An Empirical Analysis of the Fiscal Regime for Exploration in India

This paper presents an analysis of the fiscal regime for oil and gas exploration in India from 1999-2010, covering the period from the liberalisation of the upstream sector to the present. It also addresses the following research question: is there an optimal set of fiscal terms for exploration in India? The motivation for this paper is twofold. First, in developing countries, governments’ perceptions of hydrocarbons within energy have altered significantly in the last decade, and rather than being formulated in isolation, optimal policy towards energy supply has to be considered along with broader goals relating to macroeconomic constraints and climate change mitigation. The production of hydrocarbons is widely seen as underpinned by the fiscal regime governing exploration. It follows that the design of fiscal terms by governments can be utilised to complement these broader goals. The second motivation relates to the fundamental problem faced by energy-deficit developing countries such as India in designing their fiscal systems, namely, incentivising firms to invest in exploration and production whilst ensuring a fair and preferably early share of revenues to the government. Specifically, India’s fiscal regime has faced significant problems in the past, with contracts going to arbitration and the national auditor alleging the loss of large amounts of revenue to the exchequer. Given its growing demand for energy (predicted to triple to 1500 mtoe by 2030) balance of payments constraints (a current account deficit of  6%) and environmental concerns,  the design of a successful fiscal regime for domestic exploration and production will underpin how India deals with its impending energy crisis.  The paper uses a meta-modelling approach, which combines cash flow simulations using real field data from India into a regression model to identify the impact of fiscal terms under the regime during 1999-2010 on variables representing economic returns to both firms and the government.

By: Anupama Sen

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