Reliance KG Basin Controversy

Discussion in 'Politics & Society' started by NSG_Blackcats, Feb 23, 2014.

  1. NSG_Blackcats

    NSG_Blackcats Member of The Month OCTOBER 2009 Senior Member

    Joined:
    Jul 23, 2009
    Messages:
    3,485
    Likes Received:
    1,548
    Location:
    Delhi
    I have requested you to start a new thread but you did not. So I am starting one.

    Let’s debate here.

    Just a FYI

    I am neither an expert in Oil and Gas exploration nor the spokesperson of BJP. I will try to put highlights of various reports of CAS in my coming posts.

    As you are also interested in the stand taken by various political parties specially BJP, I will try to put them as well.
     
    Singh likes this.
  2.  
  3. NSG_Blackcats

    NSG_Blackcats Member of The Month OCTOBER 2009 Senior Member

    Joined:
    Jul 23, 2009
    Messages:
    3,485
    Likes Received:
    1,548
    Location:
    Delhi
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    Report No. - 19 of 2011-12 for the period ended March 2011 - Performance Audit of Hydrocarbon Production Sharing Contracts (Ministry of Petroleum and Natural Gas)

    The Report has been laid on the table of the Parliament house on 08-09-2011

    The famous and controversial KG basin operated by Reliance – NIKO (90:10 partnership)

    Findings relating to - KG-DWN-98/3 block

    This is a 66 page report so will go through it and put the highlights whenever I have time.

    Page 1 (as per the report) –

    One of the main features of this deepwater project is the laying of 450 kilometers of pipeline and umbilicals. We appreciate the efforts of the operator in executing this world class mega greenfield deepwater oil and gas infrastructure in India within a record time.

    will continue...
     
  4. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    My only concern was that this matter is picked up by political parties and pursued politically too..thanks for starting a new thread.

    Sent from my GT-I9100 using Tapatalk
     
  5. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    Cowboy Capitalism: The Curious Case of Reliance KG Basin Gas Business at Sanhati

    I. Background
    While everyone recognises the significance of petroleum industry for an economy like India, the real happenings and intricacies of the sector do not often make the news. At best these days one hears a lot about the high and ever increasing prices of the petroleum products. It is only recently due to the commotion created by the leading lights of anti-corruption movement that the gas business of the Reliance corporation (henceforth RIL) has come for some public attention though earlier also it generated some interest when the two Ambani brothers were sparring about it. And yet in the mainstream media one hardly finds any meaningful analysis on the issue. At best there are news reports about the ongoing standoff between the corporation and the government and even such reports are lost on lay people due to the technicalities and the specificities of the petroleum business. An attempt is being made here to bring out the key issues involved that a citizen ought to be concerned about, given that it is all about claims on the precious energy resources of the country.
    Before we get into the issues involved some background details of the Reliance KG gas business will be in order. Though the hydrocarbon reserves belong to the people of the country and state is supposed to be their custodian, in 1999 the government came up with the New Exploration Licensing Policy (NELP) allowing private players to enter the fray. Right in the first round, at that time, undivided RIL (i.e., before RIL was divided between the two brothers) bagged the contract for exploring deep water D6 block of the Krishna Godavari river basin in Andhra Pradesh constituting an area of 7645 square kilometres. A production sharing contract (PSC) was signed in April 2000 between the government and RIL and its minor (10 percent) partner, NIKO Resources Ltd (a Canadian corporation), for exploration and production of gas/oil. The KG Basin is considered to be the largest natural gas basin in India. A total of 19 discoveries have been made in the block during 2002-08, 18 of gas and one of oil; in two of them a declaration of ‘commercial discovery’ was made in 2003-04 in an area of 340 square kilometres as those were substantial gas reserves; later commercial oil discovery was made in MA oil fields in an area of 50 square kilometres.[2] It is Ministry of Petroleum and Natural Gas (MoPNG) which is supposed to take care of the exploration and production of natural resources while an office of Directorate General of Hydrocarbons (DGH) was created in 1993 as the key regulator for the petroleum business in the country.[3]
    In 2011 the Comptroller and Auditor General (CAG) of India came up with a report on Performance Audit of Hydrocarbon Production Sharing Contracts in which the Reliance D6 gas business was taken up for a detailed scrutiny. The report offers significant insights about all the three aspects of the business: its exploration, investments involved, as well as pricing of the gas produced; we will take up these issues both on the basis of the CAG report [4] as well as the available media accounts.
    II. Exploration at KG Basin D6 Block
    The production sharing contract [5] has a built-in mechanism for progressive surrender of exploration area back to the government as the contractor discovers gas for commercial production in specific pockets and as it delineates certain portions as relatively less promising. The idea goes into the very heart of NELP: that the state lacks capital for rapid expansion in exploration and production of petroleum resources of the nation; hence the private parties are being invited for a time bound exploration and then forfeit the rest of the area back to the government. The objective is further twofold: one, to prevent hoarding of natural resources by the private parties without tapping them, like we have seen both in case of coal and spectrum in recent times; and two, to get a better price for the resources: as oil and gas are discovered in the basin, the neighbouring areas are likely to fetch better prices in the next round of ‘auctions’ for further exploration, like what happens with land prices.
    Thus in the contract the exploration was divided into three phases and at the end of each of the first two phases the contractor was supposed to relinquish 25% of the area and finally after the phase III, it was to hold on to only that area where the operator ‘discovered’ the petroleum resources in commercially viable quantities after drilling wells and was committed to develop further for production, rest all area was supposed to go back to the government. According to CAG, phase I of preliminary ‘exploration’ got over in June 2004 and RIL gave notice of beginning phase III in 2005, but without relinquishing any part of the original area of basin allocated to them in 2000. For phase III exploration the original end date was June 2007 and was extended to July 2008 by MoPNG, but the end result is that RIL has held on to the entire 7600 square kilometre basin for exploration till today instead of 390 square kilometres from which it had begun commercially tapping petroleum reserves after the phase III. Though Reliance had not drilled any wells in most of the area yet the ministry in a volte face of its earlier stance in February 2009 decided to declare the whole of it as ‘discovery area’ and thus practically awarding it to Reliance for future exploration “in gross violation of the contract”, according to CAG.
    The Ever-expanding ‘Discovery Area’
    As per the contract, ‘discovery area’ is only that area, where “based on discovery and results obtained from… wells drilled… the contractor is of the opinion that petroleum is … likely to be produced in commercial quantities.” Thus the concept of discovery area is inextricably linked to drilled wells and findings of petroleum deposits that are recoverable. In this case the contractor till 2010 had drilled wells only in one specific area in the North West of the total block allocated to them. To begin with DGH did not agree to RIL’s insistence of not relinquishing any area before moving to phase II in May 2004, but according to CAG, it “capitulated” within an year! It was now willing to let the exploration continue based on seismic data, which, as per the contract, was clearly a part of phase I which had to be finished before moving to phase II of drilling exploratory wells. Now DGH found it ‘prudent’ for Reliance to analyse the seismic data on a ‘fast track basis’ and that would also allow them to mark the area of relinquishment ‘in a proper manner’, DGH argued. One of the things Reliance said in its defence was that it lacked ‘ultra deep-water rigs’ for exploratory drilling in the deeper Southeast parts of the block underlining the point that seismic data by itself is inadequate for ‘discovery’.
    In July 2006, DGH permitted RIL to enter phase III without surrendering any area, since the data showed “continuity of discovery” in the whole block, of course based on Reliance’s seismic data. According to the contractor the hydrocarbon bearing channels were continuing throughout the block and had the potentiality to produce gas in commercial quantities. Interestingly even the seismic surveys covered only a part of the block. CAG has documented that MoPNG resisted this idea in 2006-2007, but had also come round to the view of DGH (and Reliance) by 2008 and approved the Reliance proposal of declaring the entire area to be ‘discovery’ by February 2009. CAG asserts that the idea of relinquishing of ‘undiscovered’ area of the D6 block was lost in a “sea of correspondence” between RIL and DGH (later DGH and MoPNG) and the contractor kept insisting that “the petroleum was likely” to exist and hence the whole area should be declared “discovery area”. The only little problem with the plea is that this is not what is meant by ‘discovery’ as per the contract signed by RIL and which they preferred to conveniently ignore and DGH and MoPNG were willing to comply. As CAG concluded:
    The contractor’s opinion that petroleum was “likely” to exist in the entire contract area and ‘could be produced after an exhaustive exploratory/ appraisal programme’ is not in consonance with the PSC definition of ‘discovery area’ which is centred on ‘existence’ of petroleum, based on wells drilled in that part (p. 39).
    III. Reliance Investments in KG D6 Block
    The contract is supposed to be based on the idea that the contractor takes the risk for exploration in terms of initial investments, but in turn is rewarded with adequate returns along with a mechanism for profit sharing with the government. Thus the contract has built in a concept of an ‘investment multiplier’ (IM), that is, the ratio of cumulative net income to cumulative capital investment in the project. As the investment multiplier goes progressively up (because the initial investment stagnates while revenues keep adding up) and the contractor has received adequate returns, the government share in the profits will go up increasingly. Thus the contract bid actually seeks the profit sharing plan of the prospective operator at specific points of IM and obviously the attractiveness of a bid will depend upon the kind of profit sharing that a bidder is willing to commit to the government. Here the KG D6 contract turns quite interesting. The profit sharing plan in the PSC reads as follows: for IM less than 1.5 [6] it is 10%, IM between 1.5 and 2 it is 16%, till 2.5 it is 28% and when IM is expected to go above 2.5, most interestingly, the government share in profits promised by the contractor jump to 85%!
    Now in order to understand the implications of this curious looking profit sharing plan we need to get into the actual details of investments in the Reliance KG basin gas business. Initially, D6 was expected to produce 40 mmscmd (million metric standard cubic meters per day) of gas, which was subsequently revised to 80 mmscmd. The initial development cost was envisaged to be $2.4 billion in May 2004, which was revised through an “addendum” in 2006 to $5.2 billion in the first phase and $3.6 billion in the second phase. So while the contractor claimed that the gas output would double, at the same time the required investment almost quadrupled![7] If we connect it with the profit sharing schedule where the government share jumps from 28% to 85% when the IM crosses 2.5, it could be well anticipated that the operator will do everything possible to keep it below 2.5, and one obvious way to do that is to keep increasing the denominator by adding up the investment required. In fact CAG commented, “The private contractors have inadequate incentives to reduce capital expenditure—and substantial incentive to increase capital expenditure or ‘front end’ capital expenditure, so as to retain the IM in lower slabs… (p. xvi)” The CAG has also observed that the $3.6 billion development cost for the second phase has the possibility of being hiked up in future in the same way as the first phase.
    Thus as per the CAG report there is every reason to believe that these investment costs have been doctored and in fact it also identifies several such mechanisms: award on single party bids, post hoc revision in scope, specifications, and amount of bids, substantial changes in orders, etc. CAG has specially mentioned ‘serious deficiencies” in the award of $1.1 billion order for a floating production, storage and offloading (FPSO) vessel (for oil production) from Aker Floating Production. In fact CAG points out that many of the single bid contracts were handed out to the Aker group companies amounting to more than $2 billion and that Aker had no prior experience of an FPSO. Based on an analysis of the CAG report, Purkayastha observes [8],
    Reliance therefore can make a double killing — by over invoicing the capital costs, it can skim money from the top. In addition, by ensuring that the capital costs take a longer time to recover, it takes out its major share of the profit right in the beginning. Not only did the Directorate General of Hydrocarbons accept this increase in capital cost, which under the contract it need not have accepted, it did so in unseemly haste – it took a scant 53 days to go through cost increase of nearly $ 6.3 billion! Some wizardry indeed.
    IV. Pricing of Reliance KG D6 Gas
    Another aspect worth noting that has been part of the ongoing drama about Reliance gas has been its pricing. Till Reliance came into the fray when only the public sector was involved in gas business, it was the government that would administer the gas prices. It needs to be noted that the gas prices have serious implications for two of the critical industries, fertilizer and power, where it is a vital input; for instance 10% of electricity in the country is being produced through gas. Thus before 2009 Oil and Natural Gas Corporation (ONGC, a PSU) gas was being sold at the rate of $1.83 per unit. In 2004, RIL bid a price of $2.34 per unit to National Thermal Power Corporation (NTPC, a PSU) against international competitive bidding. The gas was meant for its 2600 MW Kawas and Gandhar power projects and the offer was for 17 years. NTPC accepted the offer and issued a Letter of Intent, which in turn was accepted and confirmed by RIL. But then RIL had second thoughts about its bid and refused to sign a Gas Sale and Purchase Agreement forcing NTPC to file a suit against RIL in Bombay High Court in December 2005; the case is still sub judice.[9]
    Meanwhile the two Ambani brothers, who between them literally ran RIL like their personal fief in spite of all the facade of it being a publicly held corporation, began fighting for the crown jewel of KG gas as the RIL empire was being split between them after the death of their father. The entity which executed the contract with the government in 2000 was split into two companies — RIL and RNRL (Reliance Natural Resources Ltd). As RIL was supposed to supply gas to RNRL (later merged with Reliance Power, part of the younger brother’s stable), price of the gas became part of the dispute. In June 2005, the two brothers had a private settlement which included issues regarding utilisation and pricing of the gas between them, as if it was a personal property of the family, completely oblivious to the fact that the gas belonged to the nation and RIL had signed a contract with the government only for exploration and production.
    In 2007 matter of KG D6 gas price was referred to an Empowered group of ministers (EGoM) led by the then finance minister, Pranab Mukherjee, who approved a rate of $4.2 per unit for five years. This undermined the ongoing NTPC plea for $2.34 price in the court as then the government itself was fixing the higher gas price for RIL! It might be noted that till 2008 ONGC was being paid only $1.83 per unit of gas. The $4.2 price was supposedly done on the basis of RIL’s price “discovery.” Reliance’s so called price discovery was to ask a selected set of bidders (from the user industries) to quote a gas price according to a formulae which fixed the price within a narrow range of $4.54 to $4.75. With this as the basis, Reliance declared the “discovered” price to be $4.59/ unit which was later revised to $4.3. The Government then magnanimously decided that the right price was $4.2 and claimed that it was arrived at through a “discovery” mechanism.[10] It is also worth emphasising that the EGoM decided this price going completely against the recommendations of a committee headed by the cabinet secretary which had strongly objected to the Reliance proposal. Former principal advisor (energy) to the Planning Commission, Surya Sethi sums up this confusion well:
    The fact of the matter is $4.2 valid price for natural gas… is the highest price that anybody has received for natural gas anywhere. And while you say cost of production you know various figures came out: somebody has said one dollar but nobody has claimed cost of production more than 1.43 or some such number but there are numbers to show probably it is 99 cents also… Why under that situation we are paying 4.2 dollars is completely beyond me at least. As I said, this was discussed, this was demonstrated (that) this is not the way to price natural gas but yet the EGoM decided to go with that price.[11]
    Now in October 2012, Reliance has sought an ‘import parity’ price of $14.2 for KG D6 gas, straightaway more than three time increase, even before the period of present fixed price gets over in Aril 2014 and a committee headed by the chairman of the PM’s economic advisory council has been formed to look into it.[12] While RIL had in its submission to the Supreme Court in the gas supply row with RNRL stated that it was merely a contractor who is bound by government decision on price and sale of gas in ‘national interest’ (thus arguing for $4.2 price from RNRL as determined by EGoM and not the $2.34 that the younger brother was claiming as per their ‘family’ contract), the company in January this year wrote to the petroleum ministry seeking revision of “discriminatory” and “sub-market” price. Thus, while in its dispute with the younger brother RIL conveniently wanted to follow the government determined price in 2008 since that was almost double than what the younger brother was willing to offer, it now wants to go with the international prices (because apparently it is significantly higher) and is ready to contest the same government determined price!
    It might be argued that the Government also stands to gain out of high gas prices. But this is only partly true. As gas is the major feedstock for fertiliser production and also a fuel for power, this gain has to be offset against the resulting higher fertiliser and power prices. If the cost of fertiliser and power goes up, so does the government subsidy. So while the RIL would pocket the benefit of the higher cost of gas, the government would have to pay out a much higher subsidy which more than counteracts the gains from the increased gas prices. In fact the committee headed by the cabinet secretary had pointed out that higher gas prices would result in prohibitive fertiliser and power subsidies in its input to the EGoM [13] in 2007. This should be compounded with the overall deleterious effect on the economy of rising power and fertiliser costs.
    In a still evolving suspense (or horror?) story, the gas production from D6 came down to 31 million standard cubic metres per day in 2012 from 61 mmscmd in 2010, while the production was supposed to reach 80 mmscmd by 2012-13.[14] Reliance took the stand that there were ‘technical snags’, while government kept pleading for hike in production. They have also revised the estimates of gas reserves in the basin to 20% of their earlier estimates. Such precipitous decline in production has to be analysed in light of Reliance’s persistent demand for threefold hike in gas prices. Most likely the snags will magically disappear once the government gives in to the demand for price hike! In August 2012 Andhra Chief Minister voiced the concern to the Prime Minister that Reliance was “deliberately reducing the production”.[15] In fact part of the ongoing dispute between the ministry and RIL has been whether, with such low level of production, the latter has the right to charge the massive capital investment (made for 2.5 times the present production) as ‘cost’ and thus deny the government its share of profits (see Section III). Last year the solicitor general advised the ministry that, “the costs/expenditure incurred in constructing production/ processing facilities and pipelines that are currently underutilized/ have excess capacity cannot be recovered against the value of petroleum” and according to media reports [16] close to $2 billion should be ‘disallowed’ and recovered from the contractor. As of last year, RIL has already recovered $5.26 billion out of an investment of $5.69 billion. According to a senior MoPNG official quoted in The Hindu, [17]
    Every 1 mmscmd drop in production of gas means a loss of 210 MW of power capacity. Power plants in various parts of the country to the capacity of nearly 20,000 MW with bank guarantees of around Rs. 30,000 crore are lying idle without gas. Fertilizer was being imported more than anticipated due to the fall in gas output from the KG basin. This is a huge loss to the nation, and who knows if gas production was being suppressed for want of revised price.
    V. Conclusion
    Let us summarise the evolving state of affairs of the Reliance KG basin gas business in the last 12 years:
    • Once the corporation bagged the contract in 2000 for exploration and production, RIL began with asserting that the whole basin is full of gas through ‘continuity’ of hydrocarbon bearing channels and convinced the government to declare all of the 7600 square kilometres as ‘discovery area’ in 2009 after a protracted battle based on thin seismic evidence at best and against both the word and spirit of the contract that they had signed with the government; according to the CAG the ‘discovery area’ as per the contract was mere 5% of this area, the rest should have been surrendered back to the government in three stages.
    • Then they jacked up the investments involved by quadrupling it, at least on paper, while doubling the capacity of commercial production, thus quickly skimming off their investments while drastically reducing/ delaying the profit sharing with the government. Most likely, as CAG stresses, it has cooked up the books to earn handsome returns out of this investment as well.
    • At the same time, they have refused to honour their commitment to NTPC to sell the gas at $2.34 and instead have been able to force the government to grant them a price of $4.2, all the while when ONGC was being allowed a price of $1.83.
    • And the latest is that RIL is seeking an ‘import parity’ price of $14.2 while the production from the fields has come down to 31 mmscmd (from 61) when it was actually supposed to go up to 80, apparently due to ‘technical snags’ and lack of gas!
    • In the meantime, in spite of lack of gas and production, Reliance has managed to offload a 30% stake in 23 hydrocarbon blocks, including D6, to British Petroleum for $7.2 billion in 2011 and the deal was cleared by none other than a cabinet committee headed by the Prime Minister. Never mind that Reliance was supposed to be only the contractor and the assets belonged to the people of the country!
    How do we make an overall sense of this ongoing farce of Reliance KG D6 gas? After recognising the problems of Reliance’s turnabout in seeking higher prices while drastically reducing the production, this is what Business Standard, a leading business daily of the country, prescribes recently:
    This should also be a lesson as to the structural problems with India’s exploitation of natural resources. In a pure market with strong regulation, rather than this interlinked mesh of concessions, subsidies and faulty contracts, such problems would not arise. The government must move towards such models in future (emphasis added).[18]
    But what is this oxymoron called ‘pure market with strong regulation’ that the Business Standard (BS) prescribes? By ‘pure market’ if BS meant a Smithian market where actors are ‘price takers’ then how do you bring it when there are only a handful of petroleum corporations across the globe and an industry that requires huge investments? And even those corporations are often tied up with one another like the present case where British Petroleum is a partner in D6 block. More importantly, how do you let market forces play when it comes to finite resources like petroleum, that too in the public domain and where the demand seems to continuously outpace the supply? Only Business Standard and all the ideologues of ‘markets’ can enlighten us about this! Perhaps that is why they need to add regulations for good measure to their idea of ‘pure markets’. Now theoretically ‘pure markets’ ought to be self regulated, at least that is what Smith meant by the ‘invisible hand’ of the market. But given the problem that there are no ‘free markets’, advocates of markets need to grudgingly append the suggestion of regulation to their demand for ‘markets’.
    Coming to regulations, again it can only be BS that can educate us about their idea of ‘strong regulation’, but it is interesting to note the imperious attitude of Reliance towards the regulating bodies and their attempts at enforcing their mandate: when caught on the wrong foot or questioned by any of them, RIL has simply dismissed them either as if they do not have enough technical sophistication, or that they are being very ‘bureaucratic’ in their approach, and the government is repeatedly exhorted to be ‘flexible’ and understand the complexities of business.[19] It is in this context that we need to put the recent debate on the relevance and role of CAG [20] and the fine report that they have come up with in this case, the only substantial analysis that is available on the happenings at KG D6 block. Can we imagine the state of affairs once such state bodies are further neutralised, sometimes in the name of corruption, sometimes for ‘efficiency’, and at other times for the sake of markets?
    But if ‘development’ and ‘growth’ is reduced only to earning profits by the corporations, we cannot fault Reliance on that count. A 2008 Goldman Sachs report estimated RIL’s internal rate of return (IRR) from the fields at 33 percent, second-highest in the world among the top 190 projects surveyed. It seems effectively D6 contributed nearly one-third to RIL’s Earnings before Income Tax (EBIT) and Morgan Stanley attributed about Rs 745 per Reliance share of the target price of Rs 1,322 to its exploration and production (E&P) business according to a Business World report.[21] Perhaps the most appropriate interpretation of this Reliance story is that it is all about profits with markets and regulations being only a smokescreen in the sense that, whenever market distortions are pointed out the ideologues claim a failure of regulations (and therefore that of the government) and when a regulating body tries to do its job scrupulously (like the CAG in this case), the market zealots cry foul and claim that this will distort the market! Welcome to the cowboy country of Reliance: nature, people and public institutions be damned!
    [Comments and suggestions of Manali Chakrabarti and Arun Agrawal are gratefully acknowledged. An earlier and shorter version of this article will be published in Alternative Economic Survey 2013.]
    Notes:
    1. Comments and suggestions of Manali Chakrabarti and Arun Agrawal are gratefully acknowledged. An earlier and shorter version of this article will be published in Alternative Economic Survey 2013.
    2. Oil constitutes only a small part of the petroleum reserves discovered in KG D6, hence the primary focus here is on gas and related issues.
    3. Petroleum is being used here in a broad sense to include both crude oil and natural gas.
    4. Comptroller and Auditor General of India, Performance Audit of Hydrocarbon Production Sharing Contracts, Report No. 19 of 2011-12. The report is based primarily on the 2003-08 records of the government and 2006-08 records of the contractor.
    5. References to the contract are primarily from the CAG report.
    6. That is, when cumulative net income is 1.5 times the accumulated investments.
    7. What happened to ‘economies of scale’ in this case?
    8. Purkayastha, Prabir, The Reliance KG Gas Scam, Newsclick, June 16, 2011.
    9. Chowdhury, Nishith, KG BASIN GAS : Sordid Saga of Duplicity and Subterfuge: KG BASIN GAS : Sordid Saga of Duplicity and Subterfuge – Nishith Chowdhury « India Current Affairs, accessed on Dec 04, 2012.
    10. Purkayastha, Prabir, op. cit.
    11. Newsclick Production, KG Basin deal : Murky valuation of Gas prices & Production costs
    11-July-2011, KG Basin deal : Murky valuation of Gas prices & Production costs | NewsClick, accessed on 06/12/2012.
    12. MoPNG as well as the power sector have been contesting Reliance’s plea for the hike in price, and estimated profit hike for the corporation will be in the range of $8 billion if the govt. agrees for the price hike (PMO backing for Reliance on gas pricing draws fire - The Hindu, accessed on 16/12/2012).
    13. Chowdhury, Nishith, op. cit.
    14. Reliance KG-D6 reserves est off 80%: Niko - Indian Express, accessed on Dec 13, 2012.
    15. The Economic Times, Kiran Kumar Reddy urges PM to look into KG basin gas production issue, Aug 22, 2012.
    16. Mint, Govt seeks to protect KG D6 revenue share, Nov. 21, 2011.
    17. Mehduda, Sujoy, Manmohan set to end reliance on Jaipal for oil and gas, The Hindu, Oct 27, 2012.
    18. Gas: Stand firm, but move on | Business Standard
    19. Witness for instance the latest controversy where Reliance has simply refused to share information beyond the accounting books with CAG saying that it is a private entity.
    20. Besides petroleum on other natural resources as well, like coal and spectrum
    21. Dubey, Rajeev, The Great Gas Hunt, Business World, 19 Apr 2010.
    - See more at: Cowboy Capitalism: The Curious Case of Reliance KG Basin Gas Business at Sanhati
     
    Last edited: Feb 24, 2014
  6. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    Self delete
     
    Last edited: Feb 24, 2014
  7. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    The article above can be used as a baseline for facts wrt KG reliance relationship
     
  8. feathers

    feathers Tihar Jail Banned

    Joined:
    Jan 21, 2014
    Messages:
    1,817
    Likes Received:
    844
    Location:
    india
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    Not true , this issue is going on since a long time and it has nothing to do with political parties.
     
  9. feathers

    feathers Tihar Jail Banned

    Joined:
    Jan 21, 2014
    Messages:
    1,817
    Likes Received:
    844
    Location:
    india
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    AAP vs Reliance - the gas pricing controversy | NDTV.com

    The First Information Report or FIR filed by the Aam Aadmi Party against Reliance Industries and ministers in the UPA government on allegations that they jointly rigged the prices of gas, has brought into headlines a long-running dispute.

    Since Reliance struck gas in the KG-D6 block in the Krishna Godavari basin in 2002 - seen as a validation of allowing private players into gas and oil - controversy has never been far.

    The FIR, based on a complaint by a former bureaucrat, begins by referring to the first controversy that broke out in 2007, during the tenure of Murli Deora as Oil Minister, accused of colluding with Reliance to try and push up the price of gas.

    The reality is more complex, linked to the confused nature of gas pricing in India. Gas, unlike petrol, is not meant to be priced by the government. As per the rules, the supplier - in this case Reliance - is meant to discover the price in the market by inviting bids from buyers, but at an arms' length. The government can step in only if it feels the price is not fair.

    The first price of KG-D6 gas was 'discovered' in 2004, when Reliance bid and won a tender to supply gas to the public sector National Thermal Power Corporation (NTPC) for $2.34 per mmbtu (million metric British thermal units), for a period 17 years.

    Around the same time, the Ambani bothers split. One of the terms of the split was Reliance (Mukesh Ambani) agreeing to supply gas to the power plants of Anil Ambani, at the same terms - $2.34 per mmbtu for 17 years.

    But Reliance refused to supply gas to both and they separately took it to court. This, Reliance's critics say, was proof that it wanted a higher price.

    Reliance, however, told NDTV that they broke off the deal with NTPC because of an unfair liability clause in the agreement.

    They also said when they asked the government to clear the deal with Anil Ambani, the government refused. Reliance has, in its possession, a 2007 letter from the Oil Ministry, which said the $2.34 amount is not market discovered, since Reliance was bidding low to get the NTPC contract. Reliance says that they then approached more than a dozen customers in the power and fertilizer sector, and came back with a price of over $4.3 to $4.9 per mmbtu.

    The matter was referred to an Empowered Group of Ministers (EGoM), headed by Pranab Mukherjee, which settled on a rate of $4.2 mmbtu, on the logic that a higher price leads to greater revenue for the government.

    This decision raised strong protests at that time, now being repeated by the AAP, that the government was doing favours to Reliance in the guise of protecting its own interests.

    As proof, AAP cites the view taken by a committee, headed by then Cabinet Secretary KM Chandrashekhar, which strongly objected to the hike, saying "the gas pricing formula submitted by RIL suffers from several infirmities in respect of both, the formula employed and the bidding process", implying that the buyers from whom Reliance got the quotes were not truly representative.

    Strong objections were also raised by Surya Sethi, who was Principal Advisor, Power and Energy, to the Government of India. He told NDTV that $2.34 per mmbtu was already a discovered market price at which Reliance was making a profit, and there was no need to hike it to $4.32.

    As for the argument made by the Oil Ministry that the higher the price of gas, the faster Reliance can recover its costs and the quicker the government can share in its profits, Mr Sethi said the government is not in the business of making profits alone. He said the high Murli_Deora_360x270.jpgprice of gas, a limited commodity, has a cascading impact on the price of power and fertilisers, which impact the common man.

    The allegations of collusion are also based on the premise that the Oil Minister at the time was Murli Deora, who is seen as close to Reliance. Mr Deora, who is named in the FIR, rubbished that charge, saying he simply went on the EGoM's recommendations.

    But the AAP claims a subsequent letter Reliance wrote to the Oil Ministry in 2009, in which Reliance seems to say that wellhead price of gas - in other words, their cost of production - is under one dollar, is further proof that there was no reason to inflate the price from over $2 to over $4. To quote from the letter, Reliance says, "The wellhead cost per/unit (mmbtu) of Natural Gas in accordance to the above notification works out to US $ 0.8945 per mmbtu and the wellhead value for the purpose of payment of Royalty works out to US $ 3.3105 per mmbtu."

    Reliance has denied this, saying the letter was simply a calculation of royalty, and that their cost of production in 2007 was between $3-4 per mmbtu.

    But the FIR says Reliance continued to receive unfair benefits, with the second gas price hike last year recommended by the Rangarajan Committee, set up to come up with a formula for gas pricing.

    The Committee considered the average of the import price of gas, as well as the price of gas at major gas trading hubs like the US, UK and Japan, and came up with a figure of $8.4 per mmbtu.

    Surya Sethi has criticised this, saying the "Rangarajan committee's formula makes no sense whatsoever. The reason it makes no sense is because ostensibly, they say that this is the market price, but first of all there is no market for natural gas in the world. The only market that exists is in North America, the true market, where gas on gas competition is there and the market must follow certain characteristics, the market where demand and supply are fairly well balanced, the market is fully-fungible, and there is no such market anywhere in the world other than North America. And the price of North American gas is under $4, while here it has been priced at $8."

    Reliance, however, says their current cost of production is close to $7 per mmbtu, so the $8.4 price is fair.

    But even critics of the Committee's decision agree that there is little doubt over Dr Rangarajan's integrity.

    But, as in the case of the earlier price hike, there is suspicion over political collusion, since the decision was taken under the watch of Veerappa Moily as Oil Minister.

    Mr Moily replaced Jaipal Reddy who was Oil Minister between January 2011 and October 2012.

    Under Mr Reddy's tenure, Reliance was penalised over US$ 1 billion for falling output from its KG Basin gas fields. The matter is now in arbitration between the government and Reliance.

    Reliance had argued that this was because they had overestimated the reserves in the fields, an argument rejected by Mr Reddy, who ordered the imposition of the penalty.

    Mr Reddy was replaced shortly afterwards by Mr Moily. In an exclusive interview to NDTV, Mr Reddy denied any agendas at work behind his removal, saying he was simply doing his job.

    Mr Moily has earlier claimed he was not favouring Reliance, and that a higher gas price mainly benefits the public sector Oil and Natural Gas Corporation (ONGC), which is the biggest producer of natural gas in India.

    Some say that the argument - that a convergence in the interests of government and Reliance doesn't amount to collusion - would be taken in better faith if there was greater arms' length between Reliance and the oil and gas policy establishment, specifically the practice of a large number of bureaucrats from the Oil Ministry becoming associated with the company after leaving service.

    One of the members of the Rangarajan Committee, for instance, is JM Mauskar, a former bureaucrat and now a part of the Observer Research Foundation, a Reliance-funded think tank in New Delhi.

    Similarly, Sunjoy Joshi, another member of the Observer Research Foundation and who spoke in defence of the price revisions, was earlier Joint Secretary, Exploration in the Oil Ministry.

    The other allegation in the FIR is over whether Reliance is deliberately escalating its costs. In 2004, when Mani Shankar Aiyar was Oil Minister, the ministry approved Reliance's plan to develop KG-D6 at $2.39 billion to produce 40 mmscmd of gas. Just two years later, in 2006, with Murli Deora in the saddle, the Oil Ministry approved an amended plan by Reliance that it needs to spend four times that amount, $8.8 billion, to produce only double, 80 mmscmd of gas.

    The FIR suggests Reliance had a motive to pad its expenses: as per its contract with the government, Reliance first needs to recover its costs, before sharing profits with the government. So the higher the costs it declared, the longer it can delay sharing profits. The FIR says that was one of the reasons Mani Shankar Aiyar was replaced, a suggestion he laughs off.

    Reliance claims the jump from $2 to $8 billion was spurred by massive increase in oil prices in those years, which in turn pushed up the cost of drilling equipment which rose by 540% in the same period.

    Mr Deora told NDTV that he has no recollection of sanctioning the amended, $8 billion plan, saying as minister, he couldn't recall every detail.

    The AAP has rejected these claims, saying a report by the Comptroller and Auditor General (CAG) on Reliance's expenses has found evidence of gold plating. The CAG report doesn't say that in so many words. It does, however, raise questions on how Reliance chose its vendors, saying "several instances, where multiple vendors were pre-qualified. However, when technical bids were received, all vendors (except one) were rejected and the contract was finally awarded on a single financial bid."

    Reliance has rubbished these charges, producing three independent audits from global agencies which found no evidence of padding expenses. Moreover, they argue that simply padding costs has no long-term benefits.

    But Prashant Bhushan, one of the petitioners in the gas pricing issue in the Supreme Court, has alleged that Reliance brought back money from its inflated expenses through front companies.

    The petition has annexed a letter by the Indian High Commission in Singapore dated August 31, 2011. The probe found that a Singapore-based company, Bio Metrix Marketing, had invested Rs. 6,500 crore in a number of Reliance companies, including Rs. 3,000 crore in Reliance's gas pipeline company.

    But the report finds that the director of the company, Atul Kumar Dayal, has been an old advisor of the Reliance Group and has been the Director in almost 30 Reliance Group companies.

    The report says that it is "highly probable that the amounts have come from mostly tax havens to form a circuitous route. And the source needs to be ascertained."

    But those familiar with the development say "Atul Dayal is Reliance's counsel. Investments by Bio Metrix were open, transparent and perfectly legitimate transactions. These investments were made out of loans raised from ICICI bank, Singapore branch. ICICI has confirmed this fact to regulators. Regulators have investigated the matter and found no substance in allegations."

    With claims and counterclaims piling up, the only point on which there seems to be agreement is that India needs a less confusing, more consistent gas pricing policy. While on one hand, the existing Production Sharing Contract mandates market pricing, on both occasions - in 2007 and 2013 - it is the government which has stepped in to quasi-administer the price. Surya Sethi argues that the Indian market is not mature enough to throw up a gas price, and so perhaps there is a need to do away with the pretense of a market-determined price, and have government-administered pricing based on giving the producer a reasonable rate of return.

    The complexity of these debates only underlines the need for a detailed independent probe, devoid of political colour, to ascertain the charges of political collusion. With election season looming, that seems unlikely.
     
  10. feathers

    feathers Tihar Jail Banned

    Joined:
    Jan 21, 2014
    Messages:
    1,817
    Likes Received:
    844
    Location:
    india
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    Reliance contract can't be terminated: Moily to Prime Minister | NDTV.com

    Amidst controversy over gas price hike, Oil Minister M Veerappa Moily has told Prime Minister Manmohan Singh that Reliance Industries' contract for KG-D6 gas fields cannot be terminated pending arbitration on issue of output lagging targets.

    Mr Moily in a 13-page letter to the Prime Minister explained the process, the contractual requirement and the steps followed for raising natural gas prices from April 1, without which several gas fields of both private sector firm RIL and state-owned ONGC would be economically unviable to produce.

    Rebutting allegations by the Aam Aadmi Party (AAP) and its leader Arvind Kejriwal that the price increase was done to benefit RIL, Mr Moily on February 14 wrote to Mr Singh saying ONGC's average cost of producing natural gas was about $3.6 per million British thermal unit in 2012-13 and its newer finds in deep sea cost more than current rate of $4.2.

    Public sector firms ONGC and Oil India Ltd (OIL) account for about 80 per cent of India's gas production and will be the major beneficiary of gas rates going up from $4.2 to $8.

    Mr Kejriwal before resigning as the chief minister of Delhi had ordered the Anti-Corruption Bureau to register an FIR against Mr Moily, RIL and its Chairman Mukesh Ambani for allegedly creating an artificial shortage of gas in the country and raising prices.

    On gas production from RIL's eastern offshore KG-D6 gas fields lagging targets since 2010-11, Mr Moily told Singh about the process initiated by his predecessor S Jaipal Reddy of penalising the firm by disallowing a portion of cost incurred.

    While the contract provides for termination in case of a default by a contractor, Mr Reddy in May 2012 had slapped a penalty of $1.005 billion. RIL disputed the penalty and initiated arbitration.

    "In view of the contractual provision under the PSC (production sharing contract), the government will not be able to terminate the contract on account of shortfall in production as the matter is pending before the arbitral tribunal," Mr Moily wrote.
     
  11. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    Once I outline the history, you can be sure that i know when it came to public domain. Being in public domain is different than raising it in context of probity and propriety of governmental-corporate relationship. My endeavour is that political implications in not lost in only legality and it elicits a debate from political class.
     
  12. Singh

    Singh Phat Cat Administrator

    Joined:
    Feb 23, 2009
    Messages:
    20,305
    Likes Received:
    8,270
    Location:
    011
    Re: KG basin - CAG reports, Politics, Impact on Oil and Gas exploratio

    RIL's KG-D6 spend exceeds approved limit: CAG audit

    The Mukesh Ambani-controlled Reliance Industries Ltd (RIL) could have exceeded the approved spending limit at its KG-D6 block and under-utilised the facilities, the Comptroller and Auditor General (CAG) of India is learnt to have found in its audit of the company's books.

    In the performance audit report, the management committee (MC) of the D1 and D3 fields in the KG-D6 block and the Directorate General of Hydrocarbons (DGH) have faced CAG heat for "not effectively regulating" the deficiencies on the part of the operator.

    The management committee works as an oversight body and has representation from the petroleum & natural gas ministry and DGH, besides the companies that hold equity in the block. CAG also believes that the facilities in the block, set up at a huge cost, have been under-utilised due to a declining trend in production and non-drilling of wells. RIL has also been indicted by the auditor for moving directly from the discovery to the commercial production stage at the D1 and D3 fields, without conducting the appraisal programmes required under the production-sharing contract (PSC).

    According to a ministry source, in an audit memo given last month, the auditor has said: "Till March 2012, RIL has incurred expenditure of $5.76 billion on development of D1 and D3, against the MC-approved cost of $5.20 billion for Phase-I. MC and DGH are responsible for ensuring that cost calculations are reasonable and realistic, but there is no evidence that they verified it. There also were deficiencies in the existing PSC, as it did not provide for DGH/government to effectively regulate the deficiencies on the operator's part."

    When contacted, an RIL official refused to comment on the issue.

    CAG has also said in the report that the operator drilled only 18 wells, against 22 required under the initial development plan. It has added that the operator had not started Phase-II development works until December 2013. "It (the operator) had stated the production would be closed by 2015-16, if revised field development plan was not approved. It would, thus, appear that the operator has decided not to drill remaining wells, leaving the government with a fate-accompli situation."

    Following a request from the oil ministry, CAG has been auditing the KG-D6 spending from 2008-09 to 2011-12. The auditor's report is to be tabled in Parliament. DGH, too, has faced the heat over lack of appraisal plan. "It is not clear how DGH had assured itself of reliability of the development plan, as well as the associated estimates of reservoir reserves, production rates, development and production costs, etc… in the absence of an appraisal programme," the auditor has opined.

    Looking into the financial aspect, the auditor has said on-shore terminal (OT) was constructed at $827.68 million, against an estimated cost of $550.87 million. And, due to lower production, 50 per cent of these facilities remained unutilised. About half the total subsea-manifold facilities, installed at a cost of $80.19 million, against an estimated $70.81 million, were also unutilised, an official added.

    Also, the three pipelines, set up at a cost of $1,019.43 million, compared with the $906.92 million estimated (one was set up with an investment of $182.73 million) are lying idle. CAG has also alleged that different figures of gas reserves were reconciled by DGH.

    The total shortfall in production from the KG-D6 block during four years to 2013-14 stood at 154 million standard cubic metre a day (mscmd). Compared with targets approved earlier, the production shortfall was five mscmd in 2010-11, 28 mscmd in 2011-12, 55 mscmd in 2012-13 and 66 mscmd in 2013-14.

    RIL's KG-D6 spend exceeds approved limit: CAG audit - The Smart Investor
     
  13. Singh

    Singh Phat Cat Administrator

    Joined:
    Feb 23, 2009
    Messages:
    20,305
    Likes Received:
    8,270
    Location:
    011
    ONGC fears RIL taking its gas in KG basin, wants expert assessment


    New Delhi: State-owned Oil and Natural Gas Corp (ONGC) has written to the Oil Ministry seeking appointment of an international expert to assess if Reliance Industries Ltd was drawing out any of its gas in KG basin.

    ONGC says four wells drilled by RIL in the eastern offshore KG-D6 blocks are within "few hundred metres" of its gas field and it fears the two may be sharing the same pool of reservoir.

    "We had raised that issue last year... some data on over-lapping has been exchanged but things have stopped and so we have appraised the ministry about the status," ONGC Director (Exploration) N K Verma told reporters here.

    Representational Image. ReutersRepresentational Image. Reuters
    ONGC, which is yet to start producing from its portion of the gas field, fears RIL may have drawn some of its gas.

    RIL's wells - D6-A5, D6-A9 and D6-B8, ONGC feels may be drawing gas from its gas pools called G4-2, G4-3 and D-1.

    "As these pools are extending across both the blocks, there is possibility that pools of RIL and G4 are being drained through wells drilled in KG-D6," he said.

    Based on data provided by RIL, ONGC feels discoveries in two of its deep-sea blocks probably extend into RIL's block.

    Verma said ONGC after studying data is confident that the two blocks have the same pool and as per established international practices the same should be apportioned between them.

    "It (the issue) can be resolved... a third party international expert may be required to be appointed to study the data of the two fields," he said.

    ONGC says RIL is seeking additional data and clarification and "somehow not willing to accept that the fields overlap."

    ONGC fears RIL taking its gas in KG basin, wants expert assessment
     
  14. Singh

    Singh Phat Cat Administrator

    Joined:
    Feb 23, 2009
    Messages:
    20,305
    Likes Received:
    8,270
    Location:
    011
    RIL began drilling at KG without green nod


    Reliance Industries Limited (RIL) had started oil and gas exploration in the controversial Krishna Godavari basin (KG Basin) without obtaining mandatory environment clearance (EC), according to crucial documents in HT’s possession. Despite knowing this, the Ministry of Environment and Forest (MoEF) gave them post facto clearance.

    The clearances were given by the Atal Behari Vajpayee-led NDA government in 2002. RIL and MoEF did not respond to detailed queries sent by HT despite several reminders.

    A year later, RIL proposed to change the number of wells to be drilled in each of the five blocks and even this was accepted by the ministry. As per the environment clearance issued to them, “a fresh reference should have been made to the ministry to assess the adequacy of conditions imposed and to add additional environmental protection measures required, if any.”

    Aam Aadmi Party leader Arvind Kejriwal has been raising uncomfortable questions regarding the favouritism shown to RIL on the issue of gas pricing. Post facto environmental clearances are a second case in point.

    According to the letter in HT’s possession, GV Subrahmanyam, the then director, MoEF wrote to group vice president, RIL, on October 28, 2002, giving post facto environmental clearance.

    The letter says, “…MoEF has carefully examined your application. It is noted that it is envisaged to carry out exploratory/ appraisal drilling of 28 wells in the five blocks of the coast of Andhra Pradesh viz KG-0SN-97/3 (KG-19), KG-05N-97/2 (KG-20), KG-OSN- 97/4 (KG-18), KG-DWN-98/1 (KG-D4) and KG-DWN-98/3 (KG-D6).”

    “It had come to the notice of the ministry that RIL has started drilling operations without prior environment clearances,” the letter says.

    The letter further states, “The ministry of petroleum vide their letter dated Sept 12, 2002 informed the environment ministry that RIL vide its letter dated August 2002 has indicated to director general of hydrocarbons (DGH) that two wells have been drilled and a third well is under drilling in KG-DWN-98/3 (KG-D6).”

    RIL sought clearance in December 2001, but began work without getting the certificate and had even completed drilling in two wells by August 2002. Its clearance, however, came only in October 2002.

    Former secretary and planning commission advisor, EAS Sarma told Hindustan Times, “From the correspondence between the above ministries, it is clear that RIL started drilling three wells even before obtaining the mandatory clearances. The company made it a fait accompli by resorting to this. The fact that the ministries concerned acquiesced in this shows that they were under pressure”

    One year after it got post facto clearance in October 2002, RIL changed the number of wells to be drilled in each of the five blocks in KG basin. In October 2002, RIL had taken clearance for eight wells for KGD6 block, which it changed to 18 in September 2003. Similarly, for KG20, the proposed wells changed from six wells earlier to two wells in September 2003. The basin is divided into geographical areas and is termed as blocks.

    MoEF accepted this and in letter to the then RIL group vice-president AN Sethuraman on November 6, 2003, PL Ahujaral, additional director, said, “…ministry coveys its permission for drilling of 28 wells as per the revised numbers of each of the block within the same block….”

    Environmentalists object to the change in number of wells. “Every block has different dynamics and should have been reassessed. A fresh proposal should have been given and based on that, fresh environment clearances should have been given,” said Chandra Bhushan, deputy director general, Centre for Science and Environment.

    According to the environment clearance issued in October 2002, “...In case of deviations or alterations in the project proposal from those submitted to this ministry for clearance, a fresh reference should be made to the ministry to assess the adequacy of conditions imposed and to add additional environmental protection measures required, if any.”

    The ministry did not respond to whether any fresh assessment was made, based on the changes proposed by RIL.

    RIL began drilling at KG without green nod - Hindustan Times
     
  15. Singh

    Singh Phat Cat Administrator

    Joined:
    Feb 23, 2009
    Messages:
    20,305
    Likes Received:
    8,270
    Location:
    011
    Last edited by a moderator: May 10, 2015
    NSG_Blackcats likes this.
  16. Singh

    Singh Phat Cat Administrator

    Joined:
    Feb 23, 2009
    Messages:
    20,305
    Likes Received:
    8,270
    Location:
    011
    Similar article but a better source

    RIL discoveries approved without appraisal: CAG


    New Delhi:
    In a damning indictment, the CAG has said Oil Ministry and its technical arm DGH approved notification of now flagging gas discoveries in Reliance Industries' KG-D6 block despite the company not doing enough appraisal.

    RIL had found gas in the Dhirubhai-1 and 3 wells in October 2002 and were declared commercially viable finds between April 2003 and March 2004. It in May 2004 claimed the finds to hold 8.3 trillion cubic feet of inplace gas reserves, the CAG said in a draft audit report of KG-D6 block.

    The DGH approved a $2.47 billion initial development plan for the two finds by lowering the in place reserves to 5.45 Tcf and recoverable resource to 3.81 Tcf with first gas coming in August 2006.

    However before the start of commercial production, RIL in October 2006 submitted changes in the development plan by raising the capex requirement to $8.8 billion in two phases and putting recoverable reserves at 12.04 Tcf out of inplace volumes of 14.164 Tcf.

    A management committee, comprising representatives of DGH, oil ministry and the operator, in December 2006 approved the revised plan putting recoverable reserves at 10.03 Tcf and doubling of output to 80 million standard cubic metres a day.

    However the fields, which began production in April 2009, did not behave as predicted and output slumped within a year, forcing RIL and its new partner BP to restate the reserves at 2.9 Tcf.

    The CAG in the report said the production sharing contract stipulates that a contractor should submit an appraisal programme to reassess the extent of the discoveries.

    "There was no appraisal programme in respect of D1&D3 gas discoveries as required under PSC. The operator moved directly from discovery to commercial discovery.

    "Appraisal programme would have enabled the operator to delineate the petroleum reservoirs to which the discovery related in terms of thickness and lateral extent besides determining the characteristics thereof and quality of recoverable petroleum therein," it said in the report.

    The CAG said it was not clear how DGH had assured itself of the reliability of the development plan, as well as the estimates of reserves, production rates and costs in absence of the appraisal programme.

    D1&D3 output has fallen to about one-tenth of the 80 mmscmd production that RIL had estimated for this time.

    "It is not clear how DGH had ensured accuracy and realistic nature of the data before agreeing to the approval of Addendum to the Initial Development Plan (AIDP)," the auditor said.

    The CAG has sought comments of the Oil Ministry on its draft report before finalising a Performance Audit report.

    RIL discoveries approved without appraisal: CAG - NDTVProfit.com
     
    Hindi likes this.
  17. Hindi

    Hindi Tihar Jail Banned

    Joined:
    Mar 6, 2014
    Messages:
    98
    Likes Received:
    31
    Location:
    India
    Ambani brothers' dispute: Will India be taken for a ride?
    By Bhamy V Shenoy

    Public debate should have concentrated on the important subject of how the wealth from these gas reserves should be shared between the investors and the country.


    How will you react if someone sells your valuable property without your approval and pockets the profit giving only a small share to you? This is exactly what is happening with the Ambani brothers’ dispute in simple terms. The dispute involves the huge gas reserves of as much as 40 trillion cubic ft discovered in 2002 in block KG-D6 of the Krishna Godavari basin.

    Public debate should have concentrated on the important subject of how the wealth from these gas reserves should be shared between the investors and the country. Instead, the media has been diverting the public attention to sensational topics of family disputes, possible partisanship by the ruling and opposition parties, etc. In the bargain, national interest has been given a low priority.

    All the controversy and confusion comes from a lack of knowledge of underlying production sharing contract (PSC) signed by Mukesh’s Reliance Industry Ltd (RIL) with Indian government. It is the PSC which provides the legal framework for exploration, development and production of gas reserves. PSC was used for the first time by Indonesia. It is a legal framework used by several countries for oil and gas exploration and development investment projects.

    A well negotiated PSC provides protection against the oil companies from ‘gold plating’ the investment. PSC provides for a coordination committee consisting of the representatives from the government and investors to approve all the major decisions. It also provides checks against selling oil and gas below the ‘market prices’.

    Once the investment of the investors are recovered and also when their return exceeds some benchmarks, the government gets a larger share of the so called ‘profit oil and gas’. The most important factor to be monitored for ensuring the states’ share of the profits in any PSC is the prices for oil and gas. Since there are no well-defined benchmarks for deciding the market prices for oil and gas, there is a lot of judgment involved to assess their authenticity. This is precisely where Ambani brothers’ dispute can result in huge losses to the nation if the government does not act diligently.

    Despite recommendations by several high-powered committees, the government has not liberalised the Indian gas market. Gas prices are fixed on an arbitrary basis by the bureaucrats in the petroleum ministry without allowing the market to decide. Even when India was paying international price to import LNG as high as $12/ million British thermal unit (mmbtu) in 2008, the government owned gas production was sold at a throwaway price of less than $2/mmbtu.

    Two important lessons that have been learnt by oil companies are never to sell gas at fixed prices on a long term basis and also that gas prices move in sympathy with oil prices. Looks like these lessons have been forgotten or ignored both by the Ambani brothers and the government officials. Is it deliberate? Or is it out of ignorance?

    Depending upon the crude oil prices in the next 20 years and also the relationship between crude oil and gas prices, total profits generated over a period of 20 years could be between $48 billion and $156 billion. Usually the government share of these profits is about 70 per cent. Thus the government share can vary between $34 billion and $ 109 billion from the KG reserves.

    Imprudent

    For example if the average crude oil price were to be about $100 per barrel, then crude oil equivalent gas price would be $16.7 per mmbtu. On the other hand if oil prices were to be $50/b, and gas prices are discounted as much as 30 per cent in relation to oil prices, then the gas prices could be $5.83. When the gas prices can vary over such a wide range (perhaps even more) it is not prudent to sign a fixed price contract.

    If the government were ‘forced’ to accept a lower price that Anile Ambani’s Reliance Natural Resources (RNRL) is arguing for, then profits would be just $13 billion. Thus what is at stake are billions of dollars depending upon how PSC terms are implemented. I am presuming that Reliance PSC has no hidden sweetheart deals. This is a big assumption.

    Since PSCs have commercially sensitive terms, public do not have access to them even under RTI.

    When the partition of assets took place between the brothers, Mukesh Ambani’s RIL agreed to sell 6.1 tcf to RNR at a fixed price of $2.34/mmbtu as per the recent high court ruling. Such a sale is in total contravention to PSC and the government need not accept it.

    In any PSC there are terms that force any investor to sell gas at ‘arms length’ market price. A negotiated price between two brothers does not meet that criterion. Let us assume that the brothers were on good terms and they had negotiated, say, a price of $1 per mmbtu should the government accept it? It is possible that as per the mutual contract between the brothers, RIL may have to pay any price difference between what RNRL may have to pay to buy the contracted quantity of gas and $2.34 mmbtu. But this need not concern the Indian government.

    Indian government should consider taking RIL to court for violating the basic terms of PSC (not trying to get the arms length market price) and try to null and void the original contract itself to safeguard the national interest. If brothers were on good terms, no one would have found out about this sweetheart deal. Just like the high court ruled without taking into consideration the PSC terms and ruled in favour of RNR and forced the price of $2.34 on gas sales, the Supreme Court may also do the same.

    To avoid such an eventuality, the government should be a party to this dispute. In fact the government should have acted soon after it came to know the partition terms between the brothers and asked RIL for clarification. Are there any public spirited whistleblowers who can expose the KG-D6 details so that national interests, which are obviously in jeopardy, are truly safeguarded?

    (The writer is an internationally known energy expert)
     
  18. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India
  19. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India
  20. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India
  21. RajeevKr

    RajeevKr Regular Member

    Joined:
    Feb 13, 2014
    Messages:
    252
    Likes Received:
    54
    Location:
    India

Share This Page