The committee ha(s) noted that during the year 2012, the natural gas prices in these three selected hubs were around $2.5 to 3.5 per mBtu in HH (USA), $8 to 10 at NBP and $14 to 16 at Japan respectively. However, it is to be observed that the benefit of lower gas prices at HH has been largely diluted by the inclusion of Japan’s LNG FoB (freight on board) prices which include (a) 60 per cent royalty component linkage to JCC (Japanese Crude Cocktail) and host of other factors. The note prepared by ministry of finance for the EGoM on the Rangarajan committee formula argues that there is no logic in inclusion therein of the consumption by Japan which is having very high import LNG price and that nowhere in the world, wellhead prices of natural gas has been linked to spot LNG contract basis. The committee find(s) merit in this view of the ministry of finance.
The committee further observe(d) that Russia, being the second largest among the gas producing and consuming countries, exporting 40 to 50 percent of its gas to Europe at a price of about $8.77 per mmBtu, could (provide) a valuable and better indicator of (the) gas price. The committee desire(d) that Russian prices ... be incorporated as one of the reference price(s) in the pricing formula. The committee would also like to point out the glaring omission of factoring of domestic cost of production of natural gas by NOCs (national oil companies) namely ONGC and OIL which was pegged at $3.63 and $3.21 respectively during the year 2012-13. Similarly the cost of production for RIL in 2012-13 stood at $2.48 per mmBtu from (the) KG-D6 field. The committee would further like to highlight that the price of domestic natural gas need not be dollar denominated due to huge volatility in dollar vis-à-vis rupee which often leads to gains to operators for no reasons and adversely impact(s) the (finances of the) government... As the present price of $4.2/mmBtu at an exchange rate of Rs 45 (to one US dollar) works out to be Rs 189/mmBtu and, as... Rs 60/$equals ...Rs 252/mmBtu ...(this would imply that a) 30 per cent windfall gain (would) accrue (to the operator) due to the rupee devaluation from Rs 45 to Rs 60 against the US dollar.
The committee also recommended a thorough review of the government’s entire strategy of price-led investment growth, after observing that the flow of private investment in exploration was tapering every year from 2009–10 onwards despite the substantial hike in gas prices and the drastic decline in domestic gas output.
The Committee note(s) that (the) KG-D6 basin is one of the successful discoveries in the NELP regime which gave hope to the country in its quest for exploration of hydrocarbon resources. The committee note(s) that the planned production as per the approved field development plan (FDP), which was 33.83 mscmd in 2009-10 was to go up to 86.73 mscmd in 2012-13. However, the production from the KG-D6 basin started declining... the actual production was 55.89 mscmd in 2010-11 and 26.18 mscmd in 2012-13.
The... success story of (the KG gas basin and the) NELP regime (attracted)... private companies and MNCs (multinational corporations to explore gas) ... which until then (a domain of national oil companies)... However, the contractor has not adhered to the measures suggested by the upstream regulator DGH to drill wells to increase natural gas production. Also, coincidentally, the demand for increase in the price of natural gas by the contractor over and above the discovered price by arm length mechanism as provided in the PSC has also brought (in a ) question mark regarding the interest of contractor to abide in the sanctity and stability of the PSC.
Drawing the attention of the government to the Supreme Court’s observation that natural resources are national assets and must be utilised for the larger good of the people, the Vundavalli Committee urged the petroleum ministry to explore all possible options and take corrective measures to increase the natural gas production from KG-D6 as observed in the Goplakrishnan report commissioned by the DGH:
The committee also observe(d) that the DGH had commissioned a study by an expert on the decline in production and the expert has concluded that reserves as estimated earlier, which is around 10 tcf (trillion cubic feet) are still available and remedial measures will help the production to go up. The expert has also observed that the shortfall in gas production is due to non-drilling of adequate number of wells as per ADP (Approved Development Plan) and delays in commissioning additional producers would trigger water drive in the reservoir and consequent reduction of the ultimate recovery as a result of water encroachment as well as permanent loss of some of the gas reserves. Based on the aforesaid report the cost disallowance amounting to US $1.005 billion has been imposed upon the contractor which the contractor has taken for arbitration. The committee would like to point out that Supreme Court has observed that natural resources are national assets and are to be utilized for larger good of the people. Therefore, the Committee would recommend to MoPNG to explore all possible options and take corrective measures to increase the natural gas production from KG-D6 basin, as observed in the study commissioned by DGH.
On 10 December 2013, an ‘action taken’ report was presented by the government which indicated that no action had been taken against RIL for the reduction in gas output from the KG-D6 block because the company had not adhered to the recommendations of the DGH to drill more wells, install a compressor to increase gas recovery and revise its field development plan. The same day, the DGH rejected two discoveries of gas claimed by RIL—D39 and D41 in the KG- DWN-2003/1 block—that had made declarations of commerciality (DoCs) on the basis of the older gas price, calling those unviable (Business Standard, 8 January 2014). Shine Jacob of BS wrote that the DGH had stuck to its stand that the D39 and D41 discoveries were unviable and the regulatory authority had not considered the need for a review of its position even after the CCEA’s decision to accept the gas pricing formula of the Rangarajan Committee which would effectively result in a doubling of gas prices from 1 April 2014. Based on a DoC filed by RIL in January 2013, DGH had stated that ‘D39 and D41 generated negative net present value (NPV) of $520 million, considering the incurred cost of $305 million.’ Jacob added that the DGH had decided not to change its stand even as the Planning Commission, in its half-yearly review of the energy sector in September 2013, pushed for the new gas price as the basis for NELP field pricing.
Cutting through the technical jargon, a few main points were clear. The regulatory body, the DGH, was exercising its independence and autonomy. Importantly, it was headed by a technocrat who was a Jaipal Reddy-appointee. His actions were construed as pin-pricks against RIL. On 2 November 2013, it was formally announced that director general, hydrocarbons, R.N. Choubey would be replaced by B.N. Talukdar, former director, exploration in the public sector Oil India Limited and that his appointment had been cleared by CVC.
In July 2013, the DGH had recommended the levy of an additional penalty of $781 million on RIL, a figure that went up to $792 million by November with interest being added, disallowing the company cost recovery for falling gas production in 2012–13, which stood at an average of 26.07 million cubic metres a day against the target of 86.73 million cubic metres. The DGH had directly held RIL responsible for not drilling all the 31 wells it had committed to drill. After cost disallowance for 2012–13, RIL would still have to pay the government a total of $114 million in the form of ‘profit petroleum’, of which a sum of $103 million was pending. This was stated by petroleum secretary Vivek Rae. The RIL-BP consortium had invested $5.678 billion in developing D1 and D3 fields in the KG-D6 area and another $1.74 billion in the MA field in the same area. Operating costs stood at another $1.774 billion. Rae was quoted by PTI on 12 September saying the law ministry was being consulted on the levy of the penalties of RIL.
Meanwhile, CPI MP Dasgupta continued his protests He wrote again to prime minister Manmohan Singh pointing out that the principle of disallowing cost recovery had already been established in 2012 after due diligence, accepted by the then solicitor general of India, the Union law minister and finally by the then petroleum minister Jaipal Reddy. Dasgupta added that petroleum secretary Rae and Giridhar Aramane, joint secretary in the ministry, had ‘endorsed’ the report of the DGH a
nd passed appropriate orders for cost recovery to the tune of $1.8 billion and $114 million in the form of ‘profit petroleum’ within 30 days. ‘The reference to the law ministry is yet another attempt by the petroleum minister (Moily) to delay and obfuscate issues to give undue benefit to RIL,’ Dasgupta wrote, accusing the minister of overruling the advice given by his own ministry’s bureaucrats.
RIL, on its part, registered its disaffection through a letter of ‘complaint’. P.M.S. Prasad wrote a letter to Rae, excerpts of which were quoted by Rajeev Jayaswal in the Economic Times (12 September), who said he had perused what had been written. RIL disputed the issues raised by the DGH on the company’s testing methods. Prasad wrote that ‘the action is clearly an afterthought, based on an arbitrary decision and is tantamount to disputing completely valid discoveries made at the contractor’s risk’. The DGH had asked the contractor to undertake a drill stem test (or a test that measures pressure behaviour at the drill stem, provides information on ‘formation fluid’ and establishes whether a well is a hydrocarbon reservoir that can be commercially exploited). The test was meant to ascertain the viability of the D29, D30, and D31 fields, the three new gas finds by RIL. Prasad requested that the DGH be asked to ‘rectify the errors and remove the hurdles’ which was ‘needlessly delaying further progress in these discoveries’. The DGH had also asked that five other discoveries (D4, D7, D8, D16 and D23) be relinquished since their field development plan (FDP) had not been submitted in time. Prasad claimed that neither the regulator nor the petroleum ministry had ever informed the company through the Management Committee or in any other way, of the need for a ‘separate FDP for these five discoveries’. Then came the hint of a warning. Prasad wrote that RIL was unnecessarily being projected as a defaulter and the government’s move towards ‘forcing the contractor to relinquish discovered resources will not only hurt the investor but considerably reduce the chances of many of these discoveries ever being produced in the future.’ He added: ‘As (a) contractor having spent enormous amount of time and money on bringing these discoveries to fruition, we stand to suffer immensely if pushed to a situation of forced relinquishment of rightful discoveries.’ Prasad’s views were echoed by Sashi Mukundan, regional president and country head of the BP group, which had invested $7.2 billion in the venture. In an interview with Sujay Mehdudia of TheHindu (16 September 2013), he claimed that RIL was not suppressing gas production. The fields had turned out to be more complex than what had been originally assumed and that recoverable reserves had to be reassessed to 3 trillion cubic feet (tcf) from the 10 tcf initially estimated. He added,
The pre-production assessments made by the operator were certified by an international consultant and reviewed and endorsed by the government to be around 10 tcf. Facilities to produce this quantum of gas were designed and necessary approvals were given by the government. As production commenced, it became evident that the field was more complex than originally envisioned, and detailed technical assessment shows that around 3 tcf of gas can be ultimately recovered from D1-D3.
Mukundan also sought to emphasise that RIL was prudent, responsible and following international best practices to optimise hydrocarbon recovery. He said in this regard:
D1-D3 fields have so far produced over 2 tcf of reserves and has another 1 tcf plus left to produce. With the downward revision of reserves by 7 tcf, international prudent development practices would not support drilling additional wells as it does not make technical or commercial sense. BP fully agrees with the operating practices of RIL. It would result in inefficient spend and potential accusations of increased cost recovery.
Commenting on the government-appointed technical expert P. Gopalakrishnan’s suggestion that gas output had fallen because of RIL’s failure to drill the adequate number of wells as per the approved development plan, Mukundan opined that it would ‘result in an inefficient spend of over $2 billion with no economic benefit’. ‘The plan is to produce the remaining D1, D3 reserves efficiently by performing work-overs, installing compression while continually looking for additional opportunities in the field,’ he added, endorsing RIL’s views.
BP’s Mukundan said the estimated pre-production gas volume was too large, and this was realised as the fields started producing. ‘An initial over-estimate of volumes is by no means unheard of in the oil and gas industry,’ he said defending the RIL consortium’s record.
He said that RIL was ‘aggressively progressing to arrest the decline in D1 and D3’ following government approvals that had been on hold for three years. Mukundan also said that they expected the field to continue producing till compression was installed in 2015, when they anticipated incremental production in the field. Stating that more than a dozen discoveries in the KG-D6 block amounting to about 2.5 tcf of resources were awaiting various approvals, he added that ‘current production could have been 50-75 per cent more than today’s levels had timely approvals been received’.
Deftly blaming the government, the BP executive claimed that had approvals come on time, the first well dug would have ‘commenced production around 2014 adding to/sustaining the gas supply from KG-D6’. Now, with the delay, production had been pushed to 2017, or even 2018, at a huge cost to the nation, he added. Mukundan also debunked the view that higher gas pricing would benefit RIL and its partners and said that it would benefit the national oil companies such as ONGC and OIL since they accounted for ‘80-85 per cent of domestic gas produced in India’. On being asked about the rationale for a hike in gas prices, he reiterated the position taken by his company and RIL that higher prices were necessary for long-term investment decisions:
On the east coast, deepwater construction activities can only take place during the December to April weather window. It hence takes 3-4 years after an investment decision to procure, construct and install facilities and for a field to start production. Investment decisions made today will yield additional production only from 2017. The PSC allows for the contractor to discover an arms-length market-determined price for gas produced. The intent is to ensure value is maximised for all partners, including the government. Gas price for our current production was agreed and fixed till April 2014. With a lack of clarity on arms-length prices beyond that period and in the absence of freedom to discover such price, it becomes difficult for RIL or BP to sanction investments to develop the 4-5 tcf of discovered resources.
When asked whether higher domestic gas prices would have an adverse effect on the economy, Mukundan sought to ‘dispel this false notion’. He went back to the argument that at market-level prices, a large share of the profits from increased revenues would go to the government, in addition to earnings from royalty and taxes. Citing a study by IHS-CERA, a global energy strategy advisory firm, he said that an average of 30 per cent of all revenue generated would go to the government as profit share, taxes and royalty, another 40 per cent would be invested in infrastructural facilities and 15–20 per cent would comprise operating costs. He also said that only ‘experienced players’ would undertake the risk of investing. The alternative, he argued, was limited investments and more energy imports for India. ‘One should bear in mind that the alternative to higher domestic gas price is not domestic gas at lower price. It is actually, no domestic gas and more imports.’
When asked why BP was not participating in the NELP rounds of auctions, Mukundan highlighted what he called ‘regulatory logjams’. He said that production from over 10 tcf of discovered resources, with potential to provide 80–100 mscmd of gas was awaiting approval, and that over 200 decisions were pending at the end of 2012. ‘Unfortunately, in the last few years, administrative focus and decision making has moved away from enabling activities. The focus is now on protecting notional government revenue. This focus is stifling activity and as a result very few activities to bring on new production are getting through,’ claimed Mukundan, adding that BP was the only international player of significance which had committed investments in India’s upstream oil and gas sector and was the single l
argest foreign direct investor in the country. He said,
Within two years of our presence, together with partners, we have had two major discoveries in the KG and Cauvery basins. We are working with our partner to develop the 4-5 tcf of existing discovered resources. All of this despite of the fact that we have seen the sanctity of contracts challenged multiple times and day- to-day approvals stuck for years, grinding business to a standstill.
He claimed that this was why Indian exploration and production companies were investing abroad. Clearly the stakes had become high for RIL and BP, whose spokespersons were being called to counter the government’s critics. On 19 September, Prasad led a team of executives in a meeting with petroleum secretary Rae after which RIL and BP put out a joint statement that read:
The meeting with senior ministry officials of the ministry of petroleum and natural gas today is a positive step to resolve long drawn issues in the KG-D6 block, impacting some of the existing satellite discoveries. We believe that any decision will be taken in the best interest of energy security of the country.
Rae was quoted by journalists as saying that the government would like to resolve all issues as quickly as possible instead of importing gas at $14. ‘We want to quickly bring out gas, but within a legal framework,’ he said, adding that the ‘PSC does not provide for delayed submission of the DoC (declaration of commerciality) or FDP (field development plan).’
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