Calculating RIL's penalty PDF Print E-mail
Monday, 24 October 2016 00:46
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Taking opex and capex into account is only fair


Arriving at the ideal penalty for Reliance Industries Limited (RIL) in the ONGC gas-migration case was never going to be easy or uncontroversial, given the widely-shared perception that RIL knowingly stole gas from ONGC’s KG Basin gas-field. In the event, it is not surprising the clamour is to get RIL to pay the market value – around Rs 7,000-8,000 crore – of the gas it got from ONGC’s field. The problem with this solution is that, with RIL not going to accept it, it is going to drag on in court; more important, it is not a fair solution. To begin with, it is important to keep in mind even the AP Shah panel which was tasked with coming up with a solution could not come up with a firm conclusion on whether RIL knew it was dipping into ONGC’s gas. While Shah has asked the government to investigate the matter further, all that we have is evidence that RIL had seismic data in 2003 which suggested reservoir continuity – but since ONGC also had seismic data, as did the petroleum regulator (DGH), it is difficult to know why neither ONGC nor DGH did anything about it like suggesting RIL and ONGC jointly develop the field by sharing capex and opex.


It is also important to keep in mind seismic continuity and reservoir connectivity is not the same thing – while the 2003 study done for RIL’s partner Niko Resources suggests the former, the latter is what allowed ONGC’s gas to migrate into RIL’s gas field. Indeed, if a seismic study was good enough to accurately determine what a field contained, there would be no need for exploration. Keep in mind that, despite having seismic data for its field and even after drilling a few exploratory wells which gave RIL better data on the nature and extent of its reservoir, the company estimated it had 10 tcf of gas in 2005, but only 2.3 tcf came out in the final production.


The fair way to arrive at any penalty is to examine how much RIL actually profited from the gas migration, even it inadvertently – any such exercise also needs to be informed by what ONGC would have had to invest to drill such gas and whether this would have been profitable. Which is why, as FE reported last week, petroleum minister Dharmendra Pradhan plans to take into account RIL’s opex and capex while calculating the penalty. In that sense, the exercise boils down to a classic profit-petroleum one, where the company’s opex and capex have to be stripped out of the revenues, apart from the taxes and royalties paid on the gas to the government. Given this will dramatically lower any proposed penalty on RIL, it is certain to be bitterly opposed and touted as a sign of the cronyism within the government. Whatever the results of the final report, it is certain either RIL or someone else will take it to court. Petroleum minister Pradhan’s real job will begin after the final report on penalties is out. 


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