For all its seeming reasonable, that’s what the CAG report on Reliance Industries really adds up to
On the face of things, as some newspapers highlighted last week, the CAG has a brand-new face, it is no longer combative, it is more appreciative of the ground reality. “Normally, the entire amount of US$ 427.03 million would be required to be disallowed for cost recovery”, begins the CAG statement which then goes on to say, “at this stage, keeping in mind the national interest and energy security, Audit recommends that MoPNG should accept sharing of exploration cost of only those of the above mentioned wells which resulted in commercial discovery and disallow the cost recovery of US$ 118.99 million already effected by the Operator on the remaining wells”.
But is the CAG looking at the broader picture or just being hypocritical? The point at issue here is that, according to the way the Directorate General of Hydrocarbons (DGH), the Ministry of Petroleum and Natural Gas (MoPNG) and the CAG interpret the Production Sharing Contract (PSC), Reliance was not supposed to be exploring for more gas once a certain period in its contract had expired. Reliance, however, continued to drill since its interpretation of the PSC was that this was permissible. What the DGH is now saying is that since RIL found gas in one set of wells out of its ‘illegal’ drilling, let’s allow that expenditure—after all, the gains to the nation are far more since valuable gas has been found.
If that’s not hypocrisy, what is? Under the PSC all expenditure is to be reimbursed, not just expenditure that resulted in an oil/gas discovery.
What this means is that if the ‘illegal’ work had resulted in new discoveries, all of the expenditure would have been legitimate.
But why, is the question, was this expenditure illegal in the first place? That, in turn, leads us to the whole issue of whether Reliance’s other discoveries are legit and actually how the PSC is really being looked at in narrow accounting terms instead of as an instrument to increase the supplies of oil and gas in the country.
While most in the media have focused on the CAG objections to the amount of money Reliance spent, the real issue is of whether Reliance should even have been allowed to retain as much of the 7,645 square kilometers of area as it has—see the FE story by my colleague Siddhartha Saikia (goo.gl/hc4fbt) which explains all the points in an easy-to-read manner. If you take the D1/D3 recoverable gas as 2.9 tcf, this would suggest that around 40% of Reliance’s gas finds are in areas it should have relinquished several years ago. Going by this logic, this is the real Reliance scam, though the sensible question to ask here is whether someone else would have found the gas after Reliance had relinquished the area as per the provisions of the PSC. Since there is no certainty someone else would have—plus, the existing operator has first-hand knowledge of the geology—it makes sense to allow as much exploration as possible by the existing operator.
The CAG report chastises MoPNG and the DGH for not noticing this earlier. Under Articles 4.1 and 4.2 of the PSC, the CAG says, 25% of the original Contract Area (the 7,645 square kilometers) was to be given up. But Article 3.11 of the same PSC, which is what MoPNG used, allows the entire area to be retained under certain circumstances… indeed, so does the last sentence of 4.1 itself as well as Article 1.39 which details what a ‘discovery area’ is.
So is the PSC to be seen as an iron-clad accounting document or is there some flexibility to be given since the ultimate aim is to discover more oil/gas?
The issue of whether Reliance had the right to drill more wells for exploration is related to this. Under the conventional view of the PSC, a contractor gets a certain number of years to discover oil/gas. Once this is done, and an elaborate plan of action drawn up and approved by the DGH, the rest of the contract period is to be spent completing this. The problem with this, however, is that it is a static view of things. After drilling several wells and studying their data, or thanks to new technologies being available, a firm may feel there is more oil/gas to be found in areas explored earlier. This happened not just in the case of Reliance, but also in the case of Cairn India—the latter’s story is even sadder since, having found more oil after it went and did some more exploration, the government has not yet given it an extension of the contract to allow the oil to be taken out; the law ministry has opined that Cairn’s lease can be extended in return for the government hiking its stake in the JV!
While the obvious answer is to allow more flexibility, Reliance’s interpretation of the PSC is that Article 15.3 anyway allows it such continuous exploration, so the $427 million in costs was never illegal. Indeed, there is a larger issue here since, were the costs to be deemed illegal, someone can come along and question—as the CAG did in its 2011-12 report—the sanctity of the new finds.
There is also the interesting case of Allseas Marine Contractors where RIL has paid the company 200 million euros extra. Should this have been done? The CAG seems to believe the amount was not allowable while RIL’s view (read Siddhartha’s story) is that there were many unforeseen events. So, for instance, while the expected surface current was supposed to be in the range of 1-2.4 m/second—that is what historical weather data suggested—the actual currents went up to 3.2-4.1 m/second. As a result of this, and several other delays, Reliance wasn’t in a position to hand over the wells on time to Allseas. Since the contract demanded this, Allseas wanted to leave—in any case, some of its vessels were contracted to be redeployed, so Reliance brought its own vessels—but Reliance managed to get Allseas to stay on by paying it more. If, at this point, Reliance had gone by the book, and started to apportion blame, the work would have suffered and it is an open question as to whether the company could have recovered this from the other contractors working on the project.
This is where it is so important for the MoPNG—this applies to the defence ministry as well since its make-in-India projects will face a lot of such unforeseen delays—to begin looking at the entire process as one of collaboration and not just pure audit of a contract between two parties that are not on the same side. India’s oil security depends upon it.