In order to overcome problems associated with the cost-recovery contracts in oil and gas exploration sector, a high level panel recommended the government to adopt production-linked contracts wherein companies would be chosen based on the amount of output they are willing to share with the government.
The committee, under the PM's Economic Advisory Council ( PMEAC) Chairman C Rangarajan, proposed a model wherein production-sharing between the government and the contractor (the company operating a field) will be linked to the average daily production and prevailing average of oil and gas prices in a well-defined period.
In its report submitted to the government, the committee designed a matrix, which incorporates both price bands and incremental production tranches, for computation of pre-tax production share between the government and the contractor.
Government set up the committee to recommend on ideal contracts for oil and gas exploration, besides suggestion on pricing and other issues in the sector. The panel recommended a production-linked regime for sharing profit with operators and increasing the exploration period from seven to 10 years.
This means companies would have to bid on the basis of how much oil and gas produced from a field they would share with government. The report says the bids would be progressive and incremental in terms of the government's take going up with corresponding increase in both production and price.