When the Comptroller and Auditor General’s report on production-sharing contracts between the government and private companies was placed in Parliament on September 8, Reliance Industries Ltd (RIL) came under intense scrutiny.
In his first interaction with the media since the report was made public, P M S Prasad, RIL director and head of the petroleum business, tells Jyoti Mukul the focus seems to be on questioning the company’s success. Edited excerpts:
What has been your response to the CAG audit report?
Many of our submissions have not been considered by the CAG. The final report, in fact, says anything given after the exit conference was not considered. This is in spite of the fact that we were sent the full report only on July 14, two days after the conference, and asked to respond, but by July 19. We did request for some time because these issues were being brought to our notice for the first time ever since the audit started in December 2009. While nobody denied us the time, we were told by the ministry to respond as fast as possible. We tried our best and in fact did respond on August 3 with a lot of material. We then sent further supplementary material as well as independent expert assessment. However, none of these detailed submissions seem to have been considered in the final audit report.
Does the company plan to make a submission to the Public Accounts Committee, which will consider the report?
This is new for us, so we do not know the process. We have to be heard since we believe we have honest intentions. We have tried to explore the Indian basin to the extent of the blocks we have won by spending a lot more money and effort than we bid or estimated at the time of bidding. Wherever we have had a discovery like in the D6 block, we have developed in the fastest manner with all our energy and money spent. Exploration is purely our risk money. Development is also our risk money, which only becomes recoverable through the sale of gas or oil. Today, when we hear the comments by investigating and auditing agencies, as reflected in the media, we think it is not fair to all the people who are involved with the development of India’s energy resources. We have to seek justice in some way. We will go to anybody who will be considering this report. We hope we will be given the opportunity.
Does the whole controversy have more to do with the general public opinion against favours to the private sector than actual violations?
Wouldn’t you say the scrutiny is also because of the fall in gas production?
Even when production was okay every day, the government wanted to know what the production was and who your customers were, though we sell to government-allocated customers. Still there were daily and monthly reports. We do not know whether there is similar scrutiny for other fields that are producing in India and particularly the fields under the APM regime. That is where the government should actually have been worried because APM gas was at a subsidised price, so they wanted to make sure gas was reaching the right customers. But, instead, all the scrutiny seems to be on our gas, which anyway is supposed to be sold freely by the contractor as per the PSC. We did not mind because it is pathbreaking stuff. The government wanted to make sure, and so we cooperated.
The fall in production is part of the uncertainty of the E&P business. Based on the best information and reports of some of the best consultants of the world, we assessed the likely resources in the field and put a development plan together. After a year and a half or two years into production, we now realise the reservoir behaviour is not in accordance with the prediction. We are not the only ones. It keeps happening all the time to even the most experienced and biggest international oil companies.
There is a view the company has deliberately suppressed production since profit-sharing based on the investment multiple works out adversely because of the capping of gas price by the government.
There can be all kinds of speculation but the reality is that no company will give up certain cash flows based on today’s price for an uncertain tomorrow. Who knows what will be the price after 2014? Also, with the kind of inflation running and the current interest rates, maybe a price of $7 a British thermal unit will be more or less equal to today’s $4.2. It does not benefit me to wait for an uncertain higher price and give up certain cash flows of today.
We have a partner. BP also wants to make sure that production is highest so that they get their returns quicker than later. As soon as all other formalities are completed, we are going to work in an integrated taskforce over the next three four months and then you will see BP’s assessment. If somebody says we artificially suppressed production then it does not make sense commercially and also technically. In a field, if it can produce more, and we are producing less there is always the possibility of more water ingress. Therefore, production has to be maintained at the most optimal rate that the field allows — neither more nor less.
What do you have to say about the CAG charges the company was allowed to retain acreage in violation of the PSC?
That’s not true. We drilled quite a few wells and then did advanced seismics that established the whole area as a discovery area. There are two types of reservoirs: structural and stratigraphic, where oil and gas run like a channel or river. We have shot high-resolution seismic and drilled some locations in that channel and then we co-related and calibrated the seismic to conclude that as long as the same seismic behaviour is there, there would be oil and gas. In 7,600 sq km, if we have to drill so many exploration wells, the drilling expenses themselves become ridiculously high and are not warranted when techniques today have advanced further.
Has RIL drilled wells according to the committed work programme?
The PSC allows the contractor to drill either to the basement or bid for depth, whichever is attained first. That’s what we have done. If somebody thinks India is as prospective as Saudi Arabia or Qatar, showing that people will flock in here, then they are not correct. You have to incentivise people and companies to come and invest here. And, here, out of 236 PSCs plus some pre-NELP PSCs, how many have gone into commercial production — one Cairn and one Reliance. We seem to be focusing on these two guys and say how have they succeeded? Had they not succeeded, we would have continued to be even more energy dependent and continued to make only the rich producing nations richer. The intention of NELP on the contrary was that we explore our basins and then get gas and oil at a decent price so that people can invest more into the business. This would spur the economy.
When we import oil and gas we only transfer wealth from this country, which we can ill afford, to countries which do not need it. Why is it that the only two successful companies who have enhanced domestic production are being targeted? No one is questioning the fact that had it not been for these two our imports would have surged far higher. We are paying $16 for LNG on spot basis and the full price for imported crude oil. By 2014, even the contract LNG will also go to $13-plus. Yet we want to deprive companies producing domestic gas from getting a fair price. Is it not strange that when under the same contracts oil producers are allowed fully international prices, gas producers should be discriminated against and not be given similar prices?
So, you are saying the extensions were justified?
In my view, the observation that you have been given unfair extensions is ridiculous. The purpose of NELP is to thoroughly explore all the sedimentary basins as quickly as possible. Can anybody say we have not explored? We have spent much more than we were committed to spend and we have done more work programme than what we had bid for because we truly believed in exploring. If some statutory agencies take far more time to grant approvals to conduct exploration then we have every right to get extensions on those grounds. So, what is the big deal about it? How does the Government of India lose anything in the process? In the end, we spend much more money and by giving an extension, we only end up doing more exploration. What is the monetary benefit in spending more of our money.
Is the cost escalation justified when production is lower than expected?
What was the actual cost inflation at that time. Can anybody say that for the facility we have built this cost is unreasonable. Today, with the benefit of hindsight, you might say production is less. But, did we know the production would be less? We did not know. Not only us, but all the best consultants in the world did not know. The DGH did not know. This is for the first time a discovery was made in the deepwaters of India on the east coast. No one had any references or analogies. We did not know how the field would behave and yes it has given us a nasty surprise. Why will people not remember what happened in other fields? What happened in the Gulf of Mexico, and even closer home to ONGC in the Neelam field? Surprises can happen in this business at any time.
Why the increase in cost?
Between 2003 and 2008, the entire oil and commodities markets were on fire. Steel and real estate prices too went up manifold. Why are people forgetting about it? Why are people pointing at inflation in only the KG-D6 costs? You should see how much cost escalation many international projects built during this period suffered. We have produced all this data before the CAG. We submitted so much data, but nobody took cognizance of it. I admit that when the CAG says something, it makes headlines. When we reply, it is not news-worthy because hard technical facts are not sensational.
Appreciate that in exploration, it is entirely my risk money. I have done far more than the total work programme committed in all my blocks put together. This was spending far more than I had committed and all of it my risk money, which in case of failure I have to write off. If anyone is willing to look at the period with even a shred of objectivity they would know that the industry went in for some massive cost escalation during the period.