DGH disagrees with Kelkar report on oil exploration contracts

Upstream regulator DGH has put in a strong note of dissent against the Vijay Kelkar Committee suggestion to continue the present regime of allowing oil and gas producers to recover costs before paying the government its share.

The Director General of Hydrocarbons, R N Choubey, who was part of the Kelkar Committee, said in the note that the panel had exceeded its brief and quoted data that had no attributable author or source.

Sources with direct knowledge of the development said the panel, in Chapter 2 of its report, recommended continuation of the present production sharing contract (PSC) framework for the oil and gas sector, which allows for cost recovery by exploration and production (E&P) companies before they pay the government its share.

This was in contrast to the suggestion by the Prime Minister-appointed Rangarajan Committee to shift to a revenue-sharing model that would require companies to share a biddable amount of oil or gas output with the government from the first day of production, irrespective of cost.

Sources said Choubey in the note pointed out that the Oil Ministry had initially asked the Kelkar panel to review the recommendation of the Rangarajan committee but later withdrew that from the terms of reference.

The Kelkar panel, which was essentially asked to suggest ways to increase oil and gas output, also said there was little incentive for investors to "gold plate" costs or go for "wilful under-production," an apparent reference to the controversy around cost escalation at Reliance Industries' KG-D6 field and production falling below target.

Kelkar, who was Oil Secretary from 1995 to 1997, submitted the first part of his report last week.

Choubey, sources said, was of the view that since the review of the Rangarajan panel report was outside its purview, the Kelkar Committee should not have included Chapter 2.

Incidentally, an association of oil and gas operators such as RIL and BP have opposed dumping the cost-recovery model in favour of the revenue-sharing framework.

Choubey also contested the Kelkar panel conclusion that developing projects under the PSC regime would result in an additional 7 billion barrels of oil equivalent compared with the revenue regime, saying it wasn't clear how and who made these calculations.

Incidentally, Chapter 2, which concludes that "There is little incentive for the investor (i) to 'gold plate' or (ii) for wilful under-production," is not mentioned in the committee's executive summary.

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