Cost hikes overrun energy sector

May 12 2014, 12:38 IST
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The exploration and production company is not the only state-run firm struggling with spiralling expenses. The exploration and production company is not the only state-run firm struggling with spiralling expenses.
SummaryPSUs have seen worse cost escalation but have less to show for it.

Reliance Industries (RIL) is mired in arbitration and subjected to adverse commentary for revising the KG-D6 development expenditure from $2.47 billion initially to $8.84 billion, but the public-sector hydrocarbon explorer ONGC too reworked its capital spending plan several times since it got its KG block (KG-DWN-98/2) in 2000, at the same time that RIL received its block (KG-DWN-98/3). Whatís curious is, ONGC has already incurred $1 billion for exploration alone in the block where commercial production is not expected before 2017. While ONGC hasnít even readied a field development plan (FDP) for its 9,800-sq km block, the latest estimate is that development of the first-to-be taken-up northern segment of the block would itself cost $5 billion and that of the full block almost double that amount.

The exploration and production company is not the only state-run firm struggling with spiralling expenses.

NTPC, another major energy PSU, can hardly claim to have been economical with costs either (its fixed costs have risen 83% between FY09 and the first quarter of FY14, the latest period for which figures are available), although the cost-plus regime (for fixing tariffs) has long come to its rescue.

Private players in the power sector enjoy no such immunity as their tariffs get predetermined through auction. Then there is Coal India, which saw its cost of production jump over 20% over two years.

In the case of ONGC, not a single molecule of hydrocarbon has been produced by ONGC from its KG-D6 block while RIL has been producing gas from its block since April 2009. Itís another matter the private company could not match the committed production schedules for ďgeological reasonsĒ. The northern part of ONGCís KG-DWN98/2 is seen to hold 2 trillion cubic feet (tcf) of gas and 117 million tonnes of oil, while RILís KG-D6 field was initially seen to hold 5.45 tcf of gas (this estimate was lowered substantially later).

ONGC produces about 15 million tonnes of crude oil every year from Mumbai High where it continues to invest billions of dollars to sustain the output (the third phase of redevelopment is about to begin and is estimated to cost Rs 21,546 crore). At its peak in 1989-90, the field yielded a little over 20 million tonnes of crude.

Whether by design (as is alleged in the case of RIL) or inefficiency (as with the ONGC), avoidable cost increases would eventually burden the consuming industries, hit the economy

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