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Oil & gas auction policy shifts risks to developers: Ind-Ra

By Religare

The government's approval of the marginal fields policy (MFP) for 69 oil and gas fields, proposing market linked prices and a revenue sharing mechanism, would shift the key risks to developers says India Ratings and Research (Ind-Ra).

However, the agency maintained that this policy is also likely to result in the simplification of the method to calculate the government's share. This presupposes prudence on the part of developers while bidding as the biddable parameter is likely to be the revenue share of the government. Developers will need to consider an overall exploration, development and production (EDP) cost along with volume and price estimates, as these would be the key variables for ensuring a reasonable internal rate of return on the projects.


Ind-Ra expects the market linked prices for such gas to be closer to the lower of the spot or term liquefied natural gas landed prices, as these would be the alternatives available with key end-user industries. Thus, market-linked price from these marginal gas fields could be in the range of 1.5x-2.0x of the current domestic gas price of USD4.66/mmbtu.

In a significant move, the methodology for the calculation of the government's share from the hydrocarbons produced from these marginal fields has been shifted to the percentage share of gross revenue. This is in stark contrast to the earlier production sharing contracts (PSC) which comprised two main elements, cost recovery and sharing of profits based on pre-tax investment multiple.

The new methodology, though simplifies the basis of calculation of government's share, would place a greater risk on developers as they would need to estimate three key variables in advance before placing a bid a) EDP costs b) quantum of hydrocarbon extractable and c) market prices.

Generally, revenue sharing contracts have been more amenable for businesses where upfront costs and output are fairly ascertainable. However, in case of hydrocarbon discovery both costs and output are not ascertainable completely and the success of the exploration activity itself is a low probability event. Thus, there might be situations where in developers could incur higher-than-expected EDP costs and thereafter the need to share a percent of the revenue with the government could lead to a longer payback or breakeven period, thus depressing project returns.


Additionally, the nuances with respect to the percentage sharing methodology whether it would be a fixed percentage over the life of the block or would be a sliding scale dependent on gross revenue and cost incurred by the developer remain to be seen and would determine developers' interest in the same.

Story first published: Monday, September 7, 2015, 23:00 [IST]
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