Rangarajan Committee formed to Review Existing Production Sharing Contracts (PSCs)

The Union government on 30 May 2012 announced the constitution of a committee under the chairmanship of Prime Minister's Economic Advisory Council’s (PMEAC) chairman C. Rangarajan to review the existing production sharing contracts (PSCs). The PSCs are to be reviewed in the backdrop of the recent spat between Reliance Industries Ltd. (RIL) and the Petroleum Ministry.

The review followed the Comptroller and Auditor General’s (CAG) draft report that had asked the Petroleum Ministry to carry out a comprehensive review of the PSCs to protect the interests of the Government.

The committee will look into the structure and elements of the guidelines for determining the basis or formula for the price of domestically produced gas, and for monitoring actual price fixation as well as for any other issues relating to PSCs. It will rewrite some of the terms in the PSCs signed for exploration and production of oil and gas. The committee is not to affect agreements that have already been signed. Current PSCs, signed under the New Exploration Licensing Policy (NELP) of 1999 provide for private companies to recover all of their capital and operating expenditure from oil and gas revenues after which the profits are shared with the government as per a specific formula. However, this model was severely criticized when RIL recovered most of its investment from revenues earned from sale of natural gas even as output fell short of the targets in RIL’s eastern offshore KG-D6 fields.

Oil ministry now wants to punish RIL by imposing a penalty for not drilling committed number of wells but finds its hands tied in absence of a specific provision in the signed PSC linking cost recovery to production. The Rangarajan Committee has also been asked to suggest "structure and elements of the guidelines for determining the basis or formula for the price of domestically produced gas, and for monitoring actual price fixation

It is to carry out a review of the existing PSCs, including in respect of the current profit-sharing mechanism with the pre-tax investment multiple (PTIM), as the base parameter. The committee has been entrusted with the responsibility to recommend necessary modification for the future PSCs. Also the committee will have to explore various contract models with a view to minimise monitoring of expenditure of the contractor without compromising on the hydrocarbons output across time and on the government's take.

It will be the responsibility of the committee to suggest a suitable mechanism for managing the contract implementation of PSCs which is currently being handled by the representation of regulator/government nominee appointed to the Management Committee. It will have to come out with suitable governmental mechanisms to monitor and to audit Government of India (GOI) share of profit petroleum.

The committee is to submit its recommendations by 31 August 2012.