OIL Production : Production sharing VS Revenue sharing

 

Explained By: Suchak Patel  

Production sharing:-

Mechanism :-

  • Investment company will invest all capital and take huge risks. Profit margin is also larger.

  • Once, resources are found and developed such as oil fields, then company can recover all their capital and investments. Later, the profit oil or production is shared between government and company.

Advantages :-

  • It encourage the more production which is needed for Indian Economic growth. India remains one of the least explored countries and could hold large potential resources. There is still a significant ‘yet to find’ hydrocarbon resources of over 120 billion barrels.

  • It’s suitable for the counties like India which do not have advance technology or the Capital to invest in oil exploration activity which have no certainty related to the outcome. OVL invested in bangadesh and Vietnam under such model.

Disadvantage :-

  • Gold plating :- The IM ratio = Revenue /Investment decide the profit share between the Government and Private. Private companies show more investment on the records. This issue was also raised by CAG in its latest report in case of KGD6 basin controversy. It is observed that Reliance/BP are deliberately hoarding gas to sell it at higher prices on a future date. But Reliance/BP maintains that production has suffered due to unforeseeable complexities in the operation of the project and additional investment is required to restart the production from the field.

    Therefore, the Rangarajan Committee has recommended shift to Revenue Sharing in the new oil and gas exploration policy.

Revenue sharing

Mechanism :-

  • Here the revenue will be shared between the government and OGECs (OIl and GAS exploration companies) from the first batch of production of the oil and gas itself.

Advantage:-

  • Gold Plating chances are minimised, which has produced huge controversy in case of KG D6 Basin recently.
  • It will also safeguard the Government’s interest in case of a windfall arising from a price surge or a surprise geological find.

Disadvantage :-

  • Investing companies to receive all revenues only under an escrow account ( Detail in foot note) so that the government could protect its share of revenue, and in certain circumstances, restrict the contractors’ access to the account. The spirit of partnership and trust is completely missing.

  • Missing the importance of the uncertainty in Oil and gas :- draft provisions in the model contract, the contractor is expected to commit to a production profile and is liable to pay penalties if the actual production varies from the forecast by 25 per cent.

 

(The two members including current DHC of the kelker committee dissented due to Gold plating chances )

( An escrow account is a temporary pass through account held by a third party during the process of a transaction between two parties. This is a temporary account as it operates until the completion of a transaction process, which is implemented after all the conditions between the buyer and the seller are settled.)

 

Post By Mr. Suchak Patel (9 Posts)

A PG student of Transportation Engineering , Preparing For civil service, Ahmadabad !

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