The Kelkar Committee had been set
up with primary idea of chalking out the way forward towards reducing import
dependency in the Indian Hydrocarbon Industry by 2030. In order to create a
vibrant Hydrocarbon Industry that could attract the required investments and
human resource pool in order to boost domestic E&P activities and thereby
enhance domestic production of oil & gas, the committee has come up with a
remarkable yet simple set of recommendations for the short to mid term in the
first phase of its submission. The committee had been entrusted with the
difficult task of delving deeper into the complex issues of framing and
administration of the existing as well as upcoming contractual framework to
create an enabling operating environment for the Indian E&P Industry and to
suggest possible changes in the existing fiscal structure, policy environment,
institutional and contractual framework and other operational aspects. The
recommendations made by the committee in its first phase of submissions can be
broadly categorized as outlined below:
Increase Information
Availability & Transparency
The committee is of the view that
in order to encourage participation of international oil companies in the
domestic hydrocarbon industry, immediate roll out of Open Acreage Licensing
Policy (OALP) is necessary with the need to collect data for prospective basin
areas that are perceived to be of high risk, and that have so far attracted
limited or no capital investments by building the National Data Repository. The
committee feels that availability of high quality basin information collected
through speculative surveys is quintessential to attract investments due to the
inherent risks involved with E&P investments. The committee has also
proposed that the possibility of a multi-client speculative survey model should
be explored and developed and enabling reforms should be formalized and rolled
out at the earliest so that participation from international oil companies is
encouraged while estimating the potential of basin areas that are perceived to
have high risks associated with the investments.
The committee has also called for
implementation of reforms to improve accessibility to information and transfer
of data related to Indian basins by formulating guidelines for more simplified
and seamless modes for data transfer, in line with global best practices. The
committee has suggested that the data residing in the NDR should be used for
the OALP as well as for marketing of promising Indian sedimentary basin areas
to others. The seamless access to data and information on Indian sedimentary
basins is expected to generate more interest in global players.
Formulate Enabling
Policy Environment
The committee is of the opinion
that the fiscal policy environment in which domestic as well as international
oil companies are operating in India needs urgent consideration. In line with
global best practices all forms of hydrocarbon assets should be given tax
holidays for the minimum duration of 7 years while hydrocarbon assets falling
in the category of deepwater, ultra deepwater, North East, high temperature
high pressure categories should be eligible for 12 years of tax holiday period
from the date of first production. This would not only ensure additional
investments in the higher risk hydrocarbon asset class, but also offer a better
risk reward spectrum to the industry.
Since oil & gas operations
are complex and requires best-in-class technological interventions, often
requiring expatriates to be involved, the Govt. should promote and encourage
companies to involve such skills through hiring of expatriates by relaxing
social security and provident-fund norms for expatriates. This would help
Indian companies provide oil field services that require expatriate personnel
in a cost effective manner and will reduce the expense burden on companies
thereby encouraging them to involve such experts when necessary.
Applicability of service tax on
cash calls has been a grey area leading to multiplicative tax implication on
transactions involved in carrying out E&P operations of PSC operating under
the consortium structure. To avoid such double taxation, the Government should
further issue clarification reiterating the non-applicability of service tax
levied on cash calls made by the operator to other partners in a consortium
thereby reducing the fiscal implications on the E&P operations.
Moreover, the committee has
called for reduction in the rate of dividend tax paid on income earned
internationally by subsidiaries of Indian oil and gas companies. Under current
tax laws in India, the remittance of dividends by an overseas subsidiary to its
holding company is effectively taxed at a rate of 16.99 percent. Reducing the
tax on dividend paid will ensure that the companies have more funds available
with them to further re-invest in building their portfolio of assets. Also, the
committee has reiterated that the applicable tax regime is revised to ensure
that Indian firms are not disadvantaged when operating in host countries on
production sharing contracts in cases where the host countries do not impose
taxes on international players as the underlying PSCs already accounts for the
government’s proceeds. Since E&P operations require huge investments,
rationalizing the tax structure will leave the companies with more cash on hand
to re-invest it on developing its technological capabilities as well as
investing more in prospective areas.
The committee has also called for
the Government to reduce the burden of under-recoveries being currently shared
by the E&P National Oil Companies as it believes that the upstream
companies should not be required to subsidize under recovery of downstream
companies. To achieve this goal, the committee has advised the Government to
start the process of de-regulation of petroleum fuels such as diesel and
kerosene with immediate effect or else if it decides against this mechanism, it
should be ready to shoulder a higher share of the under-recoveries through its
revenue receipts. Moreover, the committee has called for urgent implementation
of Kirit Parikh committee recommendations on calculation of under-recoveries to
rationalize the quantum of subsidy being borne by the industry.
Improve Contract Administration
After reviewing the Indian PSC
models and its operations, the committee felt that given the alignment between
the government's and contractors’ interests under the PSC system, more emphasis
should accorded on prudential and fiduciary oversight of technical dimensions
than the fiscal dimension which has been the case of late as in the case of
KG-D6 block. The committee has urged that the Petroleum Ministry and DGH should
restrict its involvement only to the prudential and fiduciary oversight of the
E&P operator. As already provided in the PSCs, the Contractors are expected
to adopt Good International Petroleum Industry Practices (GIPIP) while
developing discoveries and the DGH should focus on ensuring such adherence.
Since in principle, the basis for computation of profit petroleum under the PSC
is similar to the computation of taxable profit under the Income Tax Act, the
committee is of the view that the fiscal dimensions, including computation of
profit petroleum, should be under the purview of the revenue authorities and
bring the calculation of Profit Petroleum and profit sharing, as stipulated in
the PSC, under the purview of the Income Tax Department, under the jurisdiction
of Finance Ministry.
Moreover, the committee feels an
urgent need for standardizing the clearance requirements as much as possible by
creating a single window clearance system for oil and gas projects along with
adopting a concurrent approach for statutory approvals to minimize the total
time taken. The committee also feels that establishing an IT based workflow
system and moving to E-governance practices will further drive efficiency in
the entire process of contract administration.
Strengthening
Institutional Framework
The committee in its report has
called for clear demarcation of responsibilities in ensuring that E&P
operations through administration of PSCs are non-disruptive and the entire institutional
system works as efficient machinery. To ensure this, the committee has
reiterated that any financial audits relating to PSC should be carried out
based on accounting records and financial statements prepared under the
provisions of the PSC in Chartered Accountants of India.
The government may conduct the
audit through firms of Chartered Accountants or through the Comptroller and
Auditor General (CAG), or through international auditors with assistance from
management consultants and other experts with relevant experience in auditing
oil and gas operations. Such an audit – whether conducted by the CAG or others
– should not include performance or efficiency auditing that lies beyond the
scope stipulated by the ICAI. This clearly entails that CAG is not authorized
to conduct performance audits of E&P operations under the ambit of PSCs and
task is essentially restricted to auditing the books of accounts. However, in
the event of any report of irregularities, the government may determine the
need for a forensic or investigative audit in addition to the annual audit.
The Petroleum Ministry may
further establish an inter-ministerial panel to whom it may entrust the dispute
resolution mechanism for a flexible dispensation depending on the circumstances
to ensure timely resolution of issues concerning PSCs arising out of such
forensic or investigative audits or any other event.
Encourage Participation
of Global Technology Partners
The committee feels that the NOCs
should be encouraged to adopt progressive small and marginal fields’ policies
for rapid development of small and marginal fields. To enable such progressive
action, NOCs should have the flexibility to bring in an experienced partner for
IOR/EOR schemes to ensure implementation of the best practices. NOCs should
also be allowed to put small and marginal fields out to global tender and form
contracts with interested parties for the same purpose to enable use of the
best technology available across the globe to ensure efficient exploitation of
such resources. Moreover, small and marginal field projects should receive
international prices of oil and gas, and not be subjected to contribution
towards downstream under recoveries.
Moreover, to encourage companies
in exploiting the resource potential of unconventional hydrocarbons, the
committee believes that the Government should put in place a policy for private
players to permit them to explore shale oil and gas resources under the PSC
regime. Current policy permits NOCs to explore shale oil and gas resources from
onland blocks that were allotted to them on nomination basis. The committee has
also called for Coal India Limited to seek to engage with private players and
NOCs to develop capabilities in gas extraction, to exploit gas from CBM.
Develop Human Resource
Pool
The Committee has called for
strengthening of DGH and its capabilities by using the funds made available
through OIDB cess collection. The committee has emphasized the need for DGH to
create an HR pool by hiring the best talents. In order to achieve this, DGH
should have the freedom to recruit and or deploy international experts at
global compensation levels as required.
The committee also believes that
to further enable the DGH to carry out-best-in class technical feasibility
assessments; it should have the freedom to employ external agencies for
carrying out technical feasibility assessment as required.
Conclusion
Bringing in necessary
transparency and accessibility to data and information on Indian sedimentary
basins through OALP and NDR, coupled with strengthening of the institutional
framework to clearly demarcate responsibilities of DGH, the Petroleum Ministry
and the auditing agencies will definitely prove to drive more investments and higher
efficiencies in administration of contracts. Moreover, tax reforms coupled with
initiatives for granting greater freedom and flexibility to the DGH in building
human resource and technical capabilities will further create an enabling
operational environment for the industry.
Infraline Energy Oil & Gas Knowledgebase Team
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