Under the production sharing contract, the Government, the Government has a mechanism for recovery of cost and profit sharing under between the contractor and the government. It is explained as follows:

1. The contractor (RIL in case of KGD6) incurs all expenditure and takes all risk associated with the exploration of gas.

2. The only manner in which a contractor can recover the cost so incurred is from the revenues from sale of gas produced and sold.

3. The PSC regime stipulates that the revenues from sales of gas are to be first applied to set off the costs incurred by the contractor in exploration, development production of gas.

4. These costs are always pre - approved by government.

5. The maximum percentage of revenue every year which may be allowed to recover costs is biddable item in the international competitive bidding for the block under NELP. The winning bid of RIL for the KGD6 block prescribed that 90% of the revenue every year to be set off against costs. It is to be noted that the other two bidders for the KGD6 block, ONGC and Cairn, had bid 100% of the revenue every year for recovery of costs.

6. The remaining revenue after recovery of costs is “Profit Petroleum” which is shared between the government and the contractor. The percentage in which the Profit petroleum is to be shared between the government and and the contractor is also a biddable item in the international competitive bidding for the block under NELP. For the KGD6 block, the winning bid of RIL prescribe that the Government’s share of profit will be minimum 10% and would increase to 85% with increase in profit petroleum. The other bidders for the block, ONGC and Cairn, had bid a maximum share to the government as 60% and 65% respectively.

7. From the provisions of the cost recovery and profit sharing in the PSC as described above, It is obvious that for the KGD6 block, based on the winning parameters bid by RIL, 90% of the revenues in the initial years will go towards recovery of total cost incurred by RIL from the execution of PSC till commencement of production. (RIL has incurred costs on exploration, development and production on the KGD6 fields from the year 2002 to March 2009). If ONGC or Cairn would have won this block and made this discovery, 100% of the revenue would have gone towards recovery of cost.

8. Once the costs are recovered the bulk of the sales revenues will be “profit petroleum” to be shared between the government and the Contractor. As described earlier, as per the numbers bid by RIL, the share of the Government from the profit petroleum can increase upto 85% with the increase in cumulative sales revenues. The cumulative sales revenues are a function of quantity of gas sold and the sale price of gas.

9. The fact that the revenues in the initial years will be utilized primarily towards recovery of costs as approved by the government in accordance to the provisions of the PSC is been blown out of proportion by RNRL to state that the government gets only 1%, i.e. Rs. 500 cr. While the contractor gets Rs. 50000 cr.

10. On the contrary, at the price of gas approved by the government, over the life of the field, the share of government is significantly higher than the share of the Contractor.

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