Royalty and Tax Model - A Win-Win Situation for the Government and Investors

Anupam Mathur
Executive Director and CEO,Tata Petrodyne Limited
Anupam Mathur, Executive Director and CEO, Tata Petrodyne Limited Exploration and Production licensing models have their own pros and cons, says Anupam Mathur, Executive Director and CEO, Tata Petrodyne Limited. Royalty and tax model is currently being adopted by many countries successfully for the model has its own advantages. With the increase in production, there is a built in incentive for both the government and the investors. The government is spared the botheration of keeping track of cost recovery, and the investors are relieved from following the cumbersome prescribed Government processes and seeking large number of approvals.

Contrary to this, in the PSC regime, with the increase in production, the other stakeholders' incentive goes down while the government's profit share goes up. "It is, thus, not an attractive option for the other stakeholders or investors," says Mathur. The investors put in their money in the exploration, and if the venture is successful and there is discovery, the government reimburses the money to the investors, in the form of cost recovery from its own share of profit. "Initially, since the PSC model was marked by risks and uncertainties, investors were hesitant investing their money into it. The government then introduced the cost recovery mechanism, where the investor, if successful in the venture, can recover the cost of the same besides making reasonable profit. The government then have a walk -in option after the completion of the exploration and appraisal phase, with a 30-40 percent participating interest," adds Mathur. Cairn, as for example, has made a commercial discovery in the Rajasthan block, and ONGC, as a NOC, exercised the option of walking-in as a government nominee, with a 30 percent interest in the PSC. "ONGC, in this block, has invested in the development phase and not in the exploration phase. Risk money during exploration phase was invested by Cairn, and once the block was declared as commercially viable, the government exercised the option of walking-in," Mathur further says.

Bringing another drawback of the PSC regime, Mathur says, "Some of the PSC model has specific clauses, which are not very conducive for free business viz Domestic Market Obligation (DMO). A portion of hydrocarbon produced has to be sold in the domestic market at the pre-determined prices regulated by the government. Any changes in its conditions is a long process, as the investors have to await government approvals. It's more beaureautric and less business-oriented approach." adds the CEO. Despite the disadvantages, the investors are willing to undertake the exploratory risk on the condition that they are paid a fair return after discovery efforts. "But with the market price control on output and not on inputs, investors do not have much incentive. Regulatory control in the PSC regime definitely slows down the process," to put it in Mathur's words. "Generally, excessive control makes a country less attractive for the investors."

Tata Petrodyne is working in Australia under Royalty and Tax model, and "it is working very well over there. If the model is emulated in India, it should work well in quick monetisation of the assets and attracting more investors into the country," says Mathur. "Australia's systems and policies make it a lucrative place for investment for the companies and stakeholders. However, the country has other limitation like availability of human resources."

To conclude in Mathur's own words, "C Rangaranjan committee has been mandate d to submit recommendations for bringing about an improvement in the PSC regime in India. The committee is studying various PSC models from different countries and picking up the good features from each of these, some of which would hopefully be incorporated in the proposed PSC contract. But the implementation has to be swift and simplified which remains to be seen."