Petroleum Minister says this model will be based on revenue sharing rather than profits.

The Cabinet on Wednesday approved a new policy for the auction of 69 small and marginal oil fields to private and foreign companies that could unlock hydrocarbon reserves worth around Rs 70,000 crore.

Announcing the decision, Petroleum Minister Dharmendra Pradhan said this “paradigm changing” model of sharing revenue instead of profits and giving out unified licences for all hydrocarbons in the field instead of a license per hydrocarbon could later be considered for the entire sector.

“We have made a paradigm shift from cost-recovery model to revenue sharing. At the same time, we have decided to implement unified licensing regime. This is a primary step towards ease of doing business,” said Mr Pradhan.

As a move forward on the Modi government’s ‘Minimum Government, Maximum Governance’ agenda, the successful bidders of the fields on auction will be free to sell crude oil or natural gas at market-determined prices, without any government interference, Mr Pradhan added.

“The revenue sharing and royalty sharing mechanism with the government will be benchmarked against the prevailing market price of oil on the day. If the company sells at below this price, then the sharing will still have to be done at the market price. If the company manages to sell at a higher price than the market rate, then the sharing will be based on this higher price,” the Minister said.

The earlier profit sharing mechanism meant that the government had to scrutinise the various costs incurred by the private companies, which often led to delays and disputes. Of the 69 fields to be put on the block, 63 are owned by ONGC and 6 by OIL.

As an additional change from the existing regime, companies operating these new fields will be able to sell gas to any customer of their choice and not be bound to the government’s allocation policy. In addition, under the unified license policy, companies will be able to exploit any and all hydrocarbons (oil, gas, shale oil, shale gas, etc) found in the field, unlike the current system where a separate license is required for each hydrocarbon.

With crude oil currently at $45 a barrel, the Minister estimated that the production of hydrocarbons from these new fields will be worth around Rs 3,500 crore a year.

According to Mr Pradhan, the current proved reserves in these fields stand at 89 million tonnes of oil and oil equivalent. An Oil Ministry official further stated that these reserves could increase as the fields as still only partially explored. “As exploration can continue for the entire duration of the license, these reserves can go up,” he said, adding that it is better to undertake exploration as soon as possible as all such services are cheaper now.

The bid document is to be made public in three months. The winning bidders, who will be given a license for 20 years, have been set strict targets by which they have to start production. “The production deadline is three years from the signing of the contract for online fields, four years for shallow fields and six years for deep fields,” the official said. Failure to begin production by this time will result in the fields being taken back. Production of oil could even start as soon as a year and a half in some of the fields, but gas could take longer, the official added.