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A look at NELP- Part IV - Views on News from Equitymaster

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A look at NELP- Part IV

Feb 12, 2008

In the previous article we profiled the evaluation criteria for the bidders at the NELP VIIth round. In this article, we shall look at the salient contractual terms for the successful bidders. Production sharing contract The arrangement between the government of India and the company (contractor) is called a “production sharing contract” (PSC). As the government retains the ownership over reserves discovered, the PSC allows the contractor to recover exploration and development costs by retaining a portion of the production, known as “cost oil.” This portion can vary depending on oil prices. “Profit oil” is the amount of oil left after deducting royalties, taxes, and cost recovery. This is typically shared between the partners based on proportions agreed upon in the contract.

Typical contents of a PSC

  • Provisions relating to exploration phases, work programme and relinquishment of blocks.

  • Discovery and appraisal- Reporting and testing of discoveries, submission of appraisal programme and implementation.

  • Management committee (The oversight and decision making body)-Review and approval functions at different stages of the contract period.

  • Miscellaneous provisions covering production sharing, record keeping, data protection and dispute resolution matters.

Salient features of the model PSC for NELP VII

  • Up to 100% participation by foreign companies is allowed.
  • State participation is not mandatory.

  • The contractor will be eligible for an income tax holiday for 7 years from start of commercial production.

  • Imports required for petroleum operations will be exempt from customs duty.

  • The contractor will have the option to amortise exploration and drilling expenditures over a period of 10 years from the first commercial production.

  • Royalty for onland areas will be payable at the rate of 12.5% for crude oil and 10% for natural gas. For shallow water offshore areas, royalty will be at the rate of 10% for both crude oil and natural gas. For deepwater offshore areas, royalty will payable for both crude oil & natural gas at the rate of 5% for the first 7 years of commercial production and thereafter at the rate of 10%.

  • The contractor will have the freedom to market the oil and gas in the domestic market.

  • Accounting has been clarified to be on accrual rather than actual basis.

  • Provisions of gas utilisation policy and pricing at uniform prices to priority sector have been incorporated.

  • Process of price discovery of natural gas has been clarified in greater detail than before.

  • There is greater clarity over currency exchange issues.

This article concludes our series on the VIIth round of NELP.

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