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AUG 25 2014

Oil Ministry proposes to extend exploration phase for deep-sea blocks by three years

  • Economic Times, ET Bureau / Hyderabad
  • Created: Mon 25th AUG 2014

The oil ministry proposes to extend exploration phase for companies operating in deepsea blocks by three years, accepting the demand of energy firms that said the seven years allowed by the government may be adequate for onland blocks but challenging areas in deep waters required more time.

In the proposed new regime for blocks, which will be auctioned in future, it has also specified that the government would have the right to impose financial penalties on contractors for "minor" errors, such as deviations from approved field development plan, delays in executing projects or small technical errors.

The ministry proposes to terminate the contract in the case of a "major default" such as knowingly submitting false statements to the government and selling of stakes in the block without prior approval of the government, oil ministry officials said.

The penal provision for minor defaults is a new feature of the proposed revenue sharing model to avoid litigation, officials said. The ministry has invited stakeholder comments on proposed changes in oil and gas contracts.

ETfirst reported on August 19 that the government plans to introduce simpler revenue-sharing in the next auction of oil and gas blocks, so it does not need to micromanage oilfield affairs and companies have no incentive to inflate costs. After getting comments from industry and other stakeholders, the ministry will seek Cabinet approval to change the contractual regime and then it will launch the tenth round of the New Exploration Licensing Policy ( Nelp-X).

The idea of having specific penal provisions for minor deviations from planned activities came after the government faced an arbitration notice over disallowing costs for shortfall in output, officials said. Reliance Industries has invoked arbitration, contesting the oil ministry's move to impose billions of dollar penalty on the contractor for a fall in output from its KG-D6 gas fields. RIL argued that the production sharing contract between the contractor and the government does not provide for any penalty in the event of a shortfall in output, which it claimed was because of geological reasons.

The ministry, however, imposed about $2.4 billion penalty for falling output, arguing that the production declined because the contractor did not drill wells as per the field development plan. Industry experts say that the proposed revenue sharing contract model does not provide enough incentive to energy firms to take risk in Indian sedimentary basins, which is not very prospective.

However, the government has also faced embarrassing criticism from the CAG, who had observed in 2011 that the oil ministry had been lenient in enforcing production sharing contracts.


Comptroller and Auditor General New Exploration Licensing Policy Reliance Industries limited New Exploration Licensing Policy Indus India

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