Business

An Oil Leak At Barmer

It’s a quarter of India’s crude. The discount, meant for PSUs. Who gets it? Reliance, Essar.

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An Oil Leak At Barmer
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The Cairn Oil Spill: Why And How

The Field

  • Cairn Energy India Ltd operates RJ-ON-90/1 on-land block in Barmer district of Rajasthan
  • Now majority owned by Vedanta Group, Cairn started oil production from August 2009. State-owned ONGC has 30 per cent stake in the block.
  • Produces 7.5–8.75 million tonnes (about 24 per cent) of India’s indigenous oil production of 34.7 mn tonnes

The Deal

  • In February 2008, GoI nominated PSU refineries—Indian Oil, HPCL, BPCL and MRPL—to procure 3.5 to 4.2 million tonnes of crude output expected from the Barmer fields
  • But the actual offtake by the government refineries was abysmal—less than one million tonnes in 2009-10 and 2010-11. In 2011-12, the offtake rose to 1.67 million tonnes or 36 per cent of the allocation; next year, it fell to below 20 per cent.
  • The CAG audit says beneficiaries of this were private refineries Reliance and Essar, both of which are equipped to handle tough crude

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What Next

  • A PSU refinery in Rajasthan is at least five years away. Meanwhile, pvt refineries will continue to benefit from govt failure to firm up the pricing formula.

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How you package information makes all the difference, as former Comptroller and Auditor General (CAG) Vinod Rai was fond of telling his team. Be it the spectrum scam, the K-G basin gold-plating or the coal scams, the CAG’s ‘sensational’ reports grabbed the headlines for months. In contrast, the auditor’s second performance audit rep­orts last month on the production-sharing contracts of four oil and gas exploration blocks created hardly a ripple. The irony is that these audits showed government revenue loss running into hundreds of millions of dollars due to an ostensible private sector nexus.

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Take Cairn India’s onland block RJ-ON-90/1 in Barmer district of Rajasthan, which accounts for one-fourth of India’s domestic crude oil production. In 2010, it came into limelight over royalty and cess payment issues taken up by ONGC, which holds 30 per cent stake in the block. (Vedanta Resources finally picked up a 60 per cent stake in 2011).

According to the CAG audit report, sheer poor planning—or as a reputed energy expert hinted, ‘a lot of complicity’—has resulted in two private sector refineries (Reliance and Essar) taking full advantage of indigenously produced crude being supplied at their doorstep at a cost lower than what they would have got from countries like Venezuela (from where similar crude is sourced). The report says that the Rajasthan crude is being supplied to the private refineries at a discounted price, one that was originally meant for the PSU refineries.

The government had in February 2008 nominated PSU refineries Indian Oil, HPCL, BPCL and MRPL to procure 3.5 to 4.2 million tonnes of the estimated 7.5 to 8.75 million tonnes of annual crude output expected from the Barmer fields. But presently Indian Oil is the only PSU utilising the Rajasthan crude. It currently picks up 1.5 million tonnes of Rajasthan (RJ) crude for use at its Koyali refinery in Gujarat and at the Panipat refinery in Haryana. “Given the quality of heavy crude, which is low in sulphur but high in wax content, and the difficulties in transportation, we certainly negotiated and got a pretty good discount,” recalls Sarthak Behuria, former CMD of Indian Oil Corporation.

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Replying to Outlook queries on why private sector refineries are being supplied the bulk of its output at a discount, Cairn India limited its response to stating: “In September 2009, the government designated PSU refineries to purchase the Rajasthan crude, a sweet low sulphur crude, at a provisional pricing formula till it is examined and approved by the government. Since these refineries were not lifting the quantity of crude oil allocated to them, the GoI allowed marketing freedom to the Contractor to sell remaining quantity to domestic private refineries.”

Of the estimated 250 million barrels of oil equivalent sold for the past five years, over 80 per cent has gone to private refineries (a companywise break-up is not available). As the government did not allow Cairn to swap the RJ crude in the international market nor did it push the PSUs to invest in upgrading their refineries in the last several years, the biggest beneficiaries have been the private sector refineries which are well-equipped to handle the worst quality of crudes. For context, not many of the PSU refineries are equipped to handle the waxy crude from RJ as it has high residues that require secondary processing units.

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Experts wonder why it took the government more than five years to take a decision on entrusting HPCL with the responsibility of setting up a 7 million tonne refinery to process RJ crude. “I would not put it beyond the public sector to be hand-in-glove with the private sector in not picking up the RJ crude and work to the private sector advantage,” says a reputed energy expert.

Consider this. In April 2007, the government nominated multiple refineries to offtake the production from the field. In April 2008, it approved the laying of a 580-km pipeline from Barmer to Salaya in Gujarat for delivery of crude to the nominated refineries. In December 2008, when the pipeline work was under way, the operator got the delivery point at Salaya changed to Bhogat on the Gujarat coast, involving the laying of an additional 80-km pipeline. This was approved in July 2009. The whole process led to a nine-month delay in starting crude production. As the pipelines were not completed, the sale of crude took place through tankers up to June 14, 2010.

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Moreover, while the production-sharing contract had stipulated that the buyer would bear the transportation cost bey­ond the delivery point, Cairn incurred $8.87 million tow­ards shipping cost to MRPL (which stopped taking the crude after 18 months) and Reliance and adjusted it from the revenues. The CAG report is critical of the fact that in the absence of the government not finalising the price, “the sale of RJ crude was taking place at a provisional price agreed upon bet­ween the operator and the buyer.” Says A.K. Sharma, director (finance), Indian Oil, “There is no forced discount. Whatever discount we are getting is due to the quality of crude.”

Sharma disclosed that Indian Oil is often told by Cairn that it should pay the 90 cents extra charged from the private refiners (this premium was put in place recently and doesn’t figure in the audit). But even that difference does not cut into the attractiveness of getting the domestic crude that reduces the cost of freight, provides assurance of supply and cuts large inventory costs. “The advantage of domestic crude supply is in the freight cost. Depending on where it is sourced from, the freight cost adds 70 cents (from Middle East) to $2 (from South America) per barrel,” says Sharma.

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The audit agency has refrained from quantifying the loss to the exchequer, though it hints that there is no provision through which the government will be able to recover any shortfall in price retrospectively from the private sector. Surely, protecting government revenues is a good goalpost?

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