03 March 2014 Business ril: KG Basin gas

Where Shall We Drill Now?

Petroleum ministry in a bind over Reliance gas hike as PILs, AAP probe call raise din
Where Shall We Drill Now?
Where Shall We Drill Now?

The mood is distinctly downbeat in Shastri Bhawan, which houses the petroleum ministry in Delhi. It’s now evident that with the Aam Aadmi Party (AAP) legally challenging and seeking a probe in the award of high price for Reliance’s KG basin block gas from April 1, 2014, despite huge supply shortfall, this will become a big election issue.

On March 4, the Supreme Court will take up two public interest litigation cases that question the rationale for the gas price increase at a time when the company has failed to keep to the spirit of the production-sharing contract in all aspects, be it the work programme, costs or performance. Of course, there are pub­lic-sector beneficiaries from the gas price hike. But Reliance’s failure to deli­ver promised supplies—combined with its legendary lobbying power—will ens­ure that it dominates the proceedings.

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“Article 4 of the PSC makes it mandatory for RIL to relinquish the areas. The minister can’t twist the provisions or reinterpret it.”
E.A.S. Sarma, Former economic affairs secy

The PILs have also brought attention to the fact that the gas price hike will inflate household power bills considerably. Eve­ntually, even cooking fuel prices would go up as the government moves to switch people from subsidised cylinder gas to non-subsidised pipeline city gas. That will fuel the pre-election debate.

Also, it hasn’t escaped anyone’s attention that the current supplies from the kg-d6 block of Reliance have risen suddenly from below 10 mmscmd (million metric standard cubic meters per day) to around 14 mmscmd, after the Cabinet approval to allow Reliance the new price from April 1 (under the revised formula that could more than double the rate from $4.2 per million British thermal unit (mBtu) to around $8.4 mBtu).

Surprisingly, even as the government has opted to pursue the arbitration route to get Reliance to deliver on the committed work programme under the production-sharing contract, one doe­sn’t get the feeling that it is genuinely pursuing that route, given the long delay in even setting up the mechanism to begin the process. At stake is around $1.7 billion that Reliance will be able to recover—as costs on creating excess infrastructure to handle over 80 mmscmd gas—without any supplies to justify the expenditure.

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Pipelines Copy of the Common Cause PILs questioning the bending of rules for RIL

Official sources claim the delay in finalising a third neutral arbitrator for the process is because of Reliance. But instead of taking a stern stand, the pet­roleum ministry appears to be sha­dow run by senior Reliance personnel who would like to have everything done their way. This includes hastening the process of finalising the bank guarantee to pave the way for them to get the new gas price; and getting a quick Cabinet approval to retain five of the discoveries they have made in the KG basin block, despite having failed to meet the regulatory deadlines and parameters to establish their claims.

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“The issue isn’t just new prices, but the entire mismanagement of the contract, nigh impossible without the DGH’s acquiescence.”
T.N.R. Rao, Former petroleum secy

Official sources told Outlook that the petroleum ministry is in the process of seeking Cabinet approval to let Reli­a­nce retain three of the discoveries, estimated to together hold around 1 tcf reserves, something the Directorate General of Hydrocarbon (DGH), the reg­ulator, has not accepted. “The pet­roleum ministry proposes to go to the Cabinet to find out whether it should allow Reliance to retain and develop the discoveries or relinquish the area,” official sources stated.

Reliance claims to have surrendered 81 per cent of the area (around 6,400 sq km) awarded to it under the D6 block. While Reliance is keen to hold on to around 600-700 sq km area where three significant discoveries holding around 1 tcf reserves have been made, there are some in the petroleum ministry and DGH who are keen to get it back and repackage it for re-auction under the next round of NELP.

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“Article 4 of the production sharing contract (PSC) makes it mandatory for RIL to relinquish the areas as prescribed. There cannot be any discretionary space in it. The minister cannot twist the provisions of the PSC according to his own interpretation,” says retired economic affairs secretary E.A.S. Sarma, who has consistently been raising the red flag, questioning the lax implementation of PSC where Reliance is concerned. The dangers of any laxity, Sarma points out, would lead to diluting the sanctity of PSC. Already, Sarma points to a news item stating that Cairn has demanded that 8,000 sq km of the Barmer area relinquished by that company be returned to them as it contained valuable hydrocarbon resources.

“Relinquishment not done, penalty challenged, production shortfalls...but RIL has recovered its investment. India has lost.”
Gurudas Dasgupta, CPI

Similarly, the bank guarantee has been necessitated by many, including the finance ministry and the Com­p­troller and Auditor General of India (CAG), questioning Reliance claims that the gas reserves in their field is not 10-11 trillion cubic feet (TCF) as originally certified by international consultants but around 2.9 tcf (of which about 2.2 tcf has already been produced), which has resulted in lower than anticipated production.

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Additionally, with its partners, Reliance has blamed the geological factors for the sharp drop in gas production from levels over 40 mmscmd, an argument which has been questioned by the DGH and a technical expert appointed to look into reasons for the sharp decline in gas production from what was once seen as a most promising find. Subsequent discoveries in the KG block, however, show there is reason to hope more gas is still waiting to be found, else nothing explains BP’s $7.2 billion investments.

“The issue is not merely the new prices, but the entire mismanagement of the contract to the detriment of public interest—this is not possible without the acquiescence of DGH/MOPNG—which only a comprehensive inquiry can establish and the FIR (by the Delhi government) is one such desired step,” says former petroleum secretary T.N.R. Rao.

Given the probe facing V.K. Sibal, former head of DGH, and the recent FIR filed by the Delhi government, there is keenness within the petroleum ministry not to let Reliance dictate the terms of the bank guarantee and instead “draft a format of guarantee that will hold till the final arbitration decision. We don’t want the Indian courts to be out of this as only then can we be sure of justice,” opined official sources.

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