Cabinet Tweaks Pre-NELP Oil Blocks, Reduces ONGC Burden Of Levies

The Cabinet today tweaked pre-1999 oil and gas contracts to provide for proportionate sharing of statutory levies like royalty and cess between the operators of an area, and not put the entire burden on state-owned ONGC.

The Cabinet Committee on Economic Affairs also extended the special dispensation of marketing and pricing freedom to natural gas produced from areas in the North Eastern region, Petroleum Minister Dharmendra Pradhan told reporters. Besides, income tax benefits have now been extended to all the 28 oil and gas fields awarded before the advent of the New Exploration Licensing Policy in 1999.

The decisions would unlock investments and boost oil and gas production, he said.

The government, he said, had awarded some discovered oil and gas fields to private firms in the 1990s with a view to attracting investments in the country.

To incentivise such investments, the liability of payment of statutory levies like royalty and cess was put on state-owned firms, who were made licensees of the blocks. ONGC and Oil India Ltd were allowed the right to back in or take interest of 30-40 percent in the fields, but were liable to pay 100 percent of the statutory levies.

This, Pradhan said, led to fresh investments getting stalled as the state-owned firms were not keen to incur more liabilities.

To correct this, the CCEA has decided that “statutory levies including royalty and cess will now be shared in proportion to the participating interest of the contractor in pre-NELP exploration blocks”, he said, adding that this would impact seven such fields.

Also, the levy so paid has been made cost recoverable with prospective effect. It means that like capital and operating expense, the statutory levies can now be first recovered from the sale of hydrocarbons before sharing the profits with the government.

"This will benefit pre-NELP exploration blocks in which fresh investment for additional development and production activities is expected as sharing of royalty and cess, and cost recoverability of same will help in making additional investment commercially viable for licensee company – ONGC/OIL," he said.

These are the same conditions that ONGC had insisted upon in 2010 when Vedanta bought Cairn Energy plc's 70 percent stake in the prolific Barmer basin oil block in Rajasthan. ONGC, which held 30 percent stake in the block, gave approval to the deal only when Vedanta agreed to pay its share of royalty and cess.

Royalty for onland block is presently 20 percent. An equivalent amount of cess is also levied.

Pradhan said based on recommendations in 'Hydrocarbon Vision 2030 for North East', the Government has extended timelines for exploration and appraisal period in 10 operational blocks of region considering geographical, environmental and logistical challenges.

"The exploration period has been increased by two years and appraisal period by one year," he said. "Also, to stimulate natural gas production in the region, the government has allowed marketing, including pricing freedom for natural gas, to be produced from discoveries which are yet to commence production as on July 1, 2018."

The CCEA also decided to extend tax benefits under Section 42 of Income Tax, 1961 prospectively to operational blocks under pre-NELP discovered fields for the extended period of the contract.

Section 42 of Income Tax allows the companies to claim 100 percent of expenditure incurred under a production sharing contract as tax deductible for computing taxable income in the same year.

While signing PSC of pre-NELP discovered fields, 13 contracts out of 28 contracts did not have provision for tax benefit under Section 42 of Income Tax Act. Now, this will bring uniformity and consistency in PSCs and provide incentive to the contractor to make an additional investment during the extended period of PSC, he said.

Pradhan said the CCEA also relaxed the timeline from seven days to 15 days for giving written notice to notify the occurrence of a force majure event in a PSC.

"The approvals given today are expected to help in ensuring the expeditious development of hydrocarbon resources," he added.