Sector Update
Oil & Gas
Rangarajan committee report on the production sharing contract mechanism in petroleum industry was published yesterday. The salient features, recommendations and its impact on the Oil and Gas sector and the companies is as follows:
m Revenue sharing instead of cost recovery: It is proposed to dispense with cost recovery and pre-tax investment multiple mechanism to post-royalty-payment revenue sharing in future PSCs. Revenue sharing will differ for different levels of production and price levels. This will ensure that there is no ambiguity on the costs that are supposed to be recovered. Also, the delay due to costs being accepted by the management committee would be avoided thus hastening the overall development and production process. Also, it is recommended that contractors can be allowed to carry out further exploration throughout the mining lease (ML) period in the ML area.
Impact: Ambiguity over costs to be recovered under cost recovery would go away. Also the process of getting costs approved from the MC will not be needed hastening the process of exploration and development. It will expedite rapid development of the domestic E&P segment.
m Extension of tax holiday and time frame for exploration: As exploration and production in ultra deep water blocks (drilling depth of more than 1,500metres) is relatively expensive the committee has recommended an extension of the tax holiday from current 7 years to 10 years. Exploration time frame for deep water / ultra deep water blocks will be extended from current 8 years to 10 years.
Impact: Prospects of the blocks on eastern and western coastline are perceived to be high (yet risky due to high pressure/ temperature etc.). Hence, the committee recommended this extension to incentivize the E&P players for taking risks and explore the potential.
m Inter-ministerial committees to resolve contract issues: For policy related issues the committee has recommended the setting up of a secretary level inter-ministerial committee to resolve issues and for technical and approval related issues the committee has recommended the setting up of an empowered committee of secretaries.
Impact: As the committee will have representatives from ministries like MoPNG, Environment and Forests (MoEF), Defense, Finance and Law & Justice, the approval process for blocks will be speeded up.
m Audit: The committee has recommended that selected blocks be periodically audited by CAG while the rest by CAG-empanelled auditors. The committee has further recommended that CAG audit should be performed once in two years during the development phase.
Impact: Issues regarding CAG audits will not crop up in future.
m Gas price mechanism: The proposed gas price would be the price based on volume-weighted average of two prices. One component of pricing would be trailing 12-month volume-weighted average netback price of LNG. The second component would be volume-weighted price of US’ Henry Hub, UK’s NBP and Japan Custom Cleared LNG import price. The new price will be applicable for a period of five years.
Impact: If the new gas pricing formula is implemented, the domestic natural gas price would certainly move up from current US$4.2/mmbtu (for RIL KG D6 and APM gas) to about US$6.5-8.0/mmbtu thus benefitting gas producers with further investments in the sector.
m Impact on sector and stocks: We believe the policy recommendations would remove any ambiguities pertaining to the PSCs compared to the current fiscal regime of PSCs. Also, the purpose of the new recommendations is to expedite the E&P process with further investments which currently is delayed due to lack of clarity on fiscal terms, delay in approvals etc. Most importantly, the new gas pricing formula suggested by the committee would be applicable to all domestic natural gas producers and benefitting all upstream players. If the new formula is adopted, the current gas price of US$4.2/mmbtu (for RIL KG D6 and APM gas) will be revised upwards. Every single dollar increase in gas price will result in about 4-6% jump in earnings for RIL, ONGC and OIL. However, we need to wait and watch till the government discusses gas price with user industries like power and fertiliser and comes out with a price and the timeline of application.
Thanks & Regards,
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