Companies can recover full exploration cost from new discoveries only: Oil Ministry

New Delhi: Vedanta, Reliance Industries and other oil companies can fully recover exploration cost incurred after the expiry of the so-called exploration period, according to an oil ministry clarification, which also said such cost – currently about $650 million for Vedanta and $250 million for RIL – will have to be recovered from new discoveries alone, and not from the revenues of the older, producing ones. The clarification will allow companies to recover all exploration cost, albeit with a delay, and protect the government’s cash inflow from older discoveries.

The licensees get 5-8 years to explore oil and gas in their allotted blocks. At the end of the exploration period, they retain the area needed to develop the discoveries and get a mining lease for that. The rest of the land is relinquished to the government. After the finds begin to generate revenue, the companies recover costs before sharing profit with the government.

In 2013, the government allowed contractors to continue exploration in lease areas beyond the exploration period. Some ambiguity in the order had led to an interpretation that the contractors could recover only the cost that went into making a commercially viable discovery. This could have saddled them with large unrecovered costs.

The latest clarification has sought to address the ambiguity. “Cairn Oil & Gas welcomes the government’s October 2019 office memorandum (OM) as it removes ambiguity and interpretational concerns created by the February 2013 OM. The October 2019 OM clarifies exploration cost recovery for both successful and unsuccessful discoveries as per principles and provisions of the production sharing contract (PSC), which augurs well for the industry,” Vedanta, which subsumed Cairn two years ago, said in an emailed response to ET. Reliance didn’t respond to ET’s request for comment.

The clarification will impact Vedanta’s 25 discoveries in Barmer block and Reliance’s MJ discovery in KGD6 block, which were made in post-exploration period. All such costs, which may or may not have resulted in a discovery, can now be recovered though only from the revenue of new discoveries, and not from those made during the exploration period, according to an official.

This means RIL’s $250 million and Vedanta’s $650 million of exploration costs can now be fully recovered although with a delay. “Through this OM, the government’s cash inflows from the existing discoveries have been protected. Overall, October 2019 OM is envisaged to be net positive for the industry,” Vedanta said.


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