Revenue Sharing Contract (RSC)
Revenue Sharing Contract (RSC) is a term used in the Hydro carbon industry and refers to an agreement between Contractor and Government whereby Contractor bears all exploration risks, production and development costs in return for its stipulated share of revenue resulting from this effort. Thus, RSC is a fiscal regime existing in the exploration and production of hydrocarbons.
Here Contracts are based on “biddable revenue sharing”. i.e., bidders will be required to quote revenue share in their bids and this will be a key parameter for selecting the winning bid. They will quote a different share at two levels of revenue called “lower revenue point” and “higher revenue point”. Revenue share for intermediate points will be calculated by linear interpolation. The bidder giving the highest net present value of revenue share to the Government, as per transparent methodology, will get the maximum marks under this parameter.
Revenue Sharing Contracts were adopted for all hydrocarbon explorations in India through a Cabinet decision dated 10.03.2016, in view of the structural failures of the then existing fiscal regime - Production Sharing Contract (PSC). The RSC is now a part of the new fiscal regime adopted on 10.03.2016 called HELP or Hydrocarbon Exploration and Licensing Policy. Earlier, revenue sharing models were adopted in 1997, in the exploration of coal bed methane (CBM) and also in exploration of small and marginal fields.
Differences with Production Sharing Contracts (PSC)
The production sharing contracts (PSC) were based on the concept of profit sharing where profits are shared between Government and the contractor after recovery of cost. Under the profit sharing methodology, it became necessary for the Government to scrutinize cost details of private participants and this led to many delays and disputes. Under the new regime of RSC, the Government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc. Unlike in the existing fiscal model of Production Sharing Contract (PSC), where fund flow to the Government commences only when all contract costs have been recovered (in case of a 100% cost-recovery bid by the Contractor), in the new system, share of revenue to the Government will commence from the very first day of production. The proposed changes will lead to a simple and transparent system with easy-to-monitor parameters of production and price. RSC is expected to minimize Government intervention and remove complications in accounting, and incentive for gold plating, which may occur while allowing for profit sharing, based on cost recovery. See here for a more detailed discussion on the problems with PSCs.
Benefits of RSCs
Advantages of RSC are as follows:
- Government need to audit only the production and revenue by the exploring company
- There is no need for micro-management or control over budget and expenditure of the exploration company
- Hence, there is minimum regulatory burden and ease of doing business
- There is significant reduction in administrative discretion while granting greater freedom to the operator.
Revenue Sharing Models adopted prior to 2016 for Hydrocarbon explorations in India
In India, the contracts under Coal Bed Methane (CBM) Policy of 1997 (though production of CBM started only in 2007) used to provide for biddable revenue sharing based on production linked payment (PLP). Ad-valorem Royalty at the prevailing rate would accrue to the State Governments, whereas the production linked payment on ad-valorem basis, will be made to the central government. PLP for different production slabs is a biddable item.
Explorations of Marginal Fields are also on a Revenue Sharing Contract (RSC) Model. This revenue sharing model is based on a revenue-based linear scale. The contractor is required to pay biddable Government share of revenue (net of royalty or post-royalty). For the sake of calculation of Government revenue, the minimum price will be the price of Indian Basket of Crude Oil (currently comprising of Sour Grade (Oman & Dubai Average) and Sweet Grade (Brent Dated) of Crude Oil processed in Indian refineries) as calculated by Petroleum Planning and Analysis Cell (PPAC) on a monthly basis. If the price arrived through bidding is more than the price of Indian Basket of Crude Oil then the Government's take will be calculated based on the actual price realized.
In March 2016, the policy of RSC was adopted across all hydrocarbons.
Revenue sharing model in case of gas exploration post 2016
In the new fiscal regime – Hydrocarbon Exploration and Licensing Policy (HELP) adopted by the Government in 2016, pricing Freedom has been granted to contractors, subject to a ceiling price limit, for new gas production from Deepwater, Ultra Deepwater and High Pressure-High Temperature Areas. The policy provides pricing freedom to the gas production from existing discoveries which are yet to commence commercial production as on 1.1.2016 as well as for future discoveries. However, considering the imperfections in gas markets in India, and to protect the interests of the consuming sector, a ceiling based on the landed cost of the alternate fuels has been imposed. The ceiling price shall be the, lowest of the
- Fuel oil import landed price
- Weighted average import landed price of substitute fuels (0.3 x price of imported coal + 0.4 x price of imported fuel oil + 0.3 x price of imported naphtha) and
- LNG import landed price.
The ceiling will be calculated once in six months. The price data used shall be the trailing four quarters data with one quarter lag. To safeguard the Government revenue, the Government’s share will be calculated based on the higher of prevailing international crude price or actual price. All gas fields currently under production will continue to be governed by the pricing regime which is currently applicable to them.
Revenue Sharing Model Suggested by the Rangarajan Committee in 2012
Rangarajan Committee, which reviewed the production sharing contract (PSC) system in 2012, had recommended that PSC should be replaced with an incremental production-based sliding scale combined with a fixed, price-sensitive scale. That is, the bids will be made in a bid matrix, in which the bidder will offer different percentage revenue shares for different levels of production and price levels. The bids will have to be progressive with respect to both volume of production and price level. The production tranches will be different for various sectors (onland, shallow water, deep water, and CBM), and price bands will be based on historical and prevailing price trends. Production and price bands are to be suitably designed after due deliberation and considering available historical data for Indian geological basins. Since companies have the option of bidding for the Government take at various production levels and price tranches, there should be little complaint about the toughness of the terms, as these will get determined by the market and allows bidders to factor in the fiscal terms of contract. Moreover, to mitigate the risk of E&P companies, Rangarajan Committee proposed that there should be no prescribed minimum government share and the bidder is hence, free to bid even a non-zero share. The Contractor’s cost recovery will be embodied in his share of production, which the Contractor will be free to bid. Further, Committee recommended a provision of bidding for rate of royalty, starting from zero, so as to provide big incentives for deepwater exploration, which is highly cost intensive and risk prone. The proposed model was basically a royalty – tax regime, with production level payment. Government's share arrived at through competitive bidding had to observe non-linearity with respect to marginal rate of appropriation, increasing with the output and shifting upwards for a price rise, for the government take to capture windfall gains on account of price rise and /or a surprise reserve discovery. This model is being followed by a number of countries, with some modifications, such as US, Columbia and a host of resource rich African nations. It is expected that contractors generally cannot underestimate its revenue or production beyond a point, as it adversely affects their market standing, goodwill and stock prices.
Unlike in the existing fiscal model of Production Sharing Contract (PSC), in the new system, share of revenue to the Government will commence from the very first day of production, with government just needing to monitor parameters of production and price. Further, the Management Committee will no longer go into issues relating to approval of budget or procurement issues and the private operators will have a more hassle-free operational environment. It was also stated to be in line with the Government’s broad objectives of efficiency in oil field operations and conserving scarce hydrocarbon resources, as it enhances the incentives for the contractors to reduce costs. Under the new regime - HELP or Hydrocarbon exploration and Licensing Policy – Government has adopted a variant of the revenue sharing model as against what was suggested by the Rangarajan Committee.
- Hydrocarbon Exploration and Licensing Policy (HELP)
- New Exploration Licensing Policy (NELP)
- Production Sharing Contract (PSC)
- Open Acreage License Policy (OALP)