The Prime Minister’s Economic Advisory Council (PMEAC) has put to rest all the speculation and confusion about the Comptroller and Auditors General’s power of auditing oil and gas blocks operated by private firms.

Referring to oil and gas block contracts operated by the private firms, chairman of the PMEAC, Dr. C Rangarajan, on Wednesday said that “authority of audit by CAG is unquestionable”. Dr Rangarajan said the high value oil and gas blocks would be audited by CAG itself, and blocks with low financial value can be audited by panel of auditors recognised by CAG.

In the recent past issues were raised by private firms regarding the power of the CAG for auditing contracts operated by private firms. Clarifying the issue, Dr Rangarajan said that CAG would select blocks on the basis of financial materiality and the top auditor would continue to have its statutory freedom to directly audit even these.

The government had asked the Rangarajan panel to look into the production sharing contract mechanism in the petroleum industry. After submitting the report to the Prime Minister and the Petroleum Ministry, the PMEAC made the report with recommendations public. Dr. Rangarajan said that the panel has recommended moving away from the present system to a new regime that will be a “win-win proposition for all the parties”.

The existing contract allows the contractor to recover the cost incurred in a block before giving the government its share. Dr Rangarajan panel observed that the present system is flawed as the cost becomes critical for the government since there is incentive for contractors to book as costs expenses that do not reflect the true economic cost to the contractor. Since cost recovery is at the root of the problems experienced, the Rangarajan panel proposed to dispense with it, in favour of sharing of the overall revenues of the contractor, without setting off any costs.

On the other issue of gas pricing that has been at the centre of controversy, the PMEAC has proposed a new formula. Since no market-determined arm's length price is currently obtained domestically and nor is this likely to happen for several more years, a policy for estimation of an unbiased arm's length price based on an average of two prices has been proposed. One price would be derived from the volume-weighted net-back price to producers at the exporting country well-head for Indian imports for the trailing 12 months. The other would be the volume-weighted price of US's Henry Hub, UK's NBP and Japan Custom Cleared (JCC) prices for the trailing 12 months.

The arm's length price thus computed as the average of the two price estimates would apply equally to all sectors, regardless of their prioritisation for supply under the gas utilisation policy. The suggested formula will apply to pricing decisions made in future, and can be reviewed after five years when the possibility of pricing based on direct gas-on-gas competition may be assessed.

On contract management, where the Directorate General of Hydrocarbons (DGH) in its note to the Petroleum Ministry said that the PMEAC has not addressed the dispute resolution mechanism of minor issue, Dr Rangarajan said that his panel has suggested two mechanisms for improving the progress existing PSCs. For policy-related issues, it has suggested the setting up of a secretary level inter-ministerial committee (IMC) to suggest policy solutions.

For issues involving delay on the part of the contractor in preparing for and seeking approvals, and for minor technical issues, the mandate of the existing Empowered Committee of Secretaries (ECS) can be expanded.

On October 25, NDTV was the first to report about the Rangarajan panel’s recommendation on sweeping changes for future petroleum contracts. On Wednesday, NDTV reported the DGH’s note alleging PMEAC report’s weak link on contract management.

The Rangarajan panel submitted its final report on December 20, 2012. The other members of the panel were Justice Jagannadha Rao, Planning Commission member B.K. Chaturvedi, Ramprasad Sengupta, J. M. Mauskar and Joeman Thomas. Dr. K. P. Krishnan was convener, and Petroleum Ministry’s joint secretary Giridhar Aramane was secretary to the committee.