The risk that is entailed in conducting oil and gas exploration activities, Raha explained, is never covered by banks. A company that involves itself in exploration has to show expenses on its balance sheet. Funds are sourced from the market and banks to extract oil and gas, only after a discovery. This meant that no company, especially privately-owned ones, gets into the business of oil and gas exploration unless they have very strong reasons to do so. The Indian government, therefore, offered discovered properties to companies. This was when Colonel S.P. Wahi was chairman of ONGC.2 But not much came out of these endeavours although a number of foreign and Indian companies were interested in taking over the Bombay High oilfields after substantial reserves of oil and gas were discovered. With the discovery of Bombay High, India’s dependence on imports of crude oil came down from 70 per cent to 30 per cent. India became self-sufficient in crude oil production for two years between 1982 and 1984. That was when the production in Bombay High went up. The country’s demand was at that time far lower than what it is today. With the country’s economy growing at the ‘Hindu rate of growth’ of 3.5 per cent—a term coined by the late Professor Raj Krishna—India was able to become quickly self-sufficient in oil, albeit for a short period of time. However, as demand went up, the gap between domestic production and total demand for petroleum products appeared once again and continued to widen. This was the period when the government offered discovered properties to private companies. The Panna-Mukta, Tapti and Ravva oilfields were among the discovered properties that were offered to both a consortia of foreign companies, as well as to private Indian businesses. This, in Raha’s opinion, was ‘scandalous’.
He retold the story of how the private sector became involved in the exploration of oil and gas. In the early-1990s, when P.V. Narasimha Rao was the prime minister, Manmohan Singh the finance minister, and Captain Satish Sharma the minister of state for petroleum and natural gas, a decision was taken to involve the private sector (foreign and Indian) in oil exploration. The Panna-Mukta oilfields and the Mid- and South-Tapti oilfields on the west coast went to the Reliance- Enron consortium. The Ravva oilfield in the Krishna-Godavari basin was awarded to Videocon Petroleum and Australian Command Petroleum. The contracts for Ratna and the R-series oilfields in the Bombay offshore region were awarded to Essar Oil and Premier Oil Pacific of the UK, but the deal was eventually not signed.
These deals were made between 1993 and 1995. ONGC had done all the exploration, geological and hydrological work for these blocks. These properties were not just discovered properties, but properties from which oil and gas were being produced as well. According to Raha, to an extent the top managers and directors of ONGC were also at fault because when the properties were given away to private corporations for peanuts they did not protest loud enough. Raha knew why.
During the 1990s, ONGC was a public sector enterprise that was wholly owned by the government of India. There was uncertainty regarding its future. There was a possibility that the corporation would be privatised or even dissolved. The problem with ONGC was that it was using exploration technology that had been provided to it by the Russians, who had also trained ONGC’s technical personnel. The Russians tended to be rather conservative while making assessments about the presence of oil and gas, as well as about the size of reserves. Thus, while assessing properties, ONGC was invariably extremely conservative in assessments. The oil and gas exploration business is tricky. The same set of assessments could be termed ‘pessimistic’ or ‘most unlikely’ by one group of technical experts and ‘optimistic’ or ‘likely’ by another. Most exploration companies in the West (unlike the Russians) prefer optimistic assessments because they need to show higher levels of discovered properties in order to raise money from the market and from banks.
ONGC fell prey to its own pessimistic estimates. Moreover, it did not start exploration activities in these fields. It was incorrect on the part of ONGC to declare such paltry estimates of oil and gas in its fields because private exploration companies would never be interested in investing in them, Raha argued. In 2001, after he became chairman of ONGC, he asked for the records of the years between 1993 and 1995. To his surprise he found that many files were missing, files which contained important records of transactions made during that period.
The government realised to its displeasure that international companies were showing little interest in investing in exploration blocks that were offered by ONGC. International companies were not interested because the terms and conditions did not seem attractive. This compelled the government to bring out a coherent and more attractive licensing policy for exploration of oil and gas fields. The New Exploration Licensing Policy (NELP) was thus formulated keeping in mind the needs of potential investors. This policy was put together under the stewardship of former bureaucrat Dr Vijay Kelkar and Sanjeev Mishra, who was then joint secretary, exploration, in the MoPNG. Raha believed that the main credit for formulating the NELP which, by any standards, was a world-class contractual document, should go to Kelkar. Licensing policies are terms and conditions offered by most countries and woven together in a manner so as to ensure that these are clearly understood by potential investors. The Union Cabinet approved the NELP in 1997, by which time there was a new regime in New Delhi—the United Front coalition government, with H.D. Deve Gowda as prime minister and T.R. Baalu as minister of state for petroleum, natural gas and non-conventional energy sources. According to Raha, Baalu should not be blamed for not understanding the state of affairs as he was new to the job.
Under NELP-I, the first round of bidding for oil and gas exploration blocks was done in 2000 by which time the documentation procedures of the policy had also been completed. At the time of the interview, NELP-VII was under process (it was completed in the last fortnight of November 2009). As several rounds of NELP bidding were conducted, the ministry made minor changes and modifications in the terms and conditions of the bid documents. The basic structure of the NELP, however, remained more or less intact, and Raha stressed, it was important to understand this aspect of the bidding process. One of the most important features of NELP was that it gave the operator (or the company that is awarded a contract) almost total freedom to price and market the oil and gas extracted from the discovered properties. The government or the MoPNG did not have any role to play in pricing and marketing the output. This was done at the sole discretion of the operator. The NELP simply states that the operator is entitled to fix the market price of the products and if it does not find buyers within India willing to pay whatever price it has fixed for those products, it may seek permission from the government to export the oil and/or gas. This specific clause made it a truly market-oriented policy which now seemed attractive enough for private companies. The response improved and a number of small foreign companies like Cairn Energy and Premier Energy expressed their interest.
The fact that India has 0.5 per cent of the total oil and gas resources in the world translated into 32 billion tonne of natural resources waiting to be explored. Raha believed 50 per cent of this quantum—16 billion tonne—should be discoverable. Until late-2009, roughly 7 billion tonne of oil and natural gas had been discovered. This potentially-discoverable quantum of oil and natural gas is what attracts small companies to first try their luck by bidding for the blocks on offer and then, investing in exploration work. In the first round of bidding under the new policy, that is, NELP-I, the Reliance group emerged as the winner in most blocks. In an open and transparent bidding process, ONGC lost out to Reliance in winning a number of blocks. Raha said he had heard that secret information about the ONGC bids had been leaked out, though he could not independently confirm who had done this and for whom. ‘My guess is as good as yours,’ he remarked.
Though Reliance won most of the blocks from NELP-II onwards, till then, ONGC had been ahead of Reliance. If all the seven rounds of NELP are taken together, ONGC won the highest number of blocks with Reliance following second. The foreign companies that won bids for the bloc
ks were mostly part of consortia led by either ONGC or Reliance. Very few foreign companies were awarded blocks on their own. Many, including the Russians, wondered how ONGC was awarded as many exploration blocks as it had been. The answer was simple: ONGC is India’s biggest oil and gas exploration organisation, the corporation’s first charter is India and it was but natural that ONGC would bid aggressively to win as many exploration blocks as possible.
Raha thought the same logic could be applied to Reliance. The D6 block in the KG basin had gone to Reliance in 2000. Bidding was done by companies on the basis of certain databases. The same set of data for particular oilfields was packaged and distributed to all interested companies so that they could take an informed decision on the viability of bidding for particular blocks where they could invest in exploration. All investors had access to the same data, thereby offering a level playing field to all. However, additional data could be informally sourced from other companies that were already involved in the business of oil and natural gas exploration. Raha recounted a story he had heard about how data was sourced by Reliance for the KG basin before the company placed its bid. According to this story, Anil Ambani, who was at that time still with his elder brother Mukesh, visited a retired ONGC official in Hyderabad to obtain more knowledge about the KG fields that his company wanted to acquire. The gentlemanly officer unpacked a few old papers from a rusty iron trunk and these documents apparently provided them with crucial clues about the reserves of oil and natural gas that lay beneath the bed of the Bay of Bengal.
That anecdote aside, the actual discovery in this field was made two years after the block was awarded to the Reliance group in 2000. According to Raha, Reliance subsequently misled the market by running a cleverly-managed public relations campaign. This block was said to be the ‘biggest’ gas discovery—what some missed out was the fact that it was the ‘biggest discovery of the year’, meaning the biggest discovery of the year 2002.
The 2002 discovery was certainly the biggest of that year, admitted Raha. The fact is that ONGC had discovered larger gas reserves along the west coast of India but in different years. After 2002, Bassein was the biggest discovery of hydrocarbon resources. The hype, Raha believed, was deliberately created by spin-doctors and it certainly helped the Reliance group raise capital from the stock markets and from banks and financial institutions.
So, did the ‘D’ in D6 stand for Dhirubhai, Mukesh and Anil’s late father who was the patriarch of the Reliance group? Raha said it was a clever construct, for the DGH assigns numbers to all blocks. At the same time, what cannot be denied was that as far as oil and natural gas discoveries in India are concerned, this was indeed a good discovery but not the ‘biggest ever’. Raha elaborated that blocks such as D6 in the KG basin were deepwater discoveries. In India, those hydrocarbon resources which are found at water depths of 400 metres or deeper are known as deepwater properties. The deepest well in India is at a water depth of 3 km, which has been drilled by ONGC. Globally, there are only two companies that have ever drilled that deep. One is Enron, and the other ONGC in the KG basin. When one drills up to water depths of 1,800 metres, the term used is super-deep; and beyond 1,800 metres, it is called ultra-deep. Globally, deepwater oil drilling technology is an evolving technology. It is very much like space travel: cutting-edge, very tough and unpredictable.
As one drills deeper into the water, the pressure increases simultaneously while the temperature decreases. However, after a certain depth, the temperature stabilises. But several strong currents also flow in deep water. By way of comparison, when one drills in shallow-water, as in Bombay High where the water depth is just about 60–70 metres, there are drilling platforms that stand on legs that are as high as 300 metres. So the drilling operation is done on these jacked-up platforms. Obviously, for water-depths of one-two kilometres and deeper, it is impossible to explore and drill on jacked- up platforms. The most crucial challenge is to inspect and explore on floating rigs that are not attached to the seabed. At depths of two-three kilometres, rocks are found and discoveries are sometimes made at even greater depths. In the KG basin, rocks are deeper at around 6 km and hydrocarbons found at an even greater depth of 9 km below the surface of the ocean. These deepwater hydrocarbons are extracted using drilling pipes that are 36 inches in diameter, sometimes wider. In the depths of the vast ocean, these pipes hang like strings or pieces of thread. These floating rigs are linked through global positioning systems (GPS) with the use of technology that is similar to the kind used in satellite navigation. And like spacecraft, these rigs have thrusters attached that help position the rig in the open ocean and prevent the string of pipes from breaking.
This process is followed at the stage of drilling. However, once extraction or production of gas begins, manifolds have to be installed on to the seabed. On account of the presence of sand and sediment, the surface of the seabed is not firm like the earth’s surface. The crucial challenge here is that once the manifolds are installed on the seabed, they have to remain wherever they have been installed. It is not possible to go back and reposition or repair them after these have been installed on the bed of the ocean. Theoretically, there are remote-operated vehicles that are meant for inspection and repair but after the installation of manifolds, the work is for all practical purposes done once and for all. Whereas deepwater drilling technology used in water depths beyond two km is still evolving, the technology is more or less proven for drilling up to two km. The discovery made by Reliance in the KG basin was at a water-depth of 1.2-1.3 km. This basin on the eastern seacoast of India is in an area in the Bay of Bengal where the continental shelf is initially narrow followed by a sudden slope. Therefore, at a distance that is hardly 30–40 metres from the shore, one comes across water depths of between one and 1.5 km. Along the west coast, there is a near-uniform water-depth of about 100 metres for a distance of around 100 kilometres into the sea from the shore. The geography of the eastern coast is very unlike the west coast, where Bombay High is located. Therefore, the main point highlighted by Raha is that exploration and drilling work in the KG basin is a relatively tough task.
After the D6 block in KG basin was discovered and production had begun, 80 per cent of global tenders that had been floated for gas exploration blocks had already been reviewed. In 2003, Reliance made the bid to supply gas at $2.34 per mBtu, apart from the cost of delivery that was to be added to this amount. The addition of the delivery cost brought the price of natural gas to $2.97 per mBtu. Much was made of the fact that RasGas of Qatar was supplying gas at a rate of $2.53 per mBtu to India which was considered too high when compared to the $2.34 per mBtu offered by RIL to the public sector NTPC. What this comparison missed out on was the fact that what RasGas was supplying to India was LNG or liquefied natural gas and the price of LNG includes an amount of $1.00 per mBtu for liquefaction and regassification. The bidder at the second position was Petronas (Petroliam Nasional Berhad), a Malaysian oil and gas company, which quoted a price of $3.08 per mBtu of natural gas. Therefore, the price quoted by RIL was the lowest and it won the bid to supply gas to NTPC.
So, who would buy the gas? Raha said that natural gas is bought mainly by power stations. Natural gas found along the east coast tends to be ‘dry’ and is therefore, mainly used for power generation. Gas found on India’s west coast is rich with components such as ethane (or C2) that makes it more suitable for use in the manufacture of fertilisers and petrochemicals. When a power project is established, the selling price of each unit of electricity generated is determined over a lifecycle of 15-plus-two years, that is, 17 years. It is essential to know the price at which fuel for generation of power is to be purchased by the power station over a period of 17 years. Prior knowledge of fuel prices is required in order to earmark capital for investments in building the power station. The economics of the project depend on the long-term average fuel price. NTPC had done its homework before floating the tender, in response to which Reliance placed the lowest bid in 2004 and was awarded the c
ontract. Raha then delved into how a public sector enterprise like NTPC awards contracts to private companies.
The important point to note is that all correspondence and all documents that are part of the bidding process automatically become a part of the contract. This is explicit. For example, if NTPC floats a tender and the company that bids the lowest price wins the contract, the tender and the bid are ipso facto part of the contract. This is specifically written down in the terms and conditions of the contract. Any exchange of letters and notes that subsequently takes place becomes part of the contract. Once the bid evaluation process is completed and a decision to award a contract arrived at, a notice of award is issued. This is followed by an exchange of documentation. Officials are authorised by both parties to formally sign the contract. The company awarding the contract asks the bidder for acceptance of the contract. The important point to remember in this context is that acceptance of the letter of intent (LoI) by the bidder constitutes the final contract. Often, the tender process leads to litigation.
Raha elaborated:
Let us assume that Company A has floated a tender and there happens to be a foreign Company B that has successfully bid for this tender but is about to lose the final contract. Company B files an appeal against company A in a court to try and get a decision in its favour. It harasses Company A till the latter falls in line. This is the primary motive for filing a case in court because when matters are sub judice, status quo normally prevails and is enforced by courts. Status quo means all project work remains in limbo thereby causing losses (or opportunity costs) to Company A.
GAS WARS: CRONY CAPITALISM AND THE AMBANIS Page 20
