Under the existing Production Sharing Contracts (PSC), like the one RIL had signed for KG-D6 in 2000, companies are first allowed to recover all their cost before government gets its share of profit.
This system had come in for sharp criticism from even the Comptroller and Auditor General (CAG) which said it incentivised companies by going on investing in oil and gas fields.
"We have found it too difficult (to manage) the issue of cost recovery," DGH R N Choubey told reporters at the Petrotech 2012 conference when asked about the provisions of the existing PSC. "It is difficult to assess the cost recovery and to assess the investment multiples and so on and so forth. We have found it difficult."
The existing model of PSC has come in for criticism following a sharp dip in output from RIL's eastern offshore KG-D6 gas fields. RIL has already recovered most of its investment from revenues earned from sale of natural gas even as output fell short of the targets.
The government is now trying to punish the firm by restricting its cost recovery by over $1 billion. DGH, the upstream nodal arm of the Oil Ministry, favoured moving to a system where companies would be asked to bid for the share of oil and/or gas they would offer to government.
The highest bidder would get the right to explore and produce. This way the government will be guaranteed its minimum take at all levels of production and it would not have to bother with monitoring of cost and its recovery.
"There is a limit up to which you can improve the functionality of the existing PSC...because it is a signed contract so there is a limit. You cannot simply throw out everything," Choubey said. "There is a limit up to which its functionality can be improved."
The government in May appointed a committee headed by C Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, to review terms of the contracts signed by companies to explore and produce oil and gas and recommend necessary modifications for the future PSCs.
The Rangarajan Committee, to which DGH is also a member, would submit its report by the month end, Choubey said.
The panel has 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." Choubey favoured the production-linked payment (PLP) model for the future PSCs.
The Rangarajan committee, he said, would look at PLP and other models for the PSC. "Let's see what Rangarajan Committee will recommend. I do not know. We will have to wait."
The existing PSCs can be changed only with mutual consent of both the parties. The DGH said oil companies have made representation to the panel that existing cost recovery element in the PSC should be retained as it acts as an incentive for explorers to risk their money in unknown and lesser endowed areas.
"They have made representation to Rangarajan Committee saying cost recovery elements should be retained and that is the fundamental feature of the PSC and the PSC should be retained as it is," he said.
After the committee gives its report, the government will take a final call on the shape of the future oil and gas exploration contracts.
Oil Minister S Jaipal Reddy had earlier this week stated that the Rangarajan Committee recommendations would be taken to the Cabinet for ratification and necessary changes in the contracts would be made before the launch of the next round of auction by year end.
Besides recommending suitable governmental mechanism to monitor and audit of government's share of profit petroleum, the panel would also recommend "a suitable mechanism for managing the contract implementation which is being handled at present by the representation of regulator (DGH)/government nominee appointed to the Management Committee".