From page 23 of AR FY15,
“In the case of oil fields at Bakrol, Indrora and Lohar, the original contract period ends in 2020, while in the case of Karjisan and Ognaj, the contract ends in 2030 and 2033, respectively. Under the Production Sharing Contract (PSC), the Government has the power to extend the contract for a period not exceeding 5 years and management is of the opinion that there is a reasonable likelihood of this extension.In the circumstance, effective from the current year 2014-15, the amortisation of expenses has been extended by 5 years, especially keeping in view that the investments made in recent years for drilling of new wells are expected to continue to result in oil and gas production significantly beyond the original contract period. The Auditors have taken note of the above changes in their Audit Report and their opinion is not modified in respect of this matter.”
What happens if the contract is not renewed after 2020, considering that the current government is taking the auction route for usage of natural resources?
Also I don’t like that the company is is extending the amortization period by 5 years, which it probably did in order to increase the reported net profit in the near future. The previous approach of amortizing only till the end of contract term was more conservative.
Disclosure: Invested@Rs.215