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Friday, 26 October 2012 00:00
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Now to change the rules leading to KG-D6-type issues

Given the way Reliance’s KG-D6 gas production has fallen by a third in the last one year, and could even have completely come to a halt in another 2-3 years, the government has done well to offer to smoke the peace pipe, sort of. While the original dispute over Reliance’s capital costs—and the government refusing to allow $1.2 billion of expenses till such time its gas output gets ramped up to 80 mmscmd from around 30 mmscmd now—still remains, what the oil ministry did after that was inexplicable. It simply refused to clear Reliance’s expansion plans or to declare some of its discoveries as commercial, vital for the company to go ahead with work on them. Insisting that Reliance drill more wells to fulfil its commitment, even though the company said there was no gas to be found there, was also curious. First, Reliance was the field’s operator and should know best; second, if there was a dispute between Reliance and the oil regulator, surely a reputed third-party reservoir expert’s advise could have been sought. Given that the dispute would be resolved by arbitration, there was never any good reason to stop Reliance from further exploration—thankfully, that is now behind us.

It’s not too clear how a financial audit under section 1.9 of the accounting procedure of the production sharing contract, which is what Reliance has agreed to is different from what was done by the CAG the last time around. At that time also, the CAG had done a financial audit of RIL along with a performance audit of the oil ministry and the oil regulator. That had not stopped the CAG from making its observations about how too many bidders were getting technically disqualified, leading to many single-bid awards; in the event, CAG asked the oil ministry needed to do a detailed analysis of 10 specific contracts. What Reliance has asked for is that no adjustments be made to the accounts unless it specifically agrees to this, or until this is resolved as per the contract.

More than this, the government needs to move away from the existing investment-multiple contracts were operators first recover their costs which leads to charges of cost-padding—instead a revenue-share contract, as in other areas from airports to telecom, appears better (http://goo.gl/Ei5xT). The oil regulator has plumped in favour of this, the Prime Minister’s Economic Advisory Council is expected to pronounce on this soon. Once this is done, the government will have no business getting into the business of exploration firms like Reliance.


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