New Oil and Gas Contractors may be Tough on Investors

  • Govt Wants Control Over Cash Flows, Seeks Stake Sale Pie
  • The petroleum ministry is looking to rework several of the contentious clauses in the proposed model revenue sharing contract,.
  • The review of the proposals circulated in the draft model sharing contract is based on feedback received from stakeholders.
  • An official, who did not wish to be identified said:We have held preliminary discussions and reviewing the provisions to address the genuine concerns.
  • The draft contract under which the next round of oil and gas blocks will be auctioned seeks to close all the loopholes in the earlier production sharing agreement for which the government was criticized by the Comptroller and Auditor General.
  • In the new contract, the government has proposed to have complete control of cash flows, operators cannot profit from block sales and are subjected to an environment damage liability that is more stringent than under the Nuclear Liability Act.
  • In effect, it seeks to put a lid on selling of stakes in oil blocks by companies without sharing the gains with the government.
  • The conditions require oil companies to first deposit revenues from sale of oil and gas in a designated escrow account from which they can be prevented from withdrawing if there is a written notice of default by the government. 
  • The draft Model Revenue Sharing Contracts (MRSC), the template for the award of new acreages under the new contractual system, defines proceeds of stake sale in a block as revenue. 
  • Private operators find this unacceptable as stake sale proceeds would have to be immediately deposited in the escrow account. 
  • Operators believe that this clause would hamper portfolio management 
  • This will also be a damper for multi-billion deals like the RIL-BP deal and the Cairn-Vedanta deal, which kindled hopes of FDI of around $16 billion (around Rs 96,000 crore) in 2011.
  • The concept of escrow will be unacceptable to private participants as this is unprecedented in the industry anywhere in the world 
  • It will only serve to deter investors.
  • There is no precedence of creating an escrow account for all revenues to be credited and then divided amongst parties. 
  • This will delay parties receiving the payment, add administrative complexities, result in taxation issues and can be reason for potential disputes.