and more than $150 per barrel for oil and for gas in bands of less than $6 per million British thermal unit rate, $6-10, $10-14 and more than $14 per mmBtu.

Companies will have to bid the amount they will share with the government at different levels of production as well as different rates for oil and gas.

The contractor's share of revenue from petroleum produced and saved, shall be the amount of revenue for the relevant month remaining after deducting the government's revenue share (“contractor’s revenue share”), the contract said.

The contract also mentioned that if India attains self-sufficiency in natural gas and/or crude oil and condensate, during any year, the government shall advise the contractor accordingly by a written notice. In such an event, domestic sale obligation shall be suspended for such period as may be specified by the government, and the contractor/each member thereof (if any) shall have the right to lift and export its participating interest share of crude oil and condensate and/or natural gas during the said period, subject to any other extant policy guidelines of the government applicable from time to time.