Citi Research said it had expected that RIL’s liability should be limited to the net cumulative EBIT earned by it from the disputed volumes, which it had estimated at Rs 1,600 crore ($0.25 billion).
“This is far lower than the $1.55 billion imposed by the government… This effectively almost equals the total revenues earned from the sale of these gas volumes (ie, without allowing opex and capex to be deducted).
“Even without getting into the merits & justification of the government’s action, the calculation itself in our view appears flawed and the resultant penalty appears grossly exaggerated,” it said in a note.
Stating that the decision lacks commercial justification, HSBC said RIL and its partners had just about managed to achieve a payback of its expenditure in the KG-D6 block in 2015-16, 15 years after first expenditure and seven years after first revenue from the block.
“Taking the time value of money into account, the present value of all expenditure exceeds the present value of all revenue from the block. Therefore, no case of a windfall gain can be made out, in our view. In fact, there is no profit from the block in present value terms, either,” it said.
Citi said the move has “undoes some of the good work” done by the government in the oil and gas sector, adding that “more pertinently for the sector, this action arguably does not bode well for the government’s aim of attracting investments into E&P through initiatives such as the Hydrocarbon Exploration Licensing Policy, discovered small field policy…”.
It said most planned future upstream investments in India are currently limited to state-owned Oil and Natural Gas Corp (ONGC), with being “understandably slow” in recent years in taking any major investment decisions.
“And such actions do not set a good precedent for attracting either private players or global majors, both of which are already conspicuous by their absence in Indian upstream,” it added.