Thursday 3 September 2015

Auction of Small Oil Fields | Change in Revenue Sharing Model and Licensing Method

Why in news?

  • The government will auction 69 idle oil and gas fields of state-owned ONGC and Oil India to private firms on a new revenue sharing model, which will give the bidders pricing and marketing freedom. (basically PSUs were not producing, so were asked to surrender the fields so that at least others could start the production - hence the auction)
  • new approach in the licensing and proceeds-sharing mechanisms. 

What's the new method and its advantages?
  • The first step was to move from paradigm shift from the controversial production sharing contract (PSC) and cost recovery model to -----> a more equitable revenue sharing model that protects government interest in both low oil and high oil price scenarios
    • This may appear to be a technical difference, but the effect on the ground is likely to be huge. 
    • The profit-sharing approach meant the government had to look into with great details over the cost details of those undertaking the exploration, often leading to extended delays and disputes. 
      • The revenue-sharing approach is simpler, and is likely to earn the government more money. 
    • Under the new plan, companies will be allowed to sell crude oil or natural gas at market prices, without any interference from the government and with no restriction on who they sell the produce to. The revenue and royalty-sharing mechanism will be pegged at this market rate. If companies are forced to sell at below-market prices, then the government will still get a royalty share pegged at the market rate. If, however, the company manages to sell at higher-than-market prices, then the sharing mechanism will be pegged to this higher price. 
      • That’s a win-win for the government: less oversight and an assured minimum income.
    Source: The Times of India

  • The other welcome step has to do with the licensing method. 
    • At present, companies need a separate licence to exploit each of the different hydrocarbon resources in a given field. Under the new scheme, they will receive a unified licence for all hydrocarbons, including conventional ones such as oil and gas, and non-conventional ones such as shale oil and shale gas. 
      • This goes a long way in the government’s move towards enhancing the ease of doing business. 
  • Auction of oil fields --> Less oil import
  • 70,000 crore lying unutilised in these fields


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