With the RIL-BP view tilted against the DGH-initiated Gopalakrishnan report, it was not long before demands for an assessment by an ‘independent’ consultant acceptable to both the government and the contractor started surfacing. On 25 September 2014, in an article in the Economic Times titled ‘Mukesh Ambani Co. on the offensive’, Supriya Shrinate and Shuchi Srivastava reported that the petroleum ministry had ‘initiated a note for the Cabinet to appoint a reputed consultant to verify if gas output at the KG-D6 block fell because of a geological surprise as Reliance Industries says, or the company deliberately suppressed output in anticipation of higher prices’. Terming the controversy around the gas price hike a ‘dispute’, the report stated that the company still had ‘to cope with attacks from Leftist politicians such as Dasgupta, customers in the power and fertiliser sectors who want cheap gas, as well as some sections of the government.’ Minister Moily came out as the healer who had ‘pushed for quick resolution of conflicts involving various companies in the sector’. The report also mentioned that RIL had argued that if the petroleum ministry accepted the logic of the DGH that there was more gas to be had from the declining oil fields, it should get the public sector ONGC to ‘drill additional wells and take away all the new production’. The report also recalled that minister Moily had told reporters that an earlier proposal prepared for the Cabinet to deny higher gas prices to RIL for D1 and D3 had not been sent to the Cabinet since there were legal and contractual implications.
On 27 September, another report in the same newspaper by Rajeev Jayaswal stated that the government was mulling over a new exploration licencing regime which would ‘unify and simplify the policies for oil and gas, coal bed methane and shale’, and do away with the practice of cost recovery which had caused all the problems between the petroleum ministry and RIL. Instead, companies awarded exploration blocks would share revenue from the first day of production. Apparently the proposed system, outlined in a draft policy, was designed to eliminate the necessity for CAG audits and would limit the role of bureaucrats in managing the fields, with the long-winding procedure of the DGH having to clear a discovery being negated. The new policy was aimed at providing incentives to the contractor to keep costs down, and enhance profitability. The report quoted an unnamed petroleum ministry official claiming the following about the extant policy:
It lacks the incentive to keep costs down for the operator; requires constant micro-monitoring by the government to protect the government’s stake, leading to procedural delays and arbitrations. These constraints increasingly overshadow the basic government objectives of energy security through the expeditious development of hydrocarbon resources available in the country while simultaneously conserving and promoting their efficient use. The government, while remaining committed to guard the natural wealth available within our frontiers, needs to promote judicious development of oilfields.
The name of the possible ‘independent’ international experts came out in a detailed report by Sujay Mehdudia in the Hindu on 1 October, wherein it was revealed that the Management Committee headed by DGH R.N. Choubey had refused to take a view on the appointment of consultants, Ryder Scott Company, DeGolyer and MacNaughton (D&M), Gaffney, Cline & Associates (GCA) or Netherland’s Sewell &Associates. The necessity for a fresh look by independent experts was included in the petroleum ministry’s Cabinet note which was also seeking to deny the benefit of the price revision on the expiry of the existing $4.2 per mBtu rate in April 2014 to gas produced from the old gas fields in the KG-D6 basin. Petroleum secretary Rae said that the note had been put up for inter-ministerial consultations.
It is going to the Cabinet for a final decision... The shortfall in gas production was around 1.19 tcf (trillion cubic feet) in the past three years. Whether the shortfall is deliberate or not deliberate, this has to be decided by (the) technical expert. Once the expert decides it was not deliberate, the new gas price formula will apply. If they decide it was deliberate, the formula will not apply.
Rae clarified that the appointment of international experts would be decided by the petroleum ministry not the Cabinet. On 5 October 2013, the Hindu reported that the ministry continued to ‘drag its feet’ on the relinquishment of 6,601 sq km or at least 86 per cent of the contract area, that the relevant file was pending with minister Moily at least since 16 June 2013. (On that day, the minister had stated: ‘Automatically, technically applying a rule is good for you [but] it is not good for the country’.) The report recalled that ministry officials had agreed with the DGH that RIL had exceeded the time limit given to it for developing the area and thus, as per the terms of its contract with the government, it should relinquish most of the KG-D6 area it was occupying—a kind of ‘land grab’ in the ocean bed of the Bay of Bengal.
Meanwhile, MP Dasgupta continued sending letters to the prime minister. He urged him to intervene and direct the petroleum ministry to ensure relinquishment of area. He alleged that if the area was relinquished and the discoveries handed over to the public sector ONGC for production, the government could realise Rs 60,000 crore through sale of gas from these discoveries. Reports of the replacement of the DGH head, R.N. Choubey had already begun surfacing in October 2013. Business Standard had reported on 4 October that Choubey’s term as DGH would not be extended because when he had been selected for the post in 2012 by the then petroleum minister Jaipal Reddy, his appointment had not been cleared by a selection panel, and the position had not been advertised. In his letter to the prime minister, Dasgupta also raised the issue of what he described as a ‘witch-hunt’ of honest officers in the petroleum ministry, specifically DGH Choubey. ‘We are witnessing a sorry spectacle of the private contractor [RIL] trying to browbeat its own regulator [DGH] who is an honest officer trying to uphold public interest, and the government has remained a silent spectator,’ wrote Dasgupta.
Even as these controversies raged, the CAG of India was continuing with its work. An earlier article by Akshat Kaushal and Shine Jacob in the same newspaper on 25 September claimed that the CAG was likely to take both the regulator and RIL to task for allegedly hoarding gas. An unnamed senior CAG official told the newspaper’s journalists that a forthcoming audit report would ‘clearly mention that the regulator (DGH) had failed in examining whether an intentional hoarding of gas by RIL caused a loss to the exchequer’. In their view, though there were some steps taken by the DGH, these were not enough to ascertain if there was hoarding. The official also said that the CAG report could also assess whether the price of D1 and D3 gas should be raised to $8.4 mBtu till the company could met its earlier supply commitments. The CAG, which has been auditing the spending on the KG-D6 basin from 2008–09 to 2011–12 at the request of the petroleum ministry, was expected to highlight the loss to the exchequer due to production falling to 3 tcf against the 10 tcf expected earlier. The report pointed out that A.M. Bajaj, principal director of audit (economic and service ministries) in the CAG’s office had written a letter seeking the intervention of petroleum secretary Vivek Rae as RIL was not furnishing the required financial statements to the government auditor. The audit team had issued 96 audit requisitions, including those for various records from 2008–9 to 2011–12. RIL had been maintaining that the CAG cannot perform a performance audit as the PSC allows it to look only into financial aspects.
According to a report in the Hindu (23 September 2013), the CAG had asked the petroleum ministry the reasons for the delay in execution of transnational pipeline projects such as the Iran-Pakistan- India (IPI) pipeline, Turkmenistan-Azerbaijan-Pakistan-India (TAPI) gas pipeline and the almost-defunct Myanmar-Bangladesh-India gas pipeline. These were part of the CAG’s draft performance audit report on ‘supply and pricing of natural gas’. This report indicted RIL and the central government for the fall in domestic fertiliser production. The Hindu (7 October) quoted from the report:
Non-availability of natural gas has been a major constraint in further addition of indigenous production of urea. The government could not provide as
sured supply of gas on a long- term basis while pipeline connectivity remained poor, crucial to investment and modernisation of plants in fertilizer sector. Hence the objective of enhancement of production capacity, self- sufficiency in urea production and savings on subsidy could not be achieved. Therefore, the agriculture sector remained dependent on imports to the extent of 475.29 lakh tonne during the last nine years due to shortfall in domestic production which resulted in a subsidy outgo of Rs 79,743 crore. Had the envisaged production enhancement projects materialised, subsidy savings on domestic production of urea by using LNG/RLNG (liquefied natural gas/ re-gassified liquefied natural gas) would have been Rs 8,159 crore during 2011-12 in lieu of import of 78.34 lakh tonne of urea.
On 10 October, the Economic Times reported that the petroleum ministry intended seeking Cabinet approval for a ‘general amnesty scheme’ for oil and gas operators which would allow companies like RIL to retain control over gas fields containing reserves worth some
$10 billion which they had been asked to relinquish for failing to meet deadlines. There had been complaints that in the light of adverse audit comments by the CAG, petroleum ministry official were unwilling to take decisions that could trigger investigations thereby delaying investments. The ongoing arbitration between the government and RIL had cast its shadow on efforts to resolve disputes, the newspaper stated. The proposed Cabinet note would resolve all operational issues affecting 30–40 discoveries in several blocks including Reliance’s KG-D6, ET claimed, quoting a government official who requested anonymity. It recalled that after the DGH asked RIL to surrender over 80 per cent of the area in the KG-D6 block, including eight gas discoveries, a Cabinet note had been prepared to disallow the company from benefiting from the higher gas prices that were produced from the old D1 and D3 fields.
Based on this newspaper report, E.A.S. Sarma, bureaucrat-turned- activist, wrote to the prime minister saying that a general amnesty scheme for oil and gas producers would sound a death knell for the sanctity of sovereign contracts and severely erode the credibility of the Indian government. He indicated that the word ‘amnesty’ in itself implied an offence committed by the beneficiary:
Sovereign contracts are founded on Article 299 of the Constitution and they need to be read in conjunction with the other provisions of the statute. The production sharing contracts (PSCs) executed by (the) MPNG (Union ministry of petroleum and natural gas) with RIL and the others come under this provision. A strict compliance with the PSC on the part of MPNG and the franchisee company is a prerequisite to send a strong message to all prospective candidates seeking entry into the arena of hydrocarbon development that the government would uphold the sanctity of such contracts on its part and expect the franchisees also to respect their own contractual obligations. Article 4 of the PSC deals with the franchisee’s obligation to carry out (a) certain minimum work programme in each exploration phase. It provides an option to the franchisee, at the end of each exploration phase, either to move on to the next exploration phase or to terminate the contract at that point of time. The time-frames laid down in the PSC for the three exploration phases are three years and two years each respectively.
At the end of the first exploration phase, the franchisee is obligated to relinquish 25 per cent of the franchise area. Similarly, at the end of the second exploration phase, the franchisee is required to relinquish another 25 per cent of the area. Under article 4.4, the franchisee is permitted to retain only the development and discovery areas subject to relinquishing the minimum areas at the end of each of the earlier two exploration phases. Relinquishment is mandatory under Article 4. It cannot be subject to the whims and fancies of either the franchisee or the functionaries of MPNG! From the audit reports of CAG and as per the reported views of the present DGH, it is evident that the senior functionaries of MPNG and DGH had colluded with RIL in the past and allowed the company to make undue gains by giving a go by to the various provisions of the PSC, including the obligation to relinquish portions of the franchise area as envisaged in Article 4. Article 4 of the PSC is crucial as it would have placed pressure on the franchisee to invest prudently and ensure carrying out efficient and expeditious exploration activity within the prescribed time frame in each Exploration Phase. It would have given an opportunity to the government to take back the relinquished areas and put them to auction once again to the prospective players, thereby maximising the probability of new discoveries. By not complying with the requirements of Article 4, the concerned functionaries of MPNG had deprived the government of this potential advantage and hurt the public interest. Apparently, those responsible for this have no concern for the oil security of the country and the need to protect the national interest. It is ironic that the those at the helm of affairs of MPNG today are blissfully insensitive to this concern.
In a similar vein, Sarma had earlier written an article in the Economicand Political Weekly in July 2013 in which he had argued that by allowing repeated violations of the PSC, the government was conveying a wrong message to future investors, namely, that they could mock at the sanctity of contracts and the law of the land. He had written:
The government has erred by extending the new gas prices to the already developed gas fields in the KG basin and elsewhere. Finally, natural gas is a public resource and the government is merely a trustee for the people. The Doctrine of Public Trust obligates the government to ensure that gas resources are developed on scientific lines and that the social returns maximised. In the case of the KG basin, the government has failed this test.
In a follow-up letter, Sarma wrote to the Cabinet secretary A. K. Seth on 30 October on the issue of circumvention of the provisions of the PSC by RIL thereby causing a loss to the exchequer. Sarma quoted a Right To Information (RTI) reply from the sitting DGH indicating that the directorate was aware of the prevailing situation and had recommended that RIL should be directed to relinquish eight blocks—D4, D7, D8, D16, D23, D29, D30, and D31. Quoting a report in the Financial Express (29 October), Sarma protested that petroleum minister Moily had overruled the DGH’s recommendation and decided that RIL be allowed to retain three blocks—D29, D30 and D31. He contended that the minister’s proposal would turn out to be problematic for the government:
The reported proposal of the minister for petroleum will land the government in a serious controversy as the five blocks proposed for relinquishment contain only 0.8 tcf of gas, whereas the three blocks proposed to be left with RIL contain 3.2 tcf, out of which RIL has already inappropriately drawn 2 tcf. RIL had initially declared the gas resources in the eight blocks to be 10.2 tcf, misleading thousands of unwary investors who trusted RIL and invested in the company. RIL’s misleading disclosure also induced several power companies downstream to invest on gas- based power projects. Their projects have become dysfunctional as a result of RIL’s failure to supply them gas as planned. The direct and the indirect costs to the economy on account of these failures on the part of RIL should have been quantified by now and recovered from RIL.
Instead, for reasons best known to it, the government had chosen to appoint the Rangarajan Committee in contravention of the PSC and reward RIL by doubling the price of the gas produced even from the already developed gas blocks. The interpretation of the PSC should not be left to the political executive. In the normal course, one would have expected the government to entrust this responsibility to a statutory regulator but, for some inexplicable reason, despite several letters from me, the government had deliberately chosen to allow politics to determine the enforcement of the PSC, thereby hurting the public interest irreversibly.
I believe that the Union Cabinet is entitled to be apprised of these implications. I request you to direct MPNG (Union ministry of petroleum and natural gas)to obtain the view of the law ministry before acceding to circulate MPNG’s proposal for the consideration of the Cabinet. I believe that the Union Cabinet should be prudent enough to enforce the PSC strictly and ensure that RIL relinquishes all the eight blocks to safeguard the pub
lic interest.
Moily had, of course, by then become the government’s ‘Mr Dependent’ as the Economic Times fondly labelled him in a report on 12 January 2014. After Jayanthi Natarajan was suddenly moved out as minister of environment and forests on 21 December 2013 ostensibly for doing party work, Moily was given charge of this crucial portfolio. The newspaper quoted a senior Congress functionary and Moily’s colleague in government as saying that the man of the moment was not one to shy away from responsibilities. Moily had an onerous task on hand. This person asked: ‘Who would want to clear piles of pending files at the fag end of the government, just a few months before elections, at a time when babus are gripped by policy paralysis fearing that investigative agencies would hound them in the next government?’
Moily is a man of action. He was publicly applauded by prime minister Manmohan Singh at the Petrotech conference held on 13 January. Singh said in his inaugural address:
Development of the hydrocarbon sector required particular attention in the country that produces 2.5 per cent of the world’s energy but is the fourth largest consumer and will become the third-biggest by 2020.There is a need to bridge the ever-increasing gap between demand and domestic supply. With this in mind, we are encouraging domestic and global companies to explore potentially hydrocarbon-rich areas in the framework of a stable and enabling policy environment.
Singh called for resolute efforts to bridge the gap between energy imports and domestic production to fuel India’s economic growth, while Moily stressed the need for staying the course with bold decisions even in the face of criticism. It was a different matter that although industry leaders at the conference advised caution, Moily was more than optimistic. He said the government would reconcile the reports of the committees headed by Kelkar and Rangarajan to take care of investor concerns. ‘The terms and conditions will be decided later when we finally call for the bids. There will be no policy uncertainty,’ he said.
GAS WARS: CRONY CAPITALISM AND THE AMBANIS Page 44
