Kelkar says no incentive to RIL to gold plate or under-produce

Says not just RIL's KG-D6 but fields around the world have experienced unexpected production declines

In a validation of Reliance Industries' stand, an expert committee led by former finance secretary Vijay Kelkar has said that there is little incentive for oil and gas explorers to 'gold plate' costs or wilfully under produce.

The much-awaited report of the Kelkar panel on 'Roadmap for Reduction in Import Dependency in Hydrocarbon Sector by 2030' cites examples of Oil and Natural Gas Corp's (ONGC) western offshore Neelam oifields and its Russian asset Imperial Energy to say not just RIL's KG-D6 but fields around the world have experienced unexpected production declines.

RIL's Bay of Bengal KG-D6 fields, which began gas production in April 2009, had hit a peak of 69.43 million standard cubic meters per day in March 2010 before water and sand ingress led to shutting down of more than one-third of the wells.

Last month, the output dipped to around 11 mmscmd as opposed to a projected 80 mmscmd. Currently, it is around 13.7 mmscmd.

"Typically, the range of uncertainty around the recoverable resources reduces but does not disappear as a field is appraised and developed. This uncertainty can result in unexpected production declines," the panel said in Part-1 of its report that was submitted to the Oil Minister M Veerappa Moily.

It goes on to say that Neelam field actually produced only 33,000 barrels per day as against 90,000 bpd that was projected when the field investment plan was made.

Likewise, Imperial Energy in Russia is producing just 15,000 bpd as compared to 80,000 bpd projected output when ONGC Videsh Ltd, the overseas arm of state explorer, acquired the firm.

The panel made a distinction between 'gold-plating' from accounting fraud saying while the former meant spending additional capital or resources than required to produce the hydrocarbons, the later was essentially over or under invoicing.

"In the Indian context, gold-plating is a concern in a cost-plus regime (seen in sectors such as fertiliser and power). Typically, an administered price regime for fertiliser, power sector, etc, provides an assured rate of return on the capital employed.

"Such an assured rate of return tends to be higher than the market rate and thus providing an incentive for "gold-plating" as even a firm not minimising capital cost can still get rewarded," it said.

But this kind of gold platting was not possible in oil and gas production. "But, this (gold plating due to cost plus regime) hardly is the case with the Production Sharing Contract (PSC) where neither rate of return on capital employed is assured nor the output price as the price of oil or gas is linked to relevant international price," it said.