Policy tweak in works to allow companies to sell oil & gas to affiliates
The oil ministry is considering redefining ‘arm’s length sale’ for oil and gas contracts to include sale to an affiliate, which would allow a producer to sell its output to a related party, people familiar with the matter said. All oil and gas contracts in the country mandate parties to follow arm’s length principle whereby the buyer and the seller are unrelated and act independently to achieve a fair market value of the product or service being transacted so that the government gets its fair share of revenue for the oil and gas produced in the country. The directorate general of hydrocarbons (DGH), the oil and gas industry regulator, has recently written to the ministry of petroleum and natural gas that the arm’s length sale must be redefined to end a contradiction in the model revenue sharing contract under the latest exploration licensing policy, sources said. The definition of arm’s length sale explicitly excludes sale to an affiliate. But, the new contract introduces a provision allowing sale to an affiliate. It is this contradiction DGH wants resolved, they said. The development has triggered a debate in the oil ministry on whether it is possible to redefine the universally-recognised principle of arm’s length transaction in the narrow context of oil and gas contracts. All contracts related to oil, natural gas and coal bed methane (CBM) have the provision of arm’s length sale, which prevents producers from doing related-party sale. In cases where blocks were awarded without an auction to state firms, the government, not companies, allocates oil and gas to customers.