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Foment In RIGzone

Is ONGC a victim? Should private players be favoured? A rift flares up.

Foment In RIGzone
Foment In RIGzone
It was the kind of ugly spat that doesn't exactly cover the Indian petroleum industry with glory. On one side was the director general, Hydrocarbons (DGH), head of a regulatory body that is under the administrative control of the Union ministry of petroleum & natural gas, an individual who doesn't enjoy the kind of independence that his counterparts in the telecom and power sectors do. On the other side was the country's largest (in terms of assets) and the most profitable corporate entity, ONGC.

The issue at stake: the award of oil and gas exploration contracts on the basis of bids placed by local public and private firms as well as foreign ones for various blocks as part of the 'sixth round' of the New Exploration Licensing Policy (NELP-VI). Once ONGC emerged as the top contender for over 20 blocks, DGH V.K. Sibal argued that the state-owned corporation should be denied the exploration contracts for 12 deep-water blocks 'purely' on account of its 'unsatisfactory' track record.

He went a step further and recommended the government should negotiate with foreign firms for finalising these contracts. The icing on the cake was his suggestion that in the event of negotiations with global oil and gas firms not being successful, the government should award the 12 contracts to the second-best bidder—which, in this instance, happened to be the Mukesh Ambani-owned Reliance Industries.

The agenda note that argued against considering ONGC and favoured foreign and private bidders
Click here for larger image

Clearly, Sibal had decided to take on the ONGC top brass. But he ended up on the losing side as his superiors in the government overruled him. On November 23, at a meeting of the empowered committee of secretaries (ECS) headed by petroleum secretary M.S. Srinivasan and comprising representatives of the two ministries of finance and law, Sibal's suggestions were rejected.

This happened after ONGC screamed blue murder as soon as it learnt about Sibal's suggestions. ONGC's CMD R.S. Sharma met Srinivasan a day before the ECS meeting and complained about the discriminatory attitude of the DGH. Sharma pointed out that if ONGC's past record in exploration was as pathetic as Sibal had made it out to be, why was the company allowed to participate in the bidding process in the first place?

A senior bureaucrat says that if the DGH's recommendations had been accepted by the ECS, it "would have been tantamount to changing the rules of the game after the game had begun, which would have attracted the attention of not just the Comptroller and Auditor General of India but Parliament as well—it would have blown up in our face." Srinivasan obliquely hinted that Sibal's contentions were untrue, and that ONGC was on the 'verge' of major discoveries in the near future.

After the ECS meeting, it's certain the Cabinet Committee on Economic Affairs (CCEA) will approve the awarding of the bids for the 12 blocks to ONGC. But the cold war between Sibal and Sharma is not over. Official sources claim the DGH is trying to convince the ministry to change some of the rules for the next rounds of bidding under NELP, which may bar the national oil firm from participating in them for a few years.

This is not the first time the petrocrats have taken up cudgels against ONGC. Former ONGC CMD Subir Raha had differences with former minister Mani Shankar Aiyar, senior bureaucrats and the DGH. This is not the first time the DGH has criticised ONGC's exploration track record. On the day of ONGC's annual general meeting this year, the DGH placed an advertisement trashing the company's record in finding oil and gas under NELP rounds. It stated that ONGC's performance compared poorly with those of private companies like Reliance and Cairn Energy.

Sibal has a point. Until March 2005, ONGC had been awarded 47 blocks under MELP and pre-NELP regimes; it agreed to drill 78 wells and explored 13 with a zero success rate. Only in 2006 did it strike gas in three blocks which, says the DGH, "is under evaluation by operators". In the past three years, ONGC has announced 60-70 discoveries—most in nomination blocks given to it without competition—but they haven't been 'validated' by either the DGH or other government departments.

ONGC sources counter the DGH's contentions by putting out different sets of statistics. The sources add that if ONGC's exploration record in non-NELP blocks is taken into account, its 'success ratio' at 42 per cent between 2001-02 and 2005-06 (or 269 out of 638 wells drilled) compares well with those of Reliance (47 per cent) and Cairn (37 per cent). Further, ONGC claims Sibal has been 'rather selective' in putting out data.

One report of the DGH stated that during 2004-05, ONGC discovered 137 million tonnes of 'initial in-place' reserves of oil and gas while the private sector as a whole discovered 180 million tonnes. The situation reversed the following year, 2005-06, when ONGC added 137 million tonnes to reserves against 66 million tonnes by the private sector. These reserves are incidentally not the ones claimed by individual companies in their publicity material, but reserves certified by the DGH.

It is not as if ONGC's performance should not be criticised. After all, its total production of crude fell from 26.7 to 24.4 million tonnes between 2004-05 and 2005-06. What ONGC officials are unhappy about is that a wing of the government has been 'patently' unfair in its criticism of one of the biggest companies of its kind in the world and a navratna. "We are not above criticism, but don't try and throttle our growth by unfairly denying us contracts that are legitimately due to us," says an ONGC official.

However, Sibal has a bigger problem with ONGC. He feels exploration has taken a backseat at the oil behemoth in the past 4-5 years. There's no accountability about fresh discoveries, and this is hindering competition under NELP. Sources say ONGC is 'very aggressive' while bidding alone as it isn't under pressure to show results and, therefore, shuts out competitors. That's why when it bid together with the more conservative foreign partners (British Gas and BP) in NELP-VI, it lost out.

So, Sibal wants a level playing field where private domestic and foreign majors, who're more aggressive in drilling wells to find new discoveries, are able to grab more blocks. In addition, he thinks ONGC is 'degrading' a few lucrative exploratory areas as foreign investors tend to take ONGC's failure there as a benchmark to ignore them. The way out was to disallow the awarding of some of the blocks under NELP-VI to ONGC. And now was the time to invoke the "past performance" clause, which has been a part of the bid evaluation criteria (BEC), under NELP-VI

Srinivasan, petroleum minister Murli Deora

The 296-page set of documents on NELP-VI—the so-called agenda note for the ECS—that was submitted by the petroleum ministry to the ECS, a copy of which is with Outlook, lays down the procedures, guidelines and BEC for the NELP-VI bids that were meant to be objective and transparent. The evaluation norms specify the relative weights to be given to a bidder's technical capability (20 per cent), work programme (20 per cent) and fiscal package (60 per cent). Complex formulae have been provided to award points to adjudge a bidder's technical capability on the basis of various yardsticks, one of which is accretion to reserves over the last five years.

There is a section in the documents that highlights how the process followed during NELP-VI is more detailed and hence, superior to the processes followed in the earlier rounds of bidding for oil and gas exploration contracts. The office of the DGH felt that the "government may take account of past performance of bidding companies. ..(and) at the sole discretion of the government, it may accept or reject any or all bids." It added that "even the BEC mentions that the government shall keep past performance of a company in view...." Given that ONGC has dug 32 dry wells at a cost of nearly $1.5 billion, Sibal thought it was time to block ONGC from getting some of the NELP-VI blocks.

However, the ECS agenda note also pointed out that while the BEC mentions the 'past performance' clause, this had not been given 'due consideration'. The note explained that this clause has never been invoked in the past because, "There has been a tendency to make the BEC as quantifiable as possible and to some extent the past performance of a company gets captured by the criterion relating to technical competence.... It needs to be considered...whether the rank obtained...can be interfered with and a bidding consortium eliminated...on the basis of 'past performance' clause...." And the ECS decided to reject the DGH's recommendations this time.

The committee was able to pick holes in other arguments put forward by Sibal. The DGH had suggested that exploration contracts for four small blocks not be given to ONGC because these were more amenable for exploration by a small or medium-sized company that could bring fresh expertise. As the agenda note puts it: "... these blocks, being small in size, could be done more justice by medium and small sized companies."

However, it was pointed out during the meeting of the ECS that there was no such 'contingency' provided in the BEC under NELP-VI. Moreover, what the DGH had ignored was the fact that the consortium led by ONGC included a medium-sized company, Gujarat State Petroleum Corporation, which had a fairly successful exploration record. So, the smaller blocks (with individual areas as low as 32 sq km), where ONGC was the frontrunner, may also be awarded to the state-run corporation.

The extreme views held by Sibal and ONGC's Sharma have led to a fresh debate about why the DGH is so inimical to ONGC? Is he acting in the country's interest or does he have some personal grouse against ONGC, ask many industry observers. An industry source told Outlook that Sibal had wanted to become the CMD of ONGC and pitched for the post after its former head Raha was refused another extension. But bureaucratic sources counter that the DGH was 'never interested' in that job and had not even gone for the interview with the selection board. "As the DGH, he can improve the country's exploration scenario, while ONGC is a local job. The DGH status too is better than that of a PSU chairman," explains one of them.

By Paranjoy Guha Thakurta with Alam Srinivas


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