Introduction

According to BP statistical review of energy 2015, India is the fourth largest consumer of oil and gas. Therefore India is considered to be one of the major countries which determines the economic performance of the oil and gas industry. India is also an attractive Exploration and Production (E&P) location with considerable yet-to-find reserve potential (approximately 56 billion BOE). At the same time, India is the third largest importer of crude oil which justifies India’s increasing dependence on crude imports to meet the rising domestic demand.

Yet-to-find reserves

According to The Benchmarking Report of Boston Consulting Group (BCG), India’s yet-to-find reserve potential places it in the top 15 of the world. Production sharing contract is currently prevailing structure in the oil and gas industry which is said to be coined by the Indonesian government. India adopted this structure in 1991-92 and also introduced New Exploration and Licensing Policy (NELP) in 1997-1998. NELP basically provided an equal platform to NOCs and private sector companies in exploration and production of hydrocarbons.

In this article we will enlighten ourselves with

  1. The different petroleum fiscal regimes followed by various countries.
  1. How production sharing contract (PSC) and NELP works in India?
Different Petroleum Fiscal Systems

The petroleum fiscal system is classified into two main types; Concessionary system and contractual system. Contractual system is further divided in to production sharing contracts (PSC) and service contracts.

A concessionary system involves offering of an acreage to an operating company with duration of 50 to even 99 years. The concession is held by paying a signature bonus or a fixed amount of fee to the government and thereafter royalty and tax after production of hydrocarbons.

A contractual system involves a long-term fiscal framework between the host government and the operating company. After the commercial discovery is made, the operator is bound to share the production with the host government and also for cost recovery. The final fiscal conditions quoted in regulations vary significantly from country to country and depends on the risk associated with the discovery of oil and gas.

  • Under a concessionary system, ownership of hydrocarbons passes to the investor whereas in contractual system ownership is retained by the government.
  • Government’s administrative control is low in concessionary systems with respect to contractual system.
  • Operational control of the government is higher in contractual system as compared to involvement in the concessionary system.
  • Company entitlement is marginally higher in concessionary system (around 90%) on the other hand, in contractual system it is very low (typically 50%-60%).
NELP and PSC in context of India

The Government of India introduced NELP during 1997-98.  Under this scheme public and private sector companies were considered to be equal. The Directorate General of Hydrocarbons (DGH) acts as a nodal agency for implementation of NELP. From the adjoining graph extracted from the report published by the BCG, it is evident that there is significant increase in the reserves growth from the introduction of NELP. Before NELP, only 11% of sedimentary basins in India were under exploration but this number has significantly changed over the years. As 100% Foreign Direct Investment (FDI) is allowed in oil and gas sector in India, it also created a healthy competitive environment between NOCs and private and MNCs.

Indian fiscal regime is the classic combination of tax royalty and PSC term.

  • The contracts use an Investment Multiple to calculate the percentage of share between the government and the contractor company. The ratio of the cumulative revenue generated by the contractor to the cumulative expenditure determines the Investment multiple. It is nothing but the realization of taxable amount with respect to the money invested by the operator.
  • The royalty based on a fixed rate is paid by all PSC participants. There may be a royalty holiday depending upon the risk associated with the project (typically implied in deep-water projects).
  • The contractor can recover the cost after the commercial production starts. They are free to bid less than 100% in their application. This percentage varies from contracts to contracts.
  • Profit is shared between the government of India and the company based on the investment multiple. The contractor share varies from 80% to as low as 30%.
  • Income tax is payable at a particular rate decided by the government. It varies for each PSC participant depending upon their share. The taxable revenue is the contractor share remained after deduction of the government share.
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