Application of option based revenue sharing model for hydrocarbon block auction in India under Open Acreage Licensing Policy

Abstract

Hydrocarbon exploration block auctions (excluding marginal fields) in India face decreasing private participation from despite implementation of the Open Acreage Licensing Policy (OALP) by Directorate General of Hydrocarbons (DGH), in charge of auctions. Research indicates participation is limited by uncertainty, limited information, and failure of past projects in different development scenarios in the sector. The initially promising Krishna-Godavari basin block shutdown with technical difficulties is an example. The current DGH revenue-sharing model limits flexibility of real options analysis by forcing constant commitment irrespective of the on-ground scenario.

The objective of this paper is to develop a flexible ‘revenue-share model’ to increase private participation in DGH Hydrocarbon block auctions under OALP using flexible bidding parameters. The flexible parameter uses revenue-share under predetermined scenarios baselined for evaluation by DGH. The revenue share is contingent on actual conditions, and is expected to cover risks during the project life. A new model is suggested based on the Marketed Asset Disclaimer (MAD) theory which addresses these concerns. This demonstrates efficacy of revenue-share flexibility, and the contractor pays revenue-share proportional to unfolding conditions in project lifetime.The results indicate that if DGH implements an option-based revenue-sharing model, the attractiveness of OALP regime will improve to increase private sector participation