This presentation is about Revenue Sharing Contract for Hydrocarbon Industry in India. This Revenue Sharing Regime is an evolution of Production Sharing Contracts. Indian Hydrocarbon contract policy is called NELP- New Exploration & Licencing Policy that was followed till 2016 but now new HELP- Hydrocarbon Exploration & Licencing policy is in place.

1. Indian Revenue Sharing Contract
& HELP
NISHANT MEHTA

2. Quick History
 On the back drop of 1991 L-P-G Petroleum sector was opened for
privet and foreign investment
 DGH was formally formed on 08/04/1993.
 DGH formulated New Exploration and Licensing Policy (NELP) by 1995-
96.
 According to NELP first round of Block Bidding took place by 1999.
 CBM policy was also adopted separately.

3. Insight into NELP
 No Mandatory state participation.
 No special provisions for NOCs in bidding process.
 Freedom to the contractors for marketing of crude oil in domestic
market.
 Cess tax abolished
 No import duty on equipment imported for petroleum operation
 No signature, discovery and production bonuses to government.
 7 year Corporate tax Holiday from production.
 Separate Petroleum Tax guide in place to facilitate investors.
 100% Cost recovery allowed in Production(Profit) sharing contract.

4. Insight into NELP
 Unlimited Carry forward period is allowed on contract area basis (and
not on the field basis) (partial ring jumping)
 Profit oil shared before tax.

5. Production (Profit) Sharing
Contract
 PSCs under NELP are based on the principle of “Profit sharing”.
 This Profit sharing is Biddable criteria
 No share is given to government until a profit is made other than
royalties.
 Government’s take depends on cost recovery.

6. 1. Management and control
 2 Government + 2 Contractor person in JMC
 All work permit and budget decisions are taken by JMC
 JMC will audit and approve cost recovery.
 DGH will closely monitor the minimum work obligation.

7. 2. Minimum Work obligation
 In PSC contract minimum work obligation is decided by DGH
 minimum work obligation is to be monitored by DGH.
 Contractor will have to meet their production targets set by JMC

8. 3. Relinquishment

9. 4. Commercial Discovery
“the finding, during Petroleum Operations, of a deposit of Petroleum
not previously known to have existed, which can be recovered at the
surface in a flow measurable by petroleum industry testing methods.” –
India PSC

10. 5. Cost Recovery
 100% Cost recovery is allowed under PSC.
 Costs are audited vigorously by government’s CAG.
 These costs are approved then by JMC
 Sliding scale based on investment multiple (>1.5, >3.5)

11. 6. Royalty
Area Oil Gas
on land 12.5% 10%
Offshore (shallow water<400m) 10% 10%
Deep water (>400) 1st 7 years 5% 5%
Deep water after 7 years 10% 10%

12. 7. Tax
 Tax Holiday of 7 years from the date of commentment of commercial
production
 All loss carry forward is deductible for unlimited years.
 loss from the different block which is under same license is deductible
 Tax is levied under Indian income tax act 1961.

13. 8. Local Goods and services
 Article 23 of Indian PSC

14. Employment, Training and
Transfer of Technology
Article 22 of Indian PSC

15. 9. Stabilization Clause
“If any change in or to any Indian law, rule or regulation dealing with
income tax or other corporate tax, export/import tax, excise, customs
duty or any other levies, duties or taxes imposed on Petroleum or
dependent upon the value of Petroleum results in a material change to
the expected economic benefits accruing to any of the Parties after the
date of execution of the Contract, the Parties shall consult promptly in
good faith to make necessary revisions and adjustments to the Contract
in order to maintain such expected economic benefits to each of the
Parties, provided, however, that the expected economic benefits to the
Parties shall not be reduced as a result of the operation of this Article.”
– Indian PSC

16. Some Other PSC provisions
 License and exploration period
 General rights and obligation of parties
 Government Assistance
 Valuation of petroleum
 Currency exchange control provisions
 Insurance and indemnification
 Title to Petroleum, Data and assets
 Terms and termination of contract
 Force majeure

17. Production
Cost-recovery
Contractor’s take Govt. take
Profit oil split
Tax
Royalty

18. Issues with PSC
 Inadequate incentives for the operator to keep the cost low
 Require constant & micro monitoring by government.
 Procedural delays and arbitrations
 Assessment of recoverable costs leads to dispute between the
government and contractor
 Operator manipulate investment multiple in his favor.
 Low Exploration time phase

19. Issues with NELP
 Exploration is confined to blocks which have been put on tender by
Government
 No proper guideline for pricing of Oil and Gas under NELP.
 Very high government intervention and regulation in decision making
process.
 NELP only covers conventional hydrocarbons i.e. oil and gas from
conventional fromations
 Separate CBM policy in place
 It does not recognize shale oil and gas as hydrocarbon resources

20. Hydrocarbon Exploration and
licensing Policy
 Single License for conventional and non-conventional HC.
 open Acreage Licensing Policy.
 New fiscal regime (RSC)
 New royalty Rates.
 New pricing and sale of crude oil mechanism
 New separate pricing of Natural Gas
 Increased exploration Phase (8,10)
 Majority of the decision will be taken by Contractor thus low
government intervention
 New bidding model.

21. Hydrocarbon Exploration and
licensing Policy
 Empowered committee of Secretaries will evaluate and negotiate bid
(Like NELP)
 Custom duty and oil cess weaver only on some equipments
 Only function of JMC will be monitoring of MWO.

22. 1. Single License for All HC
resources
 A uniform license to enable E&P operations to explore and extract all
hydrocarbon resources covered under the Oilfield Regulation and
Development (ORD) Act, 1948, and Petroleum and Natural gas rules,
1959. This license will enable contractor to explore conventional and
unconventional oil and gas resources including CBM, Shale gas/oil ,Tight
gas ,Gas hydrates and any other resource to be identified in future
which fall within the definition of “Petroleum” and “Natural Gas” under
PNG rules 1959.

23. Open Acreage Licensing
Policy(OAPL)
E&P companies will be allowed to put in offers for blocks at any time by
submitting and initial expression of interest (EOI) indicating the area
which it wishes to take up modalities for operationalization of OAPL will
be notified separately.

24. Fiscal Regime
Cost recovery/Production linked profit sharing will be replaced by
revenue sharing model.
Government share

25. New Royalty Rates
BLOCKS DURATION OIL ROYALTY GAS ROYALTY
Onland 12.5% 10%
Shallow Water 7.5% 7.5%
Deep Water
First 7 Years No Royalty No Royalty
After 7 Years 5% 5%
Ultra Deep Water
First 7 Years No Royalty No Royalty
After 7 Years 2% 2%

26. Pricing and sale of Crude oil
 The contractor will be free to sell the crude oil exclusively in domestic
market through a transparent bidding process on arms length basis, for
the sake of calculation of government revenue, the minimum price will
be the price of Indian basket of crude oil ( currently comprising of sour
grade(Oman and Dubai average) and sweet crude ( Dated brent) of
crude oil processed in Indian refinery) as calculated by petroleum
planning and analysis cell (PPAC) on monthly basis.
If the price arrived through bidding is more than the price of Indian
basket of crude oil then the government’s take will be calculated based
on actual price realized.

27. Pricing and Sale of Natural Gas
 The contractor will have freedom for pricing and marketing of gas
produced from this blocks on arms length basis. However, for the sake
of calculation of government revenue period, minimum price will be
price calculated as per the domestic natural gas pricing guidelines in
vogue at relevant point of time.
 If the price discovered through arms length basis is more than the
calculation based on the domestic natural gas price guidelines issued by
the government from time to time, then the government’s take will be
calculated based on actual price realized.

28. Increased Exploration Phase
 Exploration period will be 8 years for onland and shallow water blocks.
For Deep and Ultra deep blocks, exploration phase will be 10 years.

29. Model for Inviting the bids
 100 points = 50 + 50
50 for biddable revenue sharing with government.
50 for biddable minimum work program (MWP) commitment.

30. Management Committee
 The role of JMC will be largely related to monitoring of minimum work
programs and technical aspects.

31. Revenue sharing Contract
 Governments take to be determined on the basis of post-royalty-
payment revenue-sharing; cost recovery mechanism dropped.
 Curtailed role of MC and Government; no further autonomy and
empowerment of DGH –conflicts in the MC to be referred to the
Government
 Penalty on the Contractor for under-production
 Done away with ‘contractual stability’ clause which entitled
Contractors to request revisions to the PSC in case of changes in tax
laws
 No specific customs duty exemption on imported products.

34. How Investors see RSC
Higher exploration risk –absence of cost-recoverability mechanism
Impact on returns and cash flows on account of royalty and revenue
share payable to Government
No flexibility for revising the Contract to pass any adverse financial
impact due to change in tax laws to the Government
Requirement to meet production estimates, penalty for under-
production
Provision for market-determined natural gas pricing missing
Requirement of escrow account –spirit of trust missing!
Determination of revenue share –may be a matter of controversy!