India Tweaks PSC Terms Midway

In a move that could potentially squeeze domestic oil and gas upstream margins, the Indian government has decided to change the contract terms midway, reported Financial Chronicle April 16.

Sources told the newspaper that the management committee that approves investment and work programmes for contractors of oil and gas blocks has changed the terms of several existing production sharing contracts (PSCs) for the year that started April 1, 2018. The changed terms have fixed a floor for government’s share in running contracts, irrespective of the investment multiple -- the basis of sharing revenues from oil and gas blocks between the operators and the government.

Under the PSC regime, oil companies can recover their cost first before earnings from blocks is shared with the government. In this system, government’s share is decided on the basis of pre-tax investment multiple (PTIM), which is the ratio of cumulative net cash income to the cumulative exploration and development cost. So as the PTIM starts going up with increased cash generation and lower cost recovery, government’s share of profits also increases.

Companies have already flagged the issue with the government and want immediate action, Financial Express said.

At present, out of 310 exploration blocks awarded so far under various bidding rounds, 189 blocks/fields are operational. All the latter face the issue where annual work programmes may have to be reworked to provide higher profit petroleum (total value of petroleum produced and saved from the contract area in a particular period) to the government, at an increasing cost for companies, thus reducing their margins.