KG-D6 again PDF Print E-mail
Thursday, 01 November 2012 00:00
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Give govt credit for holding back $1.2bn of expenses

With the focus back on the allegations of Reliance Industries Ltd (RIL) having gold-plated costs at the KG Basin gas fields—estimated costs of development rose from $2.4bn in 2004 for a peak production of 40 mmscmd to, by 2006, $8.8bn for double the production—the government would do well to finalise the terms of the second CAG audit. The first audit of RIL’s books took place for the years 2006-07 and 2007-08. The government, of course, can take some comfort in the fact that, based on the advice given to it by Solicitor General Rohinton Nariman, it sent a notice to RIL saying the latter would not be able to recover $1.2bn of expenses on the KG Basin fields till such time that it ramped its production to the promised 80 mmscmd from the 30 mmscmd or so right now.

It is in other areas that the government, and that includes former oil minister Jaipal Reddy, is on a weaker wicket. For one, when the CAG asked the oil ministry to do an in-depth review of 10 contracts given out by RIL, 8 of which were given to a single group on a single-bid basis, the oil ministry has made little progress on this. Indeed, if the government is unable to show gold-plating, it may find it difficult to hold back $1.2bn of RIL’s expenses on the ground that production has slowed. And while Reddy got plaudits for having said he didn’t buy RIL’s claim that its production had fallen due to unforeseen reservoir complexities, he never got international reservoir experts to examine the data submitted by RIL and to give their opinion on this.

The issues of the price paid to RIL and the bid RIL won to supply gas to NTPC are slightly more complex. For one, it took NTPC over 18 months to even file a case against RIL, and it has been 7 years since and the case hasn’t even moved beyond the single judge bench in the high court. As for the price, the government got the Prime Minister’s Economic Advisory Council (PMEAC) to examine the bidding and though the PMEAC suggested improvements in the bidding process, little was done. That may be of academic interest now since gas prices from competing sources are much higher, but when the next price is decided, it is important the bidding process is pre-vetted—the fact that power prices go up 45 paise for every $1 hike in gas prices, and fertiliser subsidy by R3,000-3,500 crore, will ensure the government will be extra careful. Critics, similarly, would do well to look at cost overruns in even government projects since chances are they are also very high. As for avoiding future KG Basin-type disputes, the only solution is what the PMEAC is working on, to move away from the cost-recovery type model used today where every contractor has an incentive to bring forward expenses—this lowers the government’s profit share. Instead, move to a cleaner revenue-share mechanism that is used in every sector from telecom to roads and even airports.


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