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Wednesday, 30 November 2011 01:44
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KG Basin’s gas

Arbitration should held resolve many controversies

 

Though it was surprising that RIL should be giving the government an arbitration notice on the KG-D6 blocks considering Solicitor General Rohinton Nariman suggested the government do this, the net result is likely to be positive. Once the posterboy of India’s petroleum revolution when disparaging comparisons were made between RIL’s finds and public sector ONGC’s, the project ran into a series of controversies. First, as compared to the 80 mmscmd of gas that RIL said would be produced when it raised its capex estimates, the current production is around 35 mmscmd—at a 40 mmscmd production, the capex estimate was $2.4bn, and then was raised to $8.8bn while raising the production estimate to 80 mmscmd. The CAG report on the project was the next big controversy when, after auditing expenses for 2006-07 and 2007-08, the auditor recommended the petroleum ministry do an in-depth review of 10 specific contracts to see if relevant prudence had been applied.

Given that both the CAG and the Ashok Chawla Committee report pointed out that the current structure of the production sharing contracts encouraged all companies to either pad costs or to advance their capital expenditure plans—higher capital expenditure lowers the investment multiple and hence government share of profits—the oil ministry referred the matter to the law ministry. Since the government’s profit share had fallen due to the higher capex but the gas production hadn’t risen, Nariman recommended the government ask RIL to reverse part of the recoveries it had already made—RIL has invested $5.7bn till now and recovered around $5.3bn of this. In the event the company did not agree, he suggested the government go in for arbitration.

The arbitration now offers the chance to set to rest many of the controversies that have arisen, not just on whether the costs were excessive but on whether the government nominees on the management committee that clears costs of exploration and drilling were sleeping on the job—had they been keeping an eye on the reservoir data, for instance, they may have been able to take a call on whether additional capex should have been allowed. At the end of the exercise, the government can also take a call on whether the current investment multiple-based system of revenue sharing should be junked in favour of a simpler method.

 

 

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