In April 2009, when Reliance Industries (RIL) started production from the KG-D6 block, it was not just a turning point for the company, but also one in India’s hydrocarbon landscape. The country became more of a gas producer than one of crude oil. However, the good times did not last long and things have dramatically changed since then. The showcase deepwater field is now at the centre of a proverbial churning — one in which the government and the company are moving in different directions, unsure of what would eventually unfold.
The latest in a series of disputes is the government’s stand that the company should make available all records and accounts of KG-D6 to the Comptroller and Auditor General (CAG), since the auditor had recommended withholding of certain sanctions for the block if access to records was denied. This has resulted in approvals for budgets and work programmes being stuck.
The company says the next stage of its exploration plan for enhancing production is dependent on government approvals. Apart from development of new discoveries, RIL is working on plans to augment production from the D1-D3 fields through a revised field development programme. However, this can proceed only once the approvals are secured. And, it would take four to five years after the approvals for production to rise.
The government has invoked the production sharing contract (PSC) to deny RIL-BP approval for work programme and budget for 2012-13 and recovery of a little over $1 billion from gas sale from KG-D6
|Govt’s auditing & inspection right
- PSC Allows govt to conduct audit either through its own representatives or through chartered accountants. The scope of such auditing is fairly large and includes everything serving the petroleum operations
- Petroleum Ministry says approval for budgets and work programmes for 2010-11, 2011-12 and 2012-13 will come after CAG is given access to records
- RIL says nothing in the PSC permits an audit of operational, commercial and technical decisions of the operator
- PSC Under the NELP regime, a contractor is allowed to recover cost from production before the government and contractor take a share according to a biddable formula
- Petroleum Ministry wants to restrain RIL from recovering a little over $1 billion from gas sales
- RIL says PSC contains no provision that entitles the govt to restrict costs by reference to factors like the production level or the extent to which field facilities were utilised
Even if the petroleum ministry wants to approve this, it cannot ignore CAG. Therefore, it had invoked the production sharing contract (PSC) for enforcing the CAG diktat, though withholding of approvals is not mentioned in the PSC. Under article 1.9 of the section on audit and inspection rights of the government in the PSC, it can conduct an audit either through its representatives or through chartered accountants. The scope of such auditing is fairly large and includes everything serving petroleum operations.
Typically, companies engage auditors to finalise costs and other estimates before putting these before the government, which gets these vetted through chartered accountants. Now, with CAG entering the scene, RIL had allowed it access to all information for 2006-07 and 2007-08, albeit after protests. Now, the company is again reluctant to share information for subsequent years. It maintains nothing in the PSC permitted an audit of operational, commercial and technical decisions of the operator.
Though CAG, in its report last year, maintained its scrutiny was consistent with the PSC and wasn’t “merely limited to an arithmetical totalling of charges”, R S Sharma, former chairman and managing director of ONGC, says it is unfair to withhold approvals, adding RIL does not fall under the purview of CAG. “Decisions in exploration and production are taken in stages. Characteristics of each block are different, and decisions have to be taken on a case-to-case basis. It is a complex business. It is not like processing, or even the mining industry,” he says.
The performance audit of CAG factors in appraisal and drilling programmes for the field. In its last report, it had objected to the operator not drilling the required number of wells. Though Sharma is articulating the industry’s concern that CAG should confine itself to matters that affect the government’s share and not go into technicalities, Cairn India, which has also seen tumultuous times in securing government approval for a stake sale, appears to have no such reservations. A second round of performance audit for its Barmer block is nearing completion.
For RIL, the stand-off is deeper than just withholding of approvals. It stems from the fact that gas output from KG-D6, which had peaked to 61.5 million standard cubic meters a day (mscmd) in March 2010 and was set to rise to 80 mscmd by April 2012, has been declining for more than a year. It has now dipped to below 30 mscmd and is expected to fall further to 20 mscmd by next year. Many believe production is being allowed to fall, as RIL is stuck with a gas price of $4.2 a million British thermal unit till 2014.
The company has also initiated a parallel arbitration proceeding on the issue of cost recovery. With the government initially refusing to appoint any arbitrator, RIL had, in April, filed a plea in the Supreme Court, seeking the appointment of an arbitrator. In May, the dispute on cost recovery surfaced, with the petroleum ministry sending a notice to RIL, restraining it from recovering a little over $1 billion from the sale of gas from the field, as the company had not put 31 wells on production, something RIL had committed. The company maintains the PSC contains no provision that permits restricting costs recovered by the company through reference to factors like the production level or the extent to which field facilities are utilised. It attributed the fall in production to the unexpected geology of the area, adding data had established drilling more wells would not have helped.
On July 13, another chapter in the dispute was opened when, in a meeting with Union minister Jaipal Reddy, attended by the entire upstream brass, RIL executive director P M S Prasad and BP country head Sashi Mukundan were told approvals for budgets and work programmes for 2010-11, 2011-12 and 2012-13 for KG-D6 would be given only if the company fell in line and gave the details to CAG.
For the declaration of commerciality of certain wells in the NEC-25 and K-G D6 blocks, the ministry says it would consider extension of the appraisal period to facilitate the declaration early. Quick approvals for two blocks in the Cauvery Basin would also be given. The ministry had been dithering over these clearances, too. If approvals for KG-D6 are not secured, the two companies fear a ‘shut-in’ of the D1 and D3 fields around 2015-16. As Sharma says, stopping production from a well for a day may result in normal production being hit for weeks. Though BP denied a potential shut-in when news on this leaked, an executive in one of the companies says the approvals are necessary to prevent a fall in production.
Though the government’s tough stand may be aimed at forcing RIL and BP to get their act together and bring in transparency through a CAG stamp, as Sharma says this is vitiating the atmosphere and sending negative signals to investors. In the process, KG-D6, which should ideally have been treated as a national asset, has been turned into a pawn for securing access for CAG.