CHANDIGARH: With the USD 4 billion Bathinda oil refinery getting commissioned, fund-starved Punjab government will now give incentives, which were promised by it for the setting up of the ambitious 9 million tonne per annum project.
An Empowered Committee headed by Punjab Chief Minister Parkash Singh Badal is likely to give approval in a meeting to be held on May 10 to the promised incentives, a senior official of Punjab Industries Department told PTI today.
“After the approval by the Empowered Committee, the case will be sent to Finance Department for the release of money,” he said.
As per the Deed of Assurance signed on August 12, 2005 between Punjab Government, HPCL and HPCL-Mittal Energy Limited (HMEL), the state government had agreed to grant interest free loan of Rs 250 crore per annum for the first five years amounting to Rs 1,250 crore at the end of each beginning from the date of commercial production.
“After that the refinery will start repaying the loan to state government,” he informed.
Prime Minister Manmohan Singh inaugurated the Rs 21,500 crore oil refinery at Bathinda on April 28 after the refinery getting commissioned.
Among other incentives, the state government had also agreed to defer the payment of Central Sales Tax (CST) to the maximum of 300 per cent of fixed capital investment for 15 years.
It was also proposed that the refinery would be exempted from octroi or entry tax on all items including crude oil for a period of 10 years from the date of commencement of production.
Notably, HMEL had been pressing the Punjab government for paying Rs. 400 crore per annum as interest free loan for the first 15 years from 2011-12 to 2025-26 which is to be paid back per annum from 16th year-2026-27 onwards for the next 15 years.
For additional sops, HMEL had reasoned before state government that the refinery was located at a great distance from sea ports, which would lead to increase in landed cost of crude oil and cost of its marketing, thereby making the refinery less competitive to other refineries.
HMEL had also maintained that the incentives offered by Punjab government were among the lowest offered by other states, includingGujarat.
Steel tycoon Lakshmi N Mittal had even drawn the attention of PM Manmohan Singh towards this issue and had urged him to askPunjabgovernment to grant more fiscal incentives.
Spread over 2,000 acres of land Phullokari village, the ambitious Rs 21,500 crore refinery is commissioned by HPCL-Mittal Energy Limited, a joint venture between HPCL and Mittal Energy Investment between Hindustan Petroleum Corporation Limited (HPCL) and Mittal Energy Investment Pte Ltd, Singapore – a Lakshmi N Mittal Group Company.
RICH HOMES MAY PAY DOUBLE FOR LPG
NEW DELHI: Households with a monthly income of Rs. 50,000 or more may soon have to pay the market price of cooking gas (LPG), which is Rs. 480 more than the current price of around Rs. 400 per cylinder.
Top petroleum ministry sources said a proposal to restrict the supply of subsidised LPG cylinders to the affluent class is ready for consideration of the empowered group of ministers (EGoM) under finance minister Pranab Mukherjee.
The idea is to replicate what happened a few years back, when people who could afford stopped buying food grains from public distribution system (PDS) shops despite having ration cards.
As a first step, it is proposed to withdraw the supply of subsidised cylinders to all members of Parliament, MLAs and first class gazetted officers. This scheme will then be extended to all households with a monthly income of Rs. 50,000 or more.
It has also been proposed that the affluent can buy the subsidised LPG and pay the market price difference to the oil companies directly through cheques.
The other way would be that these classes start buying the blue-coloured 19-kg cylinders that are currently being sold at market price of about Rs. 1,200 per cylinder.
“We need to do away with a large part of subsidies going to the class of people who do not need subsidies,” a senior petroleum ministry official said.
In addition, households in all major cities having piped gas connections will now have to compulsory surrender their cooking gas connections or choose between the two connections. If piped gas consumers refuse to surrender their LPG connections, they will have to be ready for discontinuation of gas supplies coming to their kitchens.
Dual connections also encourage the menace of black marketing of LPG cylinders.
GOVERNMENT DEFENDS DECLINE IN OIL OUTPUT BY IMPERIAL ENERGY
NEW DELHI: The government has defended the steep fall in oil output by Imperial Energy, which ONGC acquired for $2.1 billion three years ago, and blamed geological complexity for the situation, ironically putting forth an argument similar to what Reliance Industries said to explain the drop in D6 gas production.
Imperial’s Russian assets produced about 15,400 barrels per day (bpd) at end of last year, significantly less than the target of 80,000 bpd set by ONGC Videsh, when it made the costly acquisition. The Comptroller and Auditor General (CAG) criticized ONGC in a report last year, and said the falling output resulted in a loss of 1,182.14 crore for ONGC.
Oil secretary GC Chaturvedi recently told Parliament’s standing committee that Imperial Energy’s output fell because of unexpected geology and difficult terrain. He said the block was evaluated before ONGC acquired it but “the assessment about the production has not lived up to the expectation. So far as the reserves are concerned, they are there.” “The reserves, which they had anticipated, I believe, they have got it verified by some external consultant also. The reserves are there. But the problem is arising in bringing those reserves out,” the report said quoting Chaturvedi.
Reliance has also made a similar case to explain why gas output from D6 has almost halved, but the ministry has rejected this view and penalized the company.
“There is no doubt about reserves in both cases. Reserves of Imperial and RIL are certified. Problem is that they are unable to recover hydrocarbons as they had initially planned due to technical reasons,” an oil ministry official told ET requesting anonymity. The official said approved recoverable reserve of RIL’s D1 and D3 fields is 10.03 trillion cubic feet and third party consultants have certified the same. “Reserve is there, but problem lies in recovering it,” the official said.
Imperial Energy has 17 oilfields in rough terrains ofTomskregion inRussia. They vouched for the reserve but said wells drilled in the oilfields of did not yield results as anticipated, the parliamentary panel said in its report of April 27. Imperial’s Russian assets produced about 18,500 barrels of oil per day in June 2011, significantly less than the target of 80,000 barrels per day set by ONGC Videsh at the time of acquisition.
OVL acquired Imperial Energy of UK in 2009 with an investment of $2.1 billion. Oil secretary GC Chaturvedi told the panel that the block was evaluated before ONGC acquired it but “the assessment about the production has not lived up to the expectation. So far as the reserves are concerned, they are there.”
“There is no problem of reserves. The reserves, which they had anticipated at that point in time, I believe, they have got it verified by some external consultant also. The reserves are there. But the problem is arising in bringing those reserves out,” the report said quoting Chaturvedi.
Chaturvedi said actual problem was coming in the production because of the “very tight reservoir”. “It requires a different technology as they say. The current technology, which is available about simple drilling, is not going to work. They hope to produce more, but it involves a lot of expenditure,” he said.
According to US-based reservoir consultant DeGolyer & MacNaughton, 2P reserve of Imperial before acquisition was assessed at 122.673 MMT of oil and oil equivalent gas, which rose to 125.784 MMT after the acquisition, but slipped to 110.894 MMT on April 1, 2011. The ministry, however, downplayed the decline in reserve estimates saying, “the variation is within the acceptable norms in oil industry”. “It is an accepted principle in the E&P industry that reserves do undergo change from time to time, based on availability of additional data generated,” the report said quoting the oil ministry.
NO SOLUTION IN SIGHT FOR RELIANCE-MINISTRY ROW
NEW DELHI: An amicable solution between Reliance Industries Ltd (RIL) and Petroleum Ministry on the dispute regarding cost recovery from the D6 block seems unlikely.
A senior Petroleum Ministry official said that the notice served to RIL on Wednesday, disallowing about $1 billion as cost recoveries for 2010-11 and 2011-12 in the East Coast gas fields, was based on recommendations from the highest legal authorities.
RIL has been held responsible for violation of its committed work programme under the production sharing contract (PSC). The official termed the Petroleum Ministry’s decision as ‘cautious and conservative’.
When the output from the producing gas fields started seeing a steep decline, the Ministry had asked the Solicitor General and others about the course of action, the official said. The Solicitor-General had advised that the least the Ministry could do was to serve a notice disallowing cost recovery for the period.
On whether this was in response to the arbitration notice served by RIL, the official said, the notice sent by Reliance last November was pre-mature and based on media reports.
To pre-empt any such move by the Government, RIL had recently approached the Supreme Court to appoint an arbitrator. It had sent an arbitration notice on the grounds that the move to recoup the expenditure was illegal as it was against the PSC.
The official said the Ministry was yet to take a call on the appointment of an arbitrator and other issues. In fact, the notice should have been sent earlier, but it was only after due diligence was done by the Government, he said, and added that this was the bare minimum that the Government could have had done. Once output from the fields improves, the contractor can always recover the cost.
The Ministry said that in the given circumstances, it had no other option but to restrict the cost recovery incurred by the contractor for the excess capacity created in the block KG-DWN-98/3 and limiting the recovery of costs only to the extent of the infrastructure used for production. Further, the disallowed costs shall be added to the respective years’ profit for sharing between the Government and the contractor, the Ministry said.
In terms of the approved AIDP, the contractor was required to drill, connect and put on stream 22 wells by April 1, 2011, with an envisaged production rate of 61.88 mscmd and 31 wells by April 1, 2012, with an envisaged production of 80 mscmd.
However, the output has significantly fallen short of the projected numbers. The output from the fields (D-1, D-3 and MA) has plummeted and is currently producing around 34 mscmd. RIL has been maintaining that the drop in output has been because of geological complexities.
‘Govt move unwarranted’
RIL said that the Government move to disallow cost recovery is violative of the PSC.
In a statement, RIL maintained that a contractor is entitled to recover all of its costs under the terms of the PSC and there are no provisions that entitle the Government to disallow recovery of any contract cost as defined in the PSC.
The Government’s May 2 communication articulates the very issues which are subject matter of the notice of arbitration issued by RIL, and these issues will be resolved through the arbitration process stipulated under the PSC initiated by RIL.
INDIA CUTS BACK ON IRAN OIL IMPORTS
NEW DELHI—India’s top two importers of crude oil fromIranplan to reduce shipments by at least 15% this financial year, people with knowledge of the move said, in an important victory for the U.S.-led sanctions effort againstTehran.
The shift came as a new report said that, in a sign international sanctions are having an effect,Iran’s oil output has dropped to its lowest level in more than 20 years.
New Delhi, ahead of a visit next week by Secretary of State Hillary Clinton, eased up on its public defiance of U.S. efforts to isolate Iran, asking state-owned Mangalore Refinery & Petrochemicals Ltd. and closely held Essar Oil Ltd. to cut back imports of Iranian oil in the year that ends in March 2013, the people with knowledge of the move said.
Indian officials have said they would continue to buy fromTehran, but they will be increasingly stymied by efforts by theU.S.and European Union to strangleIran’s oil trade to getTehranto make compromises on its nuclear program.
As a result ofIran’s growing isolation,Iran’s crude output fell to 3.2 million barrels a day in April, down 150,000 barrels a day in two months, according to Vienna-based JBC Energy GmbH. That level hadn’t been hit since 1990, in the aftermath of the Iran-Iraq war.
Though Iran’s oil production was already hurt by previous sanctions, a round this year targeting exports “is making things worse—reducing the amount of money Tehran itself has available to invest,” said Trevor Houser, a partner at New York-based economic research firm Rhodium Group.
A new refinery built through collaboration between Mittal Energy and state-run Hindustan Petroleum Corp.
The Organization of Petroleum Exporting Countries has concluded that international oil markets are well supplied, in a cushion against fears that declines in Iranian production and exports will drive up prices.
Tehransays its nuclear program is for peaceful purposes, but theU.S.and others hold it is aimed at weapons production.Iranreturned to negotiations over the program last month inIstanbuland has agreed to meet again on May 23 inBaghdad.
The return to the table came under pressure after the EU agreed to ban all oil imports fromIranfrom July 1, and European businesses began to sever ties. TheU.S., meanwhile, introduced measures to isolateIran’s central bank, the main conduit for oil revenue. Those sanctions take effect on June 28.
Asian importers such asJapanandSouth Koreahave trimmed their imports in the first quarter of 2012 following lobbying by theU.S.ThoughBeijingopposes sanctions,Chinacut its imports this year by more than half, customs data show, because of a pricing dispute.
Indian officials, however—riling the U.S.—have said their country, which imports 80% of its crude oil and relies on Tehran for 12% of those imports, needed to continue to buy Iranian oil to meet its needs.
The U.S. State Department said in March that 12 countries, includingIndiaandChina, were at risk of sanctions because of purchases of Iranian oil. The Obama administration also gave waivers toJapanand EU nations that it said had moved quickly to cut Iranian imports.
But Mrs. Clinton earlier this year told Congress thatIndiawas cooperating on squeezingIranmuch more than statements by government officials had conveyed.
New Delhiasked its top oil importers to cut back in the coming year because of demands from theU.S., one of the people familiar with the request said, adding: “Definitely, there is a lot of pressure from theU.S.” A spokesman forIndia’s oil ministry didn’t respond to a request to comment.
Indiahasn’t publicly said it was aiming to cut back on trade withIran, and has sought to increase trade in other areas. Foreign Minister S.M. Krishna said last week that the nation’s crude imports fromIranare guided by its energy-security needs.
ButIndiahas been forced to reduce its purchases as local refiners find it hard to get financing, shipping and insurance for Iranian oil because ofU.S.sanctions pressure, Indian officials say.
“There’s been an attempt to diversify our purchases. Things have become very complicated,” Foreign Secretary Ranjan Mathai said in a recent interview.
Officials estimateIndiaimported around 14 million tons of Iranian crude in the fiscal year that ended March 31—a drop of over 20% from the previous year.
Crude imports fromIranfell to 18.5 million tons in the year that ended March 31, 2011, from 21.2 million tons in the year ended March 31, 2010, according to government data.
Indiareached an agreement withIranin February to pay for almost half of its oil imports fromTehranin Indian rupees becauseU.S.sanctions made using dollars for transactions nearly impossible.Iranhas been looking at ways of buying more goods fromIndiawith the rupees it gets from selling its oil.
The reductions in crude imports fromIran, though, seem to reflect thatIndiahas little wiggle room.
On Wednesday, a sign of the difficulty ofIndia’s position emerged when food ministry officials inNew Delhiindicated that a plan forTehranto import as much as three million metric tons of wheat was facing obstacles.Tehransaid it will buy Indian wheat only if it is completely free from a fungal disease. Indian officials called the demand an attempt byIranto drive down the price, saying the fungus is commonly found in small traces in many countries’ wheat supplies.
“We have asked them whether wheat supply from other countries is entirely free from disease,” an Indian food ministry official said.
IranandPakistanhave also disagreed over the priceTehranis willing to pay for wheat, Pakistani media said Wednesday.
(The Wall Street Journal, May 3, 2012)
GOVT SUGGESTS RELIANCE BE OPTIMISTIC ON COST RECOUP
NEW DELHI: After issuing a notice that will inflict a $1-billion (Rs 5,300-crore) burden on Reliance Industries Ltd (RIL), the Ministry of Petroleum and Natural Gas is keeping the doors open for adjustment in future cost recovery for the KG-D6 gas field. A senior ministry official on Friday said the government would consider RIL’s calculations in due course.
On Wednesday, the government told RIL it proposed to disallow certain cost reimbursements claimed by the company for the past two financial years. “Our notice has disallowed a total of $1.005 billion but we are awaiting the RIL response to it. Besides, RIL can always claim the disallowed cost in future years,” said the official who did not want to be named.
The company said in a statement on Friday it was entitled to recover all its costs under the terms of the production sharing contract (PSC) and “there are no provisions that entitle the government to disallow recovery of any contract cost as defined in the PSC”.
The official, however, defended the government’s move on the argument that the fall in production had jeopardised a number of investments in the user industry. For instance, a fall in production of a million standard cumbic metres per day (mscmd) would lead to a generation loss of 223 Mw. The company had estimated production of 80 mscmd this year, but revised it to 27 mscmd and then told the government it would further go down to 22 mscmd in 2012-13.
On November 23, 2011, RIL had issued an arbitration notice under the PSC on the issue. The company has alleged “wrongful denial” of cost recovery on the ground of lower production or under-utilisation of facilities. “RIL maintains that any such attempt by the government is unwarranted and violative of the PSC,” said the company.
It said since no arbitrator had been appointed by the government for nearly five months after the arbitration notice, RIL had filed a petition in the Supreme Court, under Section 11 of the Arbitration Act, for appointment of one on behalf of the government by the court.
ORDER ON RIL KG D6 ONLY DEFERMENT OF COST RECOVERY, CLARIFIES GOVT
NEW DELHI: The government on Friday said its recent move on the Reliance Industries-operated D6 block in theKrishna-GodavariBasinamounted to a mere “deferment of cost recovery” by the company although it warned that an amicable settlement of the issue would be only through stepping up the gas output.
As and when RIL is able to augment production from the ultra deepwater block off the Andhra coast, the company would become eligible for recovery of this cost, said an official source, who asked not to be named considering the sensitivity of the matter.
The petroleum ministry on Wednesday sent a notice to RIL restraining it from recovering $1.005 billion from the sale of gas from the field as the company has not put 31 wells on production as had been committed. The ministry wants to link recovery of field development expenditure to the utilisation of the infrastructure built. RIL has attributed its inability to drill so many wells to geological complexities in the country’s first ultra deepwater block that was the fastest in the world in reaching production stage after discovery.
The government sought to play down the move, saying the impact of such deferred cost recovery is “ridiculously low”. It, however, has taken the tough position that there is only one way of agreeably resolving the dispute with the country’s largest private sector enterprise. “The only amicable settlement is to produce more gas,” the official said.
The oil ministry also holds the view that the least penalty it could think of for RIL’s ‘violation’ of the commitment to produce 80 million metric standard cubic metres per day (mmscmd) gas by April this year was to restrict cost recovery. “We are extremely cautious and conservative in our response,” said the official.
RIL was to produce 80 mmscmd by April 2012 but production has now come down to 27 mmscmd. “If they manage to raise gas output, they will become entitled to recover this cost. By disallowing the recovery of $1 billion now, the company will only lose interest on this amount for two or three years (by the end of which output could rise further),” said the official.
One mmscmd is sufficient to produce 220 MW of power.
The government’s concern stems from the fact that under the production sharing contract (PSC), the company is liable to recover all costs before the government gets its share of profit petroleum. A hike in cost would mean a delay in the government realising its share of profits. What gave strength to the government in taking the view that a part of the extra cost ($8.8 billion against the initial $2.4 billion) claimed by RIL will be disallowed in the absence of a production increase is the Comptroller and Auditor General’s view that relevant single-bid contracts needed to be re-examined. Subsequently, solicitor general Rohinton Nariman said that some parts of charges could be reversed.
The oil ministry expects RIL to respond to its notice. Anticipating the move to restrict cost recovery, RIL had recently moved the Supreme Court to direct the government to appoint an arbitrator to resolve the matter. The government now says that the company will have to file a fresh notice of arbitration.
The ministry’s notice to RIL said the company has so far recovered $5.25 billion of the $5.69 billion spent on developing the field. Out of this, the ministry wants to disallow $1.005 billion. RIL need not pay this amount in cash to the government. The mode of recovering it from the company is to adjust it against any eligible recovery of field development expenditure in the future.
The hard-hitting notice from the ministry said the company has fallen woefully short of drilling the required number of wells, which has taken an “irreparable toll” on the projected production targets that have fallen to an all-time low. The ministry alleged that the breach of PSC obligations has led to a heavy loss of gas output, thereby causing a loss to the nation and, hence, it has no other go but to restrict the recovery of cost incurred in setting up excess capacity.
RIL has maintained that the PSC contains no provision that allows the government to restrict the cost recovery by citing the level of production or the extent to which field facilities are utilised.
To fix the geological problems affecting the gas output, RIL has roped in global energy major BP as a 30% partner for its 23 oil and gas blocks including the D6 block. BP has said that production from the field could rise from 2014. RIL has maintained that it has followed global petroleum industry practices in its operations and has been aggressive but methodical in its exploration activities. The company has also assured that it remains committed to complying with the contract provisions.
BPCL TO INVEST RS 170 CRORE FOR 21 PER CENT SHARE IN KANNUR AIRPORT
THIRUVANANTHAPURAM: Bharat Petroleum Corporation Ltd has decided to invest Rs 170 crore for 21 per cent share in theKannurInternationalAirport, which is expected to be commissioned in 2015, Kerala Minister Ports and in-charge of Airports K Babu said here today.
The decision of the BPCL Board, in the wake of Chief Minister Oommen Chandy holding talks with BPCL authorities, has been conveyed to state government, Babu said.
State public sector KMML and Kerala State Beverages Corporation had already decided to invest Rs 5 crore each in theKannurAirportproject for which it was proposed to mobilise an initial share capital of Rs 784 crore out of a total share capital of Rs 1,000 crore.
“49 per cent share with a total value of Rs 384 crore has been earmkared public. The minimum share an individual has to take has been fixed at 500. The share price is fixed at Rs 100 per share and steps have already been taken for the issue of public shares, he said.
Cochin International Airport Limited (CIAL), the consultant for the project, has submitted Detailed Project Report (DPR) and the airport is expected to take off by 2015.
Construction work on the first phase of the project would start next year. The global tender for the construction of runway would be invited later this month, he added.
CAIRN-VEDANTA DEAL: EX-ONGC CHAIRMAN RS SHARMA DENIES FOUL PLAY
MUMBAI: Former chairman of ONGC RS Sharma stoutly denied any foul play or lapses by the state-owned company while approving the recently concluded $8.5 billion Cairn-Vedanta deal. This comes after the Supreme Court, taking cognizance of a public interest suit that sought criminal investigation as well as scrapping of the Cairn-Vedanta deal, issued notices to the government, Cairn Energy, Vedanta and ONGC.
“I haven’t been called for questioning yet but in case I am called, there are adequate justifications on record in ONGC for not having exercised the pre-emptive rights to buy out Cairn Plc’s stake in CairnIndiaat the deal price. The board was kept fully informed from time to time regarding the implications of the transaction for ONGC,” Sharma told ET.
He went on to add: “ONGC board had met every month on the issue, where besides functional directors, we had Independent directors, as well as government nominee directors from the ministry of petroleum and finance.”
STICKY FACTS ON OIL REFINING
The recent commissioning of a 9-mtpa refinery at Bathinda is significant at least for two reasons. First, the maiden Indian venture of Mr L. N. Mittal, who is known as the world’s largest producer of steel, is not in steel but in oil, and that too in partnership with a state-owned firm, and not all alone. Second,Indiabecomes perhaps one of the largest refiners of the world, its total refining capacity at 215 million tonnes (mt) exceeding the country’s domestic production of crude as well as the demand for petroleum products.
The second reason need not necessarily be the cause for unalloyed jubilation. To avoid probable idling of the capacity, the country has to depend more on both import of crude and export of final products at whatever prices. Such dependence has its pitfalls.
Let us turn to the global scenario. Hurt by high petrol prices and shrinking domestic demand, the refineries are closing across the developed world, from US toEurope. According to the International Energy Agency, more than three million barrels of daily refining capacity have closed in Western countries since the beginning of the economic crisis. Half the refining capacity in theUSeast coast is set to disappear.
The 126-year-old Sun Oil Company in theUShas decided to quit refining. ConcorPhillips, also in theUS, is trying to sell its refinery inPennsylvania, lying idle since May last year. The same story is echoed throughoutEuropewhich witnessed a contraction of 320,000 b/d capacity last year. Petroplus,Europe’s largest independent refiner, filed for insolvency early this year and is looking for buyers for its five plants. The reason: weak demand.
USpetrol demand has fallen steadily since 2007, even though theUSpetrol price by international standard remains among the world’s cheapest. The weak demand has been caused by several factors such as emergence of fuel-efficient vehicles, blending of corn-based methanol in petrol and drop in highway travel due to high unemployment. Interestingly, the weak demand has been accompanied by excess supply.
UScrude production is at its highest in eight years, and perhaps for the first time since 1949 the country has become a net exporter of petroleum products. The emerging economies have added 4.2 m b/d capacity, with another 1.8 m b/d due to come this year. For example, Motiva, a joint venture between Saudi Aramco and Royal Dutch Shell, will this year add 325,000 b/d of capacity. In other words, it may not be smooth sailing for the Indian refiners planning to push their surplus in the world market. Who knows this better than Reliance? Despite having a huge facility, half of which is in an export-processing zone, it could not protect itself entirely from the ups and downs in the global oil market. The company’s more recent quarterly results may be a case in point.
Do ordinary people stand to benefit from the expanded refining capacity in the country? One wonders. Probably not. As long as international crude prices remain high, refining margins will be under pressure. State-owned refineries will mount pressure on the government to allow them to raise product prices. The government will in all probability succumb, at least partially, to the pressure, even if only to reduce the subsidy burden. Reports of a further rise in petroproducts are in the air, despite several rounds of increases in the past few months.
WHERE’S THE KG D6 AUDIT?
In the ultimate analysis, if RIL is to be denied cost recovery, it can only be for padding costs—GoI still hasn’t done this analysis
Given Solicitor General Rohinton Nariman’s advise and Reliance Industries Limited’s (RIL) arbitration notice to the government, it was only a matter of time before the government responded—so the government notice to RIL saying it would not be allowed to recover $1.2bn of expenses on the KG Basin gas fields was only to be expected. The language of the notice is quite harsh and should frighten RIL investors since it means a significant dip in profits. The notice says RIL has repeatedly failed to live up to the terms of the Production Sharing Contract (PSC) by not drilling enough wells—it was supposed to drill 31 by April 1, 2012, but has drilled only 18, of which only 14 are in operation—and so, as per the PSC, the government is disallowing $1.2bn of expenses claimed by RIL. The expenditure disallowed is in keeping with what Nariman had advised, that RIL’s expenses be restricted for the excess capacity it has created. As and when RIL raises production to the projected 80 mmscmd—it is 38.6 mmscmd right now—petroleum ministry officials said yesterday, it can claim these expenses.
Since both sides will cite different clauses in the PSC—maybe even the same ones!—to argue their cases, it is difficult to predict which way it will go. While the government notice cites Clause 15.11 of the PSC which it says allows for adjustments to be made to what can be expensed, the same clause says these adjustments “shall be agreed upon between the Government and the Contractor”—in other words, this can be interpreted to mean no changes can be made unless RIL agrees! Citing Clause 3.2 (ix), the government letter says certain costs can be made non-recoverable—3.2 deals with costs that are not recoverable and sub-clause (ix) says these are “amounts paid with respect to non-fulfilment of contractual obligations”. And by not digging enough wells and achieving the necessary levels of production, the government argues, RIL is in breach of its contract.
RIL, however, argues, in its arbitration notice that “any stipulation disallowing costs with reference to ‘level of production’ or ‘underutilisation of assets’ is conspicuous by its absence” in this clause. And it adds, the geological data on the field very clearly shows “the drilling of more wells will not improve the performance—on the contrary it may prove deleterious to the same.”
In other words, the fight is likely to be a long one. And there’s an additional problem here. If RIL is to dig the extra wells the Directorate General of Hydrocarbons wants it to, costs are going to go up considerably. That, in turn, will further lower the amount of profit-gas the government will get out the fields which is the original bone of contention, that RIL’s cost increases—from the initial $2.4bn when around 40 mmscmd of gas was to be recovered to $8.8bn when 80 mmscmd of gas was to be produced—were excessive. Will the government be willing to bear the additional costs of sinking these wells and, if they damage the structure as RIL says they will, who is to bear the cost and responsibility for this?
Apart from the validity of each party’s arguments, there is the issue of the underlying philosophy of the PSC. Since oil exploration is intrinsically a very high-cost-high-risk venture, the PSC allows all costs to be recovered first, before giving the government its share of profits. If the cost recovery is to be linked to how much output has been got, this would suggest RIL should have got a larger amount when, in FY10, it exceeded the projected gas output by 40%!
In which case, the fight will boil down to the government being able to prove RIL’s refusal to sink more wells is what has caused the fall in production—what the government’s notice calls “your lack of adequate/economical operation on facilities developed for production/extraction of gas”—and that’s always going to be a tough call.
Which takes us back to the CAG audit report on RIL, an audit requested by the petroleum ministry when enough people suggested RIL’s high capex was a problem. Conscious of the fact it didn’t have technical expertise in evaluation complex projects such as this one, CAG examined the data it got and pointed out that for 2006-07 and 2007-08 (CAG got data for only these two years), there seemed to be too many contracts awarded on the basis of a single bid and there were substantial variations in the original bids and the amounts given later—the scope of work also changed significantly and while multiple bidders were pre-qualified for tenders, all except one were rejected on technical grounds in many cases. The CAG wasn’t sure if this was just par for the course in a complex business—critics like Surjit Bhalla please note!—so it asked the petroleum ministry to do an in-depth review of 10 contracts, 8 of which were given to one group on a single-bid basis.
Sadly, however, there seems to have been little progress on this. In the ultimate analysis, if RIL is to be penalised, it will have to be for padding its costs, and not for failing to dig more wells, the efficacy of which is more of a technical judgment call and will vary from expert to expert. Nor has any progress been made on the other issue flagged by the CAG as well as the Ashok Chawla Committee Report, that the current ‘investment multiple’-based profit sharing contract lent itself to abuse since there was a vested interest for contractors to bring forward their expenditure—both suggested the investment-multiple be dropped. The least the government can do is to organise investor conferences to get their feedback on this. All told, the government hasn’t quite covered itself in glory.
HALDIA PETRO TO APPEAR BEFORE INTERNATIONAL COURT ON OWNERSHIP ISSUES
KOLKATA: The loss-making Haldia Petrochemicals Ltd (HPL) is set to face another phase of court room battle on ownership issues.
Having failed to convince the West Bengal Government-controlled HPL management, Mr Purnendu Chatterjee-promoted The Chatterjee Group filed a suit before the International Court of Arbitration (ICA) in Paris, seeking transfer of the disputed 15.5 crore shares in its favour.
The arbitration suit was filed according to a shareholder’s agreement in July 2004.
In a counter move, HPL this week approached the Calcutta High Court seeking a stay on TCG’s move to take the company on international court where arbitration was slated to start on June 7.
The move, however, failed to yield results, as the High Court on Friday did not pass an interim order, as desired by the HPL management.
Mr Justice I. P. Mukherjee of the Calcutta High Court today directed the private promoter (TCG) to file an affidavit in opposition to the prayer (by HPL) by June 6. The HPL management has been asked to respond to TCG’s affidavit by June 27.
“In the absence of a stay order, HPL may now have to appear before the international court on June 7,” a source close to the development told Business Line.
Earlier, the HPL management submitted before the court that the arbitration proceedings sought to be initiated by TCG was unenforceable.
The State Government felt that following a Supreme Court order last year, there should not be any case for TCG to seek arbitration on ownership. TCG, however, maintained that the Supreme Court judgment did not take a call on the private agreement between TCG and the State Government involving transfer of the disputed shares.
TURKMENISTAN PLANS TO INK AGREEMENT FOR TAPI PIPELINE THIS MONTH
ASHGABAT (TURKMENISTAN): Senior officials inTurkmenistansay the energy-rich Central Asian nation plans to sign a natural gas sales agreement withAfghanistan,PakistanandIndiathis month.
The deal would mark a decisive move toward construction of a pipeline crossing the four nations that backers hope will meet energy demands across the region.
Two high-ranking officials, who cannot be named as they are not authorised to speak with the media, told The Associated Press this week they expect the agreement to be signed at an energy conference inTurkmenistanlate May.
Progress on the project has to date been delayed by disagreement among participant nations on transit fees and the price for the gas. It has been widely assumed that gas for the more than 1,600-km pipeline will be sourced from the Dauletabad field in southernTurkmenistan.
OIL DROPS BELOW $100 FIRST TIME SINCE FEBRUARY
NEW YORK: Oil dropped below $100 per barrel for the first time since February following a disappointingU.S.jobs report and warnings of a weakening world economy.
Benchmark West Texas Intermediate crude fell as low as $99.90 Friday morning before edging back to $100.21 per barrel inNew York. Crude prices are down 2.3 percent for the day.
Oil prices have been falling since Wednesday as analysts and traders increasingly focus on the economy. The Labor Department said Friday that the economy added just 115,000 jobs in April _ far fewer than the pace of hiring earlier this year. Government data show thatU.S.oil consumption dropped 5.3 percent in the first quarter, and supplies have been growing for the past six weeks and hit a 22-year high inCushing,Oklahoma, where benchmark crude is delivered.
The European economy also is slowing down as eurozone governments continue to struggle with a mountain of debt.
“We’re fearful that the economy is slowing more than we originally thought,” PFGBest analyst Phil Flynn said.
Oil has crossed the $100 mark 21 times during the past year. It rose as high as $113.93 per barrel last April and fell as low as $75.67 per barrel on Oct. 4.
As demand falls in the West, OPEC has been delivering more oil to world markets in an effort to force prices even lower. And Western nations are planning talks withIranover its nuclear program, easing fears of a protracted standoff in theMiddle East. Concerns aboutIran, which is believed to be building a weapon, helped push benchmark oil to its peak near $110 per barrel earlier this year.
The recent drop in oil has helped make retail gasoline cheaper in the U.S. Pump prices have declined by an average of 13 cents per gallon since peaking this year at $3.936 on April 6. The national average hit $3.802 per gallon ($1 a liter) on Friday, according to auto club AAA, Wright Express and Oil Price Information Service.
OPIS chief oil analyst Tom Kloza said gas prices will head lower for the rest of the year. Kloza expects the national average to drop as low as $3.50 per gallon (92 cents a liter) before the Fourth of July.
In other futures trading, heating oil lost 5.12 cents to $3.0357 per gallon, wholesale gasoline lost 4.55 cents to $3.0045 per gallon, and natural gas lost 4.6 cents to $2.294 per 1,000 cubic feet. Brent crude, which is used to set the price of oil imported into theU.S., lost $1.98 to $114.10 per barrel.
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