Production Sharing Vs Revenue Sharing; GoI persists with reforms sans meaningful debate as opposition fails to show a spark

of Brightness
By Amit Bhushan Date: 17th April 2013

Elections 2013/4 seem to be forcing incumbent candidates to continually up the ante. No one wants to be seen slow in what each one may evaluate as some of the last laps. However the people is question seem to be focused too much on the face for elections rather than on issues. No candidate seems to have a clue for issues that will click with voters as well as little knowledge of projecting themselves as the best guardians of peoples interest. Important economic issues are treated very lightly eve n as the candidates persist with agenda of self aggrandizement with complete disdain of public interest. The supporters, quasi-supporters, well wishers and political friends of leaders in opposition (however not in support of principal opposition) are collectively showing off their gross neglect for public in face of all important image building. The result is that a weak government dependent on outside support feels emboldened to take economic decisions with long term impact effectively keeping the so call leaders in place probably rightfully deserved by weaken, tiered and battle weary soldiers. The decision in question is about changing economic policy with reference oil/gas exploration. It intends to change the incentive system for explorers including those who are existing operators of oil/gas blocks (excepting PSUs). The modus operandi to push such a decision is to discuss proposed policy with domestic operators behind the scene and directly take it to offshore investors abroad. This can then be pushed through cabinet and then move ahead to sign new concessionaires with existing and one or two new operators. The political supporters of government would remain silent spectators with their varying level of understanding of the issues and will have their concessions for their support and principal opposition can be silenced by taking about their main concerns into account such as minimum government and maximum governance while making its decisions. Our rich and diverse polity thus shows all its weaknesses and its strength is reflected rarely; Financial Market Reforms and creation of SEBI being a notable exception. To move to the subject in question, on the face of it, the move of the government may seem innocuous however this can have repercussions on public and therefore one, on which the warriors should make themselves heard to people. The forums of Parliamentary sub-committee/select-committees and media could also be utilized and comments from experts heard for public consumption so that voting happen basis position of the candidates. However the media may not be able to find funds for such shows while the candidates may also have a disdain for public scrutiny. The decision involve change of incentive structure for a mineral i.e. oil and gas only and excludes other minerals including substitutes of oil & gas such as Coal. This is being done to attract investment for the sector but is certain to result in a bonanza for existing operators since their incentive structure is likely to be aligned with the new policy for a level playing field. The government has not shown any haste for a level playing field in case of other mineral which includes coal.

To analyze a bit further on the economics of such decision, currently different operators of exploration block have different incentive system. Some are on fixed price basis their investment while some others are on production sharing. Some others have a targeted/guaranteed profit margin model for fixing price of their output. PSUs are a different league following varied pay-off models as per agreement and convenience with government and this creates investor grievance since their private shareholders are left clueless about decisions/profitability over the long term. The proposed uniform incentive structure is supposed to liberalized pricing and customer selection for all exploration block operators while government is expected to get a revenue share towards royalty. The proportion of revenue share of the government will be arrived at via an open bid process. Prima facie it looks good as the operator will have incentive to efficiently run all his operations so that they can offer max. bid to secure blocks and make profits. The proposed scheme is a departure from the production sharing contract that was followed by the government earlier and is followed for most exploration projects internationally. What production sharing entails is instead of revenues, a proportion of production of oil/gas that is produced is share with the government or its agencies instead of sales revenues. It forces companies to optimize production efficiency so that it can offer max. bid to secure blocks and manage its operations with revenues from sales of its share of oil/gas. The production sharing entails government agencies to inventorize, transport and maximize sales revenue for government to generate max. revenues. The revenue sharing also fits the bill to qualify for Minimum government and maximum governance, but in theory. In practice what may be required in optimized government and wise/decisive interventions along with effective adminstration. Now how it changes the incentive for operators. The foremost question is how government will arrive at the share (revenue or production) for existing operators in a transparent manner. Would open bid be applied and how would government assure information availability for new operators who may want to bid for these fields under new arrangement. The other questions are regarding revenue sharing vs production sharing and what is good for India. Under revenue sharing in Indian circumstances, the operator can easily reduce official revenue and siphon off funds since they are free to sell to anybody including exports. The government officials under such system have very little knowledge of the highly technical processes involved at every stage. This would also bring down tax revenues for the government while common public will have little understanding due to complexity of the isssues which are kept under tight wraps. Under production sharing our lousy agencies are supposed to receive a share of production and manage all processes involved in its conversion of resources to revenues. This requires agencies to gain some expertise for effective market intervention. It may noted that despite the challenges most producer countries have opted for production sharing model over revenue sharing even for technologically backward countries. The expertise usually develops over a period of time and continuously rising energy prices have ensured economic viability of such agencies. This also has helped the countries progressively improve their operating models, contractual expertise etc.

To be fair to government, the international operators find it tough to deal with government agencies in India which retain significant intervention powers under production sharing. The timing of sharing production and logistics etc. are other issues along with a host of technical issues. Thus from an FDI stand point revenue sharing could be a clincher provided we can convince investors about enough blocks and enough oil/gas in hose blocks. The Shale technology has eluded India so far and may be difficult to get under production sharing. However, the government and opposition leaders have spent little time debating over the issue primarily because of oppositions pre-engagement with the over hyped PM debate and that is clearly allowing government to maneuver economic policy in the manner suited to it or as understood by it. This may allow certain vested interest to have a field day again for which the leaders in power have shown no remorse and doubts remain on the integrity of opposition leaders as well to timely identify and address such issues. It is time that all PM candidates show PM like qualities to gain confidence of public and convince them of their statesmanship.