UK Study supports Profit Gas in kind

New Delhi, September 20, 2005 GAIL’s stand on ‘Profit Gas in kind’ has been supported by a study conducted by Energy Management International Limited, UK. The study on the international trend of allocation of Profit Gas says that “taking Profit Gas in kind must be seen as the priority choice of most Production Sharing Contract (PSC) operating countries of the world”. The finding would form the basis for planning the mode of appropriation of a country's share of gas including Cost Recovery, Profit Gas and Royalty.

The international practice of Profit Gas in kind as revealed by the study is contrary to the view of Gas Industry Group (GIG) that all production sharing agreements should be monetized and gas in kind should not be given to the government.

The conclusion in this report is based on the analysis of some 61 countries of which 29 operate Production Sharing Contracts (PSC). The study reveals that the government of 85% of the countries operating PSC require that their Profit Gas share is supplied in kind in addition to payment of royalty, also in kind in some cases The exceptions are those countries (roughly 15%) not having adequate gas utilisation facilities.

Among the countries using PSC, with the exception of 4 countries, which do not have domestic gas utilisation facilities, the rest of the 25 countries were found to realise or have the right to realise their share of Profit Gas in kind and also in some cases the royalties, in kind as well.

Although Gas PSC's are more recent than the PSC's dealing in Oil, there are a number of similarities between the way production of Oil and Gas both in volume and revenues arising from their disposal are shared between the Host Government (HG) and the Independent Oil Companies (IOC)

In the gas sector, a government's share of Profit Gas has been received in kind which has been used to fulfill the government's economic development plan. Limitation in gas transportation out of the national boundary has been a major factor in the decision to make domestic use of gas, to a large extent, controlled by the Host Government except where Gas is produced under concession scheme based on Tax and Royalty. In the concession based Exploration and Production (E&P), no share of profit is received by the government in kind but government receives its charges in Cash.

The main reason for a Host Government wishing to take its share in kind is to acquire the right on the gas by legal means to be able to freely use the gas in meeting the country's economic development. There did not appear to exist any major exception to this principle.

The study was conducted to ascertain the international trend of allocation of the share of gas resulting from PSC between the Host Government (HG) of a country and Independent Oil Companies (IOC's) involved in Exploration and Production of the Country's Oil and Gas reserves. The study method involved analysis of revenue and production sharing arrangements of 61 countries of which, specific provisions of some 26 countries were analysed in details, with reference to the clauses in the PSCs of those countries.

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