22 June 2009;economictimes.indiatimes.com:Rajeev Jayaswal:NEW DELHI: Oil and gas producers could be forced to pay royalties to the government on the basis of sale prices in the future rather than the present system of ‘wellhead value’, threatening profits of oil companies such as ONGC, Reliance Industries and Cairn India. The new method, which is now being examined by the oil ministry, could represent a fundamental overhaul of the system of calculating royalties, and boost revenues for the cash-strapped exchequer, weighed down by mounting deficits. Government officials said the directorate general of hydrocarbons (DGH) was likely to move a proposal suggesting the new way to calculate royalty payments. “It is not yet final. We may opt for calculating royalty on the basis of sale price for either oil, or gas, or both,” said an official in the oil ministry, who asked not to be identified. Companies were sure to strongly resist any such move, an oil sector consultant said. “Any attempt to change this would lead to litigation,” he said, requesting anonymity. Jettisoning the wellhead value system, which only takes into account the total cost of production and does not include transportation costs, could help the government make more by way of royalties from oil and gas companies for the natural resource, as the wellhead prices of oil and gas are almost always less than their actual sale prices. Current royalty rates are 5% of the wellhead value in case of offshore production for the first seven years, and 10%, thereafter, and 20% for onshore production. The lower rates offshore reflect the higher risks in extracting oil and gas.
