Government mulls policy change in petroleum costing

Government mulls policy change in petroleum costing

Last Updated: Thu, Sep 13, 2012 03:59 hrs

In a major revamp of oil and gas exploration, the government is likely to notify a policy disallowing companies from deducting as expenses all exploration costs in areas where earlier discoveries are under development or production. It is expected to create a regime whereby each discovery will be treated separately for the purpose.

The companies will, however, continue to be bound by the production-sharing contracts (PSCs) signed originally with the government, said an official who did not want to be identified.

The proposed policy will be circulated among other ministries for their comments before it is put up for the approval of the Cabinet Committee on Economic Affairs. The ministry of petroleum and natural gas has drafted the policy, based on the recommendations of the directorate general of hydrocarbons, the regulator for oil and gas production.

The current dispensation does not make any distinction among exploration, development and production costs in a block when it comes to calculating the government share in oil and gas produced from there. “A block is taken as a whole when cost deductions are made at the end of each year,” said a senior executive in one of the major oil producing companies. Oil companies pass through broadly three phases. They first explore a block to establish a discovery, move to do development and then production from that area.

Though the proposed cost recovery norm is being criticised by oil companies, the draft norm on extension of lease could work in their favour. In the case of ring-fenced discoveries under this policy, where techno-economic viability is possible after extension of the lease period, the oversight committee would be empowered to approve such an extension.

The draft policy also proposes that in cases where production from different ring-fenced reservoirs happens through a single well, the contractor will be required to put a mechanism in place for separation in costs.

The PSC period is divided into phases. At the time of award of a block, the joint venture commits a minimum work programme and this has to be completed within a time frame. Once this phase is over, the explored portion of the block remains with the joint venture only if a discovery is made. The remaining area has to be relinquished, to prevent ‘squatting’.

“Everywhere in the world, exploration continues to happen in the development area because it is not a very fine science. We want to explore more with the availability of more data,” said the official.

More from Sify: