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Reliance wins case govt should never have filed PDF Print E-mail
Monday, 06 August 2018 00:00
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Gas migration should have been fixed with joint development, award has implications for cost-padding case also

 

Given the way the issue played out in the media, it can be argued the government had no option but to press ONGC to claim Reliance Industries Limited (RIL) had ‘stolen’ its gas and demand $1.6 billion in damages for this. But, while the media can be accused of sensationalising the matter, calmer heads should have prevailed in both the government and ONGC. After all, while it is true 0.3 tcf of the gas RIL had extracted from its KG Basin fields actually belonged to ONGC’s 98/2 field, adjacent to RIL’s—this was based on a report by reservoir consultant DeGolyer and MacNaughton (D&M)—the cost of this gas and the losses to ONGC were very different. After all, ONGC would have had to invest several billion dollars to take out the gas, so ONGC’s claim would have to be restricted to profits after taking the capex/opex into account. Not surprising then, that the international arbitration panel that was examining the issue has not just refused to grant ONGC its claim, it has asked it to pay RIL for legal fees incurred.

Indeed, since oil/gas migration from one field to another is not a new thing, ideally ONGC and RIL should have jointly developed the field when the migration was discovered. And, while ONGC/government were quick to blame RIL and claim it knew the reservoirs were connected, the facts show ONGC and the regulator in a poor light as well since neither realised the reservoirs were interconnected, though they had data on it for several years before RIL started extracting gas. The reason why they didn’t realise this is that discovering connectivity isn’t easy. Indeed, forget about ONGC, RIL’s estimates for its own fields were horribly wrong. It upped its original estimates of gas-in-place in the field from 7 tcf to 12 tcf—and the recoverable reserves from 5.6 tcf to 10-11 tcf—and later slashed the recoverable reserves to 2.9 tcf; when the D&M report came out, it estimated the gas-in-place reserves at 2.9 tcf.

 

Though Tuesday’s arbitration ruling is not related, it will have important implications for the government’s larger case against RIL for artificially inflating its capital costs. While the CAG’s audit report had first talked of RIL’s capital costs being too high, when the government finalised its stance, it took a different tack. Rather than getting into whether the capex was padded, since this would have been difficult to prove, the government said RIL had promised a certain gas output for the capex and, since it had not delivered on that promise, part of the capex would be disallowed—under the profit-petroleum rules, as the capex rises, the government gets less profits; so, by disallowing part of the capex, the government said RIL had to pay it a higher profit-petroleum.

Till now, around $3.2 billion of RIL’s capex has been disallowed. In FY15, for instance, the oil ministry disallowed $2.8 billion of such expenses, or 59% of the capex incurred by RIL as the gas produced was 59% less than what RIL had supposedly promised; in FY16, the disallowed expenses rose to $3.1 billion or 65% of capex. This was always a tenuous argument since the production sharing contract (PSC) doesn’t link capex with output—all capex is to be recovered from the oil/gas output—but it worked since the government’s unstated argument was that RIL wasn’t producing the gas because it wanted to wait till prices rose. At that point, prices were $4.2 per mmBtu while RIL was lobbying for around double of that price. But, now that the D&M report has shown there is very little gas left in RIL’s fields, the government can no longer argue RIL was hoarding gas; and if it can’t do that, it may not be possible to justify disallowing $3.2 billion of capex.

 

 

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