Friday, 20 March 2015

OIL Production : Production sharing and Revenue sharing

Mechanism :-
  • Private company recover it’s total cost before handing to the government, after cost recovery profit will be shared by both private party and government as per the agreement.
Advantage:-
  • Gold Plating chances are minimised, which has produced huge controversy in case of KG D6 Basin recently.
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.
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 .
(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.)