RIL and RNRL: KGD6

Natural gas from KG Basin has started production after 7 years after the discovery and with huge time and cost overruns.

Anil AmbaniAnil Ambani’s accusation does not stand true as RIL operated KG D-6 has commenced the production within 7 years of the discovery against the global average of 9 years. KG D-6 field is one of the fastest developed fields in the world. As far as the cost overrun is concerned, commodity prices have increased multiple times during last 7 years. With the rise in capital cost, estimated recoverable reserves from initial level of 5.32 trillion cubic feet (tcf) to 11.3 tcf, as approved by the Directorate General of Hydrocarbon. Peak production of gas from the filed has doubled from initial 40 mmscmd to 80 mmscmd. Revised field development cost has been approved by Directorate General of Hydrocarbon (DGH) and other independent parties. Despite the escalation in project cost, attributed to rise in commodity prices, KG D-6 development cost of nearly $5 per barrel oil equivalent (boe) is less than half of the global average of $10-12 per boe. Compared to the RIL, which is operating in India’s first deepwater block, under the harsh weather conditions, with no prior experience, field development cost for Cairn operated Rajasthan field has increased 2.5 times. Therefore, Mr. Anil Ambani should have rather complimented the RIL’s feat then making any cynical comments. Further, he should avoid making any such comment as he himself has been unable to execute any large scale project in so far his corporate career.

RIL has tried every trick in the book –and apparently several outside the book -- to back out of its solemn, legal and contractual obligations.

RIL, on its part, has put best endeavor to honor the agreement. However, as the KG Basin property belongs to the Government and RIL is a mere contractor, statutory and Government approval always has a key role to play in implementation of the agreement.

Price of gas was always a subject of Government approval. Government has approved a higher price of $4.2 per mmbtu for KG D-6 gas. Despite this, RIL, in its letter to the Petroleum Ministry, had sought the Government approval for gas supply to RNRL at $2.34 per mmbtu. The ministry, however, rejected RIL’s plea arguing that it did not meet the arms-length sale criteria.

As far as commercial utilization of gas is concerned, the Gas Utilization Policy of the Government has overruled the marketing freedom of the RIL, which was provided to it in the Production Sharing Contract (PSC). With everything needed the Government approval, RIL contained to mere follower of the Government instructions whether it is gas price or marketing freedom.

RIL had also given an irrevocable Power of Attorney to RNRL for obtaining the necessary Government approvals, on the basis of which the Anil Ambani led company, through various communiqués, tried to obtain the approval, but the Government did not approve the same.

The government’s approved gas price is not a sale price –it is a price the government has fixed for valuing its own share of profit petroleum.

Anil Ambani’s claim that the Government’s role is only limited to fix the price for valuating its share of revenue contradicts his own stand. In a RNRL presentation to the Government on “Impact of domestic gas finds on energy security, market competitiveness and macro-economic factors”, it is clearly stated that the “Government can determine the use of gas and price. This, undoubtedly, challenges Anil Ambani’s present stand that the Government can not fix the price of gas.

We are claiming gas only from RIL’s lawful share or its rightful entitlement of production sharing contract. Our claim is entirely in line with Government’s own stand.

RNRL’s claim of gas can not be from RIL’s entitlement as the Government is the sole owner of the gas. This fact has been admitted by RNRL’s in its presentation “Impact of domestic gas finds on energy security, market competitiveness and macro-economic factors” on slide number 27.

Moreover, gas supply to RNRL would affect the present Government allocation to various fertilizer and power companies. In fact, in its letter to Department of Fertilizer, RNRL had suggested that gas supply from KG D-6 field to existing customers should be reduced to accommodate full gas supply to RNRL. RNRL had said “seller may by prior notice reduce buyer’s DCQ on pro rata basis or reduce the contract period with all purchasers or users of gas from the field”. In the same letter RNRL had claimed that Government policies are subject to RIL-RNRL case.

The facts mentioned above exposes the real intention of Anil Ambani led company which wants gas at the cost of various other industries and consumers. So claimed gas supply to RNRL also does not comply with present Government policies related to commercial utilization of gas.

As per the PSC, the contractor – that is RIL – is entitled to sell its participating share of gas in the cost petroleum and profit petroleum.

Mr. Anil Ambani apparently changes his stance as per his convenience and self-interest. Now that he says RIL is entitled to sell its gas in the cost and profit petroleum contradicts his earlier observations. In the presentation “Impact of domestic gas finds on energy security, market competitiveness and macro-economic factors” made in June 2007, on slide 28, Mr. Ambani had said that the contractor’s – RIL’s – proposal must abide by Government policy on utilization. On slide 29 of the same presentation he had said that larger perception persists that the ‘contractor has full freedom to market the entire gas’.

RIL has to abide by the Government policy and thus need to supply gas to Government nominated consumers at the Government approved price. Therefore, RIL neither has the liberty to select customers of its choice nor does it have the right to fix the price of gas. Due to these obligations, RIL does not get gas for its own consumption and buys costlier gas from market.

Petroleum Ministry’s biased stance commenced in 2006, coinciding with changes in the ministry.

It appears that Mr. Ambani has realized the biasness of the Petroleum Ministry too late and only when the Oil Ministry has taken a stand in larger public and economic interest which basically goes against the personal and commercial interest of Mr. Anil Ambani and his company.

In a presentation made to Cabinet Committee of Secretaries on Gas Pricing, on July 6, 2007, well post the so called ‘changes in the petroleum ministry’, Mr Anil Ambani had recommended “judicious allocation/utilization of domestically produced natural gas keeping in view of the larger economic objectives of the country”. Furthermore, he had said that “proposed gas allocation policy should consider allocation of gas to the existing assets lying idle, on priority basis”. In another presentation to Government Mr Anil Ambani had described the Government guidelines governing sale of petroleum as “fair, transparent and serve the national objectives”.

However, with Government intervening in the issue to protect its policies and larger economic interest, the commercial interests of Mr Anil Ambani and his company are getting hampered. Thus, sensing adverse impact of his own suggestions, recommendations and statements on his self-interest, he has started accusing the Government and its policies. In the process, he has forgotten that he is contradicting his own remarks. Was he expecting pickles while gathering thistles for others?

The Petroleum Ministry is aiming to re-write the PSC after nearly 10 years. Will this not set a precedent, allowing any Ministry to alter any contract in future?

Mr Anil Ambani himself, in a RNRL presentation on “Impact of domestic gas finds on energy security, market competitiveness and macro-economic factors” made in June 2007, had said that “by virtue of Article 297 of the constitution of India, Petroleum in its natural state in the Territorial Waters and the Continental Shelf of India is vested in the Union of India”. Government is entitled to change its policies in larger public interest. Government formulated “gas utilization/ allocation policy keeping in view the interest of the economy and priority sectors” as suggested by Mr Ambani in his presentation to Cabinet Committee of Secretaries. The Government also agreed to induct another suggestion of Mr Ambani which says “proposed gas allocation policy should consider allocation of gas to the existing assets lying idle, on priority basis”.

Now, as the gas allocation from KG D-6 field to Anil Ambani’s Dadri power plant does not comply with Government’s Gas Utilization Policy, he has tried to create uproar against the Government and its policies. While doing so, he forgot that these were his suggestions only which became an integral part of the Government’s Gas Utilization Policy.

Existing customers with stranded assets are filing a spate of unnecessary petitions in the Supreme Court, even though we have made it clear that there will be no disruption of gas supply to any existing or priority sector user, if gas is supplied to RNRL.

Apparently, Mr Anil Ambani does not even want the existing customers of KG D-6 gas to voice their concerns and grievances. Gas supply to RNRL on preferential basis would affect the existing gas supply agreements and fear of gas supply disruption looms large to existing customers. As a matter of fact, Mr Anil Ambani, in his letter to Department of Fertilizer, had stated that gas supply from KG D-6 field to existing customers could be reduced to ensure committed gas supply of 28 mmscmd to RNRL. It is out of everyone’s understanding how can he ensure the existing customers uninterrupted gas supply when he himself is advocating for reduction in their contracted quantity.

A gas price of $4.2 per mmbtu is exorbitant and can no way be justified.

It appears Mr Anil Ambani did not clear his facts properly. There are much higher prices compared to $4.2 per mbtu are already existing in the Indian market. In fact, almost all the non-APM gas prices are higher than KG D-6 gas price of $4.2 per mmbtu. Gas from Panna-Mukta and Tapti field is priced currently at $5.7 per mmbtu whereas gas from Ravva Satellite field is priced at $4.4 per mmbtu, which is slated to be further revised soon. Gas from GSPC and Niko’s Bheema fields are priced at $5 per mmbtu. The gas prices all the private and joint venture fields’ average at $4.73 per mmbtu. Comparatively, KG D-6 gas is priced at much lower price of $4.2 per mmbtu which is very much justified in the present scenario. In fact, ONGC and OIL have also requested the Government to revise the gas prices from APM fields to $4.2 per mmbtu from the present level of $2 per mmbtu.

The production cost of KG Basin gas is only Rs 43 or 89 cents.

Seemingly, Mr. Ambani was completely swayed away by media reports about production cost of KG Basin gas while making speech at Annual General Meeting of RNRL. This is something least expected from the Chairman of such large corporate group. He neither verified the facts from DGH nor from RIL. In reality, the total cost of production for KG Basin gas works out to be $2.9 per mmbtu. Cost of $0.89 is just the ‘post well head’ cost which includes operating and capital costs incurred in facilities related to treating, processing and transporting the gas to the point of delivery to the buyer.

The budgeted expenditure of RIL for peak production of 40 mmscmd was Rs 12,000 crore. It is shocking that the capital expenditure has actually gone up by Rs 25,000 crore to a staggering Rs 45,000 crore when the output became 80 mmscmd.

It appears Mr Anil Ambani, while accusing RIL of cost escalation, did not take into account the rise in equipment, rigs and commodity prices. Cost of rigs increased 2-3 times during last 4-5 years whereas installation cost also rose by almost 300% times during this period. Cost of steel, equipments, project management cost and seismic survey cost also almost doubled during this period.

Initial development plan for 2P reserves of 5.32 trillion cubic feet with peak production of 40 mmscmd required capital expenditure of $2.47 billion. With the drilling of more wells, estimates for recoverable reserves doubled to 11.3 tcf, as approved by the DGH. With rise in reserves estimates and other input costs, field development cost for KG D-6 field increased to $8.8 billion. RIL’s cost estimates were approved by the DGH as well as an independent party. RIL, operating in India’s first deepwater block under adverse weather conditions, still managed to contain the project cost. RIL’s F&D cost of about $5 per barrel oil equivalent (boe) is half of that of the world average of nearly $10-12 per boe. Compared to RIL’s F&D cost, Cairn’s field development cost for its onshore Rajasthan based field escalated by 2.5 times.