Essar and Premier protest new terms for Ratna PSC

Vol 9, PW 3 (18 May 05) People & Policy

Essar Oil and Premier Oil of the UK have written to the oil ministry protesting its decision to impose new cess (tax on produced oil) and royalty rates on the (as yet unsigned) Ratna PSC.

An oil ministry source tells us the protest letters were received at the ministry days after both Essar and Premier requested an extension to the 2nd May deadline imposed by the ministry for them to confirm unconditional acceptance of the new rates for cess and royalty payments. They said the PSC has already been initialled, reveals a source, and that it should not be reopened to add new terms and conditions.

Yet, the ministry is convinced it is right; that its decision to revise cess and royalty payments from the original terms agreed when Ratna was awarded is justified. When Ratna was awarded (in 1996) crude was about $16 per barrel and one dollar was worth Rs33, says a ministry source.

Today oil is above $50 per barrel and the dollar is about Rs43. Both these have substantially improved the economics of the project.

Cess and royalty payments are collected in rupees and in 1996 at Rs900 per tonne and Rs528 per tonne respectively would have accounted for about 32% of the per barrel oil price. Cess is today charged at Rs1800 per tonne and royalty at 10% (equivalent to Rs1250 per tonne at present prices).

Even at current rates, thanks to the depreciating rupee and the rising oil price, cess and royalty will account for less than 9% of the price of a barrel of crude, we are told. This is a sharp hit that the government is taking upfront.

More, we are told, the Indian government predicts that long-term oil prices will stabilise at around $35 per barrel. At this price government revenues from cess and royalty will be a maximum 15% of the per barrel oil price.

When signed, the Ratna PSC will run for 25 years and has a provision for a five-year extension by mutual agreement. The government is offering fiscal stability at current (cess and royalty) rates over this long term period.