An RIL bank guarantee-solution is a good idea
After getting it right on allowing continuous exploration which resulted in 8 new finds and seriously examining Cairn India’s proposal to return to it the exploration area it had relinquished, the government seems to have got badly stuck on Reliance Industries Ltd (RIL) and the gas it was supposed to be producing from the initial blocks in the KG-D6 area. While RIL’s production from the D1/D3 fields is a fraction of what the company had initially estimated, the issue was whether it was a genuine over-estimation, as RIL now claims, or whether the company was hoarding the gas till such time that prices were completely freed up to reach levels 2-3 times what they are today. Given how there are enough reservoir experts globally, it has never been clear why the government refuses to bring in experts to help settle the issue. Despite this, however, the government could have moved on. After all, the dispute with RIL is the subject of an arbitration case, so it could easily have been kept on the back-burner while the company was encouraged to explore for fresh gas in other areas. Yet, the government keeps insisting RIL will not get the Rangarajan panel’s suggested higher prices—though still not free-market prices—till such time the ‘shortage’ is made good.
This makes little sense since RIL is one of the more successful producers of gas and has had many successes. In the case of Cairn, for instance, it is a fact that the company is India’s lowest-cost explorer that has made the government consider favourably many of the proposals it has been making—at around $4 a barrel, Cairn’s operational costs are a fraction of those of the public sector ONGC. Which is why it is good news that the government has finally come around to asking RIL to furnish a bank guarantee for the amount of gas it has supposedly hoarded. This means the government is fully protected should investigations reveal RIL has indeed been hoarding gas. As for the rest of the firm’s discoveries, it can now go ahead without the sword of making good the shortfalls hanging over its head. There is now one more aspect that needs addressing. Since few are likely to explore for gas unless, as in the case of oil, they get a market price, the government needs to come out with its post-Rangarajan roadmap—in how many years will prices be fully freed up. Once this roadmap is spelt out, the chances of greater investment flowing in are higher.