The new audited report of CAG reveals that the contract of production sharing for oil and gas blocks in onshore and offshore is circulated on a large scale in media, depicting the malicious alliance between
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the central government and the big private players of the country. The drafted report explains that the Directorate General of Hydrocarbons (DGH) has favored Reliance Industries Limited (RIL) to leverage on the capital cost of the plant permitting them to gain huge margins on their initial costs. The agree- ment between the government and the private players is based on the production sharing contract (PSC) known as the “Investment Multiplier,” stating that the higher the initial capital cost, the greater will be the player’s profi t share.
During the bidding process of KG Basin (D6 Block), the capital cost estimated by RIL was $2.4 bil- lion inflating to $8.5 billion during the operations without any objections from DGH and the ministry of petroleum. For the inflation of capital costs in the operations, the obvious route is through the invoice with deals from favored subcontractors. Since CAG did not compute the account well, the government had to bear the huge losses throughout the process. Reliance, though, has denied all the allegations from the CAG report about the inflated capital cost and reducing the government’s profit share of revenue from the project. Reliance argued that the cost of project figured by the company is lower than the cost involved in the shallow-water project.
As per the CAG contract, the company had to develop a certain contracted area within a limited time span and the company violating the contract will be relinquished from it. In violation of the contract, the DGH and the ministry of petroleum designated this area as the “Discovery Area.”
The CAG has looked upon only one of the two scams. The first is the violation of the production sharing, while the other one is the high price of Reliance share ($4.2/m BTU) set in 2007, supported by the ministry headed by Mr. Pranab Mukherjee. RIL had initially agreed upon $2.34/MBTU for the supply of gas to both NTPC and RNRL, in which they noted the profit of 50% through their own calcu- lations. In the court case between RIL and NTPC/RNRL, RIL admitted that their production cost was
$1.43/MBTU while they subsequently increased the supply price to $4.2/MBTU, which leads to the issue between NTPC/RNRL.
Different Kind of Gold Plating
5The area of the KG basin is 8,100 km offshore, which was set up for gas and oil exploration. The block D-6 was given to RIL (90%) and Niko Resource Ltd. (10%) through a bidding of production-sharing contract under the new exploration licensing policy. The initial research shows that D-6 was able to produce 40MMSCD, which was further renewed to 80MMSCD. Due to this, the initial cost of devel- opment, $2.4 billion, was raised to $5.2 billion through an “Addendum” in 2006 during its fi rst phase while an additional $3.3 billion was incurred in the second phase.
According to the production-sharing contract which the government envisaged with Reliance in 2000 is called as the “Cost Petroleum.” This helped the government to cover operating cost, 5% of roy- alty, and exploration costs for the development of production of gas. According to the contract, 90% of the petroleum/gas sold comes under cost petroleum and the remaining 10% is considered as the profit petroleum until the complete capital cost is recovered.
As per the “Investment Multiplier” mentioned in the contract, the change in the proportion of profit sharing will depend on the amount of the cost recovered to the total cost. The pegging be- tween the government and RIL is based on this Investment Multiplier for their proportion of share, which signifies that the major portion of the profit until the cost is recovered will go to Reliance Industries. After recovering the major part of the costs, the Investment Multiplier will continue
5 The artifi cial escalation of costs with extensive care and logical reasoning.
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to increase along with the government’s share which is pegged to this Multiplier. Keeping this in mind, Reliance increased its capital cost which will help them to gain a large share of profits during the initial years, while the government will only get their profit in the last phase when the produc- tion is at the declining stage. Reliance ensured that they got the double profit by, first, increasing the invoice of capital cost to get money from the top and, secondly, to get longer time to recover the money which will in turn help them to get more profit.
The matter is not only about the money but also deals with the problem of financial accounting, in which the money earned at the later stage should be discounted by an amount which is equal to the amount deposited in the bank for interest.
As we know, the money earned today is more valuable than earned a year or so later. According to the standard discounting of cash flow, the discount future earning via the normal discounting rate of 10%, the share of government profit should be 63%, but in reality it is 48% only while the shares for Reliance increases from 32% to 52% (Exhibit III).
Selective Pricing by RIL
In September 2007, an Empowered Group of Ministers (EGoM) had set the price of gas at $4.2/
MBTU for the next fi ve years without any justifi ed reasons. But for the same period (2005–2008) ONGC states that it was paid only $1.8/MBTU, revealing that the price hike was mainly for RIL.
RIL asked the bidders to set the gas price which was set at the range of $4.54/MBTU to $4.75/
MBTU. Keeping this in mind, RIL declared the price to be $4.59/MBTU which was revised to $4.3/
MBTU. The government decided that the right price should be $4.2/MBTU, through the discovery mechanism.
It can be said that government can be involved in the high pricing of gas as it will help them to gain about Rs 20,000 crore as revenue. However, gas is majorly used for fuel and fertilizer produc- tion whose price has to be balanced against the higher fertilizer and fuel prices, which indirectly increases the cost of production for both along with the increase in subsidies by the government.
On one side, RIL will enjoy the higher profit share while on the other side, government will have to pay higher subsidies of Rs 75,000 crore against the gain of Rs 20,000 crore, incurring a deficit of Rs 55,000 crore for the government. The question here is not only about the high price set for production but is also about the pegging of the crude price in foreign exchange in the international market.
The other aspect of the case is why the price of gas is set in dollars when the cost has already been incurred and can be easily referred to in rupees. Why is there a court proceeding when Reliance itself admitted to selling the gas to NTPC at $2.34/MBTU against the cost price of $1.43/MBTU in 2004?
Exploitation through Policy
As of now, Reliance is the major gas producer in the country. The government has not shown any ob- jection against the vertical monopoly of Reliance in this sector until now. This effectively dictates that owning the gas grid makes economic sense for both the producer and the consumer. We have effec- tively seen that the government-owned GAIL is now just becoming a junior partner of Reliance, paying it $1.25 as transportation cost.
In the whole process, the people of the nation have been cheated by this deal. The New Explora- tion and Licensing Policy (NELP) was actually formulated to encourage private participation in the
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oil and gas sector. Instead, it has backfired and now private players are reaping exponential benefits out of it in terms of availability of crude oil and natural gas at very low prices. The private players are, in turn, selling the same at international market prices. Looting of public resources by private companies, coupled with public loot of consumers, is the hidden meaning of the country’s petroleum policies today.