Issue tied with disallowing $3bn expenses in past
Since the AP Shah panel didn’t firmly conclude RIL knew it was dipping into ONGC’s gas—why else would it ask the government to investigate this further?—it is likely the firm will contest the $1.4 billion penalty slapped on it on Friday. There are several other issues involved as well. Had RIL not taken out ONGC’s gas, even if inadvertently, how much would ONGC have had to invest to take it out, and would this be viable? To that extent, should this have been factored in while calculating the penalty? It is not clear how much of RIL’s opex and capex to extract ONGC’s gas have been taken into account while calculating the penalty, but some portion has been accounted for since the penalty notice also has a calculation on what RIL’s ‘profit petroleum’—the share of profits it gives to the government—should be and that accounts for all costs.
More interesting, in this context, is the impact of the ONGC case on the $3.1 billion of capex that RIL has not been allowed to charge as expenses while calculating ‘profit petroleum’. In FY15, the oil ministry disallowed $2.8 billion of such expenses, or 59% of the capex incurred by RIL. This 59% was, according to the government, the shortfall in RIL’s gas production that year as compared to the estimate it had made of likely gas supplies—in FY16, the disallowed expenses rose to $3.1 billion or 65% of capex, which was also the amount of the so-called shortfall in gas output. Though the production contracts are clear that all expenses are to be deducted and cannot be linked to shortfalls in production over output projections, the government stand was taken at the height of the ‘gold-plating’ allegations against RIL. The government justified its stand on grounds RIL wasn’t producing the gas because it wanted to wait till prices rose. So, it argued, till RIL extracted the gas, it wouldn’t pay for all its capex either—even if there was no ‘gold-plating’, it could be argued RIL had built up too much processing capacity. This was always a tenuous argument since the government could disallow RIL capex only if it could prove ‘gold-plating’. But now that the DeGolyer & McNaughton report—done to show the gas migration to RIL’s fields—has shown there is very little gas left in the RIL fields, the government can no longer argue RIL was hoarding gas; and if it can’t do that, it is not possible to justify disallowing $3.1 billion of capex. Though the ONGC case has hit the group’s image, the fallout may end up helping RIL in a big way.