Arvind Kejriwal and the Aam Aadmi Party (AAP) continue to stir controversy day after day. The political party has claimed that both the BJP and the Congress are working hand in glove with India’s biggest Private Sector Company Reliance Industries Limited (RIL). The rather tall claims that the company colluded with politicians to double the gas price to $8.40 per unit has drawn in criticism from almost all quarters.
The first thing to note about this gas price increase is that it was approved by an independent body – the Rangarajan Committee headed by C. Rangarajan. This committee was headed by ex-petroleum secretary and Finance Commission chief Vijay Kelkar, Vikram Mehta (former Shell India chief), R S Sharma (ex-ONGC chief) and corporate chiefs (Deepak Parekh and Ashok Ganguly). There could not be a panel with more integrity.
The Truth at Last:
RIL has been accused of two things – gold-plating petroleum costs and slashing gas production from the KG-D6 basin. Gold-plating means jacking up exploration costs to get a higher share of “profit oil”, the oil remaining after the field operator has recovered his costs.
Let’s tackle the first accusation. The Kelkar committee’s elaborate study shows that gold-plating is not economically feasible. The tactic assures high returns in cost-plus projects, which have a fixed return on capital costs (like Enron). However, there is no cost-plus pricing for oil or gas, and the production-sharing formula penalizes high costs. If these gold-plated costs are kicked back to the operator, he stands to gain huge sums of money. However, there’s no evidence of the same.
The committee also finds that underproduction is uneconomic. Production-sharing contracts (PSCs) give little flexibility to operators to produce above agreed schedules, so there’s limited scope to recoup underproduction today through overproduction later. RIL’s gas share ends with the contract period, so any willful underproduction can mean losing gas share altogether.
Perhaps the most ludicrous claim is that RIL under-produced in the basin. Gas is regulated through production sharing contracts (PSC) and these give operators little room to wiggle out such acts. RIL’s gas share ends with the contract period, so any willful underproduction can mean losing gas share altogether.
Take the example of the Ladyfern Field in Canada. The production here fell 96% after the initial few years of production. The Golfinho field in Brazil produced around 55 million barrels per day as against an estimated 175 million barrels per day. As we can see, there are many fields where production has fallen below the estimated value. The reasons for this are varied, with things like sand seepage and contamination the most abundant. The key takeaway is that handing over the KG-D6 basin to ONGC, like many people have proposed will not solve the problem.
The government owns all of India’s natural resources. As the public sector is in a precarious position, the government partner with private sector companies in the exploration and extraction business. The PSCs align the interest of the government and operator; both gain by sharing of risks and rewards.
There has been a disagreement between the Rangarajan Committee and the Kelkar Committee with the former against PSC’s and shifting to revenue-sharing contracts. The Kelkar Committee though supports PSC’s and maintains that the PSC’s provide a great balance of risk and reward. As India is from energy perspective is not a string country, private players will be willing to invest in PSC’s. Suffice to say that many fields will be unviable without competitive, remunerative prices.