Revenue Sharing Contract (RSC)

A Revenue Sharing Contract (RSC) is a contractual arrangement used primarily in the exploration and production (E&P) of natural resources such as oil and natural gas, where the government and the contractor share revenues generated from production in agreed proportions. Unlike the older Production Sharing Contract (PSC) model, which is based on cost recovery before profit sharing, the RSC emphasises simplicity, transparency, and efficiency by linking the government’s revenue directly to the total income from production rather than reimbursable costs.

Background and Evolution

India’s energy sector historically relied on the Production Sharing Contract (PSC) framework introduced under the New Exploration Licensing Policy (NELP) in 1997. Under PSCs, contractors were allowed to recover their exploration and development costs before sharing profits with the government. While the PSC model encouraged private investment, it also led to disputes over cost recovery, audit complexities, and delays in project approvals.
To address these issues, the Government of India introduced the Revenue Sharing Contract (RSC) system in 2016 as part of the Hydrocarbon Exploration and Licensing Policy (HELP). This shift marked a major reform in India’s upstream oil and gas sector, aligning with global best practices and enhancing transparency and ease of doing business.
The RSC model was first applied under the Discovered Small Fields (DSF) Policy and subsequently extended to larger blocks offered through open acreage licensing rounds.

Concept and Structure

Under a Revenue Sharing Contract, the government and the contractor agree to share revenues from the sale of hydrocarbons based on a pre-determined formula linked to production and price. Unlike the PSC, there is no concept of “cost recovery” or “profit petroleum.”
The RSC model defines two key parameters:

1. Revenue Sharing Ratio: The proportion of revenue payable to the government, determined at the time of bidding.
2. Biddable Revenue Tranches: Contractors quote different government shares corresponding to various levels of revenue or production slabs.

This ensures that as production or profitability increases, the government’s share also rises proportionally.
For example, if the contractor bids 10% government share for revenues up to ₹100 crore and 25% for revenues above ₹100 crore, the government automatically benefits from higher output or prices without renegotiating terms.

Key Features of the RSC Model

The RSC system introduced several significant reforms to promote efficiency and investor confidence:

• No Cost Recovery Mechanism: Eliminates disputes over cost verification and accounting.
• Simplified Administration: Reduces bureaucratic oversight and audit complexities.
• Transparency: Government revenue is directly linked to actual sales rather than declared costs.
• Open Acreage Licensing: Companies can choose exploration blocks of their interest at any time, enhancing flexibility.
• Unified Licensing: Single licence for exploration and production of all hydrocarbons (oil, gas, shale, coal bed methane).
• Revenue-based Bidding: Competitive bidding based on the percentage of revenue offered to the government.
• Freedom of Pricing and Marketing: Contractors can sell crude oil or natural gas at market-determined prices.

These features align the interests of both the government and contractors towards maximising production and efficiency rather than cost recovery.

Comparison Between PSC and RSC

The RSC model thus shifts exploration and financial risks entirely onto the contractor while ensuring steady revenue for the government.

Implementation under Hydrocarbon Exploration and Licensing Policy (HELP)

The Hydrocarbon Exploration and Licensing Policy (HELP), introduced in March 2016, adopted the RSC model as its core fiscal framework. HELP replaced the NELP and introduced several investor-friendly provisions:

• Uniform Licensing: One licence for all forms of hydrocarbons across the country.
• Revenue Sharing Mechanism: Transparent and predictable system for government income.
• Open Acreage Policy (OALP): Enables companies to propose exploration areas at any time without waiting for bidding rounds.
• Reduced Royalty Rates: Especially for offshore and frontier areas to attract investment.
• Marketing Freedom: Allowing producers to sell at arm’s-length prices.

The government, through the Directorate General of Hydrocarbons (DGH), oversees the implementation of RSCs and ensures compliance with reporting standards.

Advantages of the RSC Model

• Enhanced Transparency: Since the government’s share is based on gross revenue, there is minimal room for manipulation of cost data.
• Simplified Fiscal Regime: Eliminates complex cost accounting and government audits.
• Revenue Certainty: Ensures consistent government income regardless of project profitability.
• Ease of Doing Business: Reduces regulatory delays and administrative burden.
• Investor Confidence: Provides clarity and stability, particularly attractive to private and foreign players.
• Production Incentives: Encourages contractors to increase production to maximise both their and the government’s returns.

These advantages make RSCs especially suitable for small and medium-sized fields where cost auditing and management can be disproportionately expensive.

Challenges and Criticisms

Despite its strengths, the RSC model faces several criticisms and operational challenges:

• High Risk for Contractors: Since there is no cost recovery, contractors bear full financial risk for exploration and development, which may deter investment in high-risk or frontier areas.
• Lower Incentive for Cost Efficiency: As government revenue is linked to gross sales rather than profits, contractors may underinvest in exploration or enhanced recovery techniques.
• Revenue Sharing Complexity: Determining appropriate bidding parameters (production and price tranches) can be challenging.
• Market Price Volatility: Fluctuations in global crude prices can affect revenue projections and government earnings.
• Limited Appeal for Deepwater Fields: Investors may prefer PSCs for technically complex or high-cost projects.

Balancing risk-sharing mechanisms and ensuring long-term investor interest remain key policy considerations under the RSC regime.

International Experience

Revenue-based sharing contracts are widely used in countries aiming for transparency and administrative simplicity. For instance:

• Indonesia and Malaysia have experimented with both production and revenue sharing systems.
• Mexico and Brazil introduced hybrid models combining fixed royalties with revenue sharing.
• Nigeria and Ghana have adopted similar approaches for small-field development to attract private participation.

India’s adoption of the RSC aligns with these global trends toward simpler, performance-linked fiscal frameworks.

Case Study: Discovered Small Fields (DSF) Policy

The Discovered Small Fields (DSF) Policy, launched in 2015, was the first to apply the RSC model in India. It aimed to monetise 69 small and marginal fields previously held by public sector companies such as ONGC and Oil India Limited.
Key outcomes include:

• Successful bidding by private and foreign firms, including small exploration companies.
• Accelerated field development due to simplified procedures and transparent revenue-sharing terms.
• Increased domestic production and employment opportunities in the oil and gas sector.

This success encouraged the government to extend the RSC model to larger exploration rounds under HELP.

Significance and Policy Implications

The RSC represents a paradigm shift in India’s hydrocarbon fiscal regime. It promotes transparency, reduces disputes, and aligns government and private interests in maximising production. The model also complements India’s broader energy security strategy by encouraging investment, technology transfer, and efficient resource utilisation.
In the long term, successful implementation of RSCs can contribute to:

• Increased domestic hydrocarbon output.
• Reduced dependence on energy imports.
• Improved ease of doing business in the energy sector.
• Strengthened investor confidence in India’s regulatory framework.