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CII discusses report on PSC

Posted on Feb 09, 01:38PM | IBNS

Kolkata, Feb 8 : The Confederation of Indian Industry (CII) Friday stated that the existing Production Sharing Contract (PSC) Regime needs to continue for deepwater and geologically difficult areas and a clear 5 year roadmap for moving towards arms-length market determined gas pricing needs to be put in place, here.

The Chairman of Economic Advisory Council to the Indian Prime Minister, C. Rangarajan recently submitted the report of the committee for production sharing contract mechanism in the petroleum industry.

CII noted that the Rangarajan Committee Report on the PSC mechanism is a positive step as it recognizes many of the challenges faced by the Exploration and Production (E and P) Industry and emphasizes on the need for greater synergy between the Government and E and P companies thereby enhancing domestic production and incentivizing investment in this sector.

CII welcomed the report in principle but highlighted the Industry concerns particularly on the proposal to move to a revenue regime and on the proposed Gas Pricing formula suggested in the Report.

These concerns were also reiterated when a CII CEO's Delegation led by Vikram S Mehta called on Union Minster for Petroleum and Natural Gas Veerappa Moily, recently.

CII asserted that on the proposal to move to a revenue based regime, the industry is of the view that the proposed revenue sharing regime is out of sync with India's stage of E and P development and does not compensate investors for the high exploration and development risk.

Moreover, by removing the 'Cost Recovery', it treats all potential exploration and development of all discoveries at par insulated from risks and costs, which is not the case. Development of frontier and deep water areas are more challenging and costly (USD 50-100 million to drill a well) and private investors are unlikely to respond to a regime that has no downside protection for at least partial "risk-capital recovery" in frontier and deep water blocks, CII noted.

CII added, finally, the national objective of maximizing resource extraction is unlikely to be met in the proposed regime, unless further specific incentives are provided for marginal fields and difficult-to-access reserves.

CII recommended that the PSC regime should continue at least for deepwater and geologically/logistically difficult areas as the contractors will be somewhat protected via cost recovery in the case of successful exploration.

Auditing needs to be ensured to provide for transparency

CII said that while the report recognizes that India needs to move towards achieving market determined pricing under gas-on-gas competition in the next 5 years, there are some concerns on the gas pricing recommendations and formula proposed by the Committee.

The Confederation added that the proposed formula is not in line with the intent of the Production Sharing Contracts (PSCs) as it neither provides for an element of price discovery through competitive arms-length bidding nor provides import parity prices.

In effect, domestic Gas is discriminated vis-a-vis crude oil and the Committee's recommendations lead to a price which is at a 40-50 percent discount to import parity.

In addition, the proposed price setting mechanism is not driven by the realities of the demand supply dynamics of the Indian market, said CII.

The Confederation asserted, there is substantial linkage to the US which is a mature market and very different from the Indian market.

CII further asserted that the resultant price produced by the formula does not take into account the risks and cost of Exploration and Development in India and is unlikely to incentivize investment in existing discoveries and future explorations in technically challenged areas like deep water, High Pressure-High Temperature (HPHT) and frontier areas.

It is also complex and difficult to implement as it comprises too many variables with complex adjustments. Finally, there is no suggested roadmap to transition to gas-on-gas competition

CII also recommended the following:

Important to have a clear 5 year roadmap for moving towards arms-length market determined pricing . Transition to Indian LNG imports parity over the next 5 years.

Simplify the formula by using an arithmetic average of Henry Hub (HH), National balancing Point (NBP) and Asia LNG delivered prices to reflect market prices at different markets/HUBs - Americas, Europe/FSU and Asia.

Provision of additional premium for technologically challenging areas as these are only viable at higher prices.

Chairman, CII National Committee on Hydrocarbons, Vikram S Mehta said, "The Dr Rangarajan Committee report is a step in the right direction and has recognized the critical issues related to India's Energy Security."

Mehta added, "However the Industry has some concerns on some of the recommendations particularly on the proposal to move to a revenue regime from cost recovery and also on the proposed Gas Pricing formula suggested in the Report."

"We compliment the Committee for its clear recognition that Indian gas prices are significantly out of alignment with international pricing. Our key concern is that the proposed mechanism does not deliver a market price as promised in NELP and the PSC and is unlikely to incentivise investments in technically challenged areas and high risk exploration," said Co-Chair, CII National Committee on Hydrocarbons and Region President and Country Head (India), BP Group of Companies, Sashi Mukundan.

Mukundan added, "Ultimately, what is critically important is - over the next 5 years, to have a clear transition plan to either a free market pricing regime or to an LNG parity pricing in the absence of gas-on-gas competition."

CEO, Cairn India P. Elango said, "India offers significant opportunities for exploration and production companies. Intensive exploration can unlock significant value from 'yet to find' 133 billion barrels of prognosticated resources."

He added, "Internationally competitive fiscal terms can increase the exploration activities and reduce our nation's dependence on foreign oil."