Oil Ministry Backtracks On Contracts

The petroleum ministry is refusing to honour commitments made in production sharing contracts for developed and exploration blocks thereby delaying the signing of crude sales agreements.

Though some of the fields like Panna and Mukta, operated by a consortium of Enron and Reliance, and Ravva, operated by Cairn Energy, Videocon and Marubeni, have been producing oil for more than three years, the government has not been able to fix the price for their crude and its delivery point.

The latest to join the bandwagon is PY-3 offshore oilfield that was discovered by a consortium of Hardy Oil, Hindustan Oil Exploration Corporation and Tata Petrodyne. While oil is bring produced from this field for the past 18 months now, there is no hope of the government signing the crude sales agreement with consortium partners.

The PY-3 crude oil was sent to the Indian Institute of Petroleum at Dehra Dun for chemical analysis. The institute reported that the crude's sulphur content was less than .021 per cent and that it was of a very sweet variety.

Samples of crude along with the IIP report were then sent to a consultant for grading of oil and its price. As per the contract, the price of the crude oil produced by exploration companies in India would be the international price based on a basket of internationally traded equivalent crude.

The consultant was of the opinion that since the crude was of 50-51 API grade against the 38-39 API grade of the benchmark Brent crude, it should be paid the international price of Bonnylight crude (44 API) plus $ 1.7.

The government also referred the crude to another international consultant for evaluation and pricing. This consultant also gave a report similar to the one given by the first consultant.

However, now the government is refusing to pay this price saying that the sweet crude is not suited to Indian refineries since it produces a larger quantity of low-value naphtha. But, under the terms and conditions of the contract, the government has the first right of refusal on the crude produced in India and it is not even refusing to buy it. Therefore, the producer is neither getting the price promised to it under the contract nor it is being allowed to sell to any other buyer.

Price apart, the government is also going back on its commitment regarding the delivery point for the crude. As per the contract, the delivery point is an offshore storage facility put up by the producer for the purpose. But the government is now insisting that the delivery point should be refinery and that the producer will have to bear the additional transport charges for this.

The producers feel this is grossly unfair. They also do not know who will bear the loss in case of an accident while transporting crude from the offshore storage point to the refinery.

If these issues are not resolved, producers are planning to seek international arbitration. Besides time-consuming, the arbitration is expected to bring a bad name to the Indian oil sector at a time when the country is on the verge of launching the New Exploration Licensing Policy hoping for a massive inflow of foreign investment in the high-risk business of oil and gas exploration and production.