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.
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