GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  DGH should also consider developing a comprehensive PSC monitoring system, which will not only provide details of compliance with PSC provisions for any block/contract at a glance, but will also enable operators to ‘file’ returns? Documents/information electronically through the web and/or e-mail. The cost of developing (and maintaining) such an IT system will be miniscule, compared to the total GOI Profit Petroleum revenues as well as the potential (although not exactly quantifiable) gains from more effective and timely monitoring of compliance.

  (Para 8.4.4)

  Role of DGH

  In our view, the roles and functions of DGH encompass two sets of functions with potential conflict of interest – an upstream regulatory function, and a function of rendering technical advice to GOI. While in 1993 (when DGH was set up), there was lack of adequate clarity on the role and position of regulators in various economic sectors, the need for clear autonomy of sectoral regulators (from the Executive) is now well recognised.

  Consequently, we recommend that the functions currently discharged by the DGH be clearly demarcated. The technical advisory and related functions should be discharged by a body completely subordinate in all respects to MoPNG (either a cell/ attached office/ subordinate office within the MoPNG or a separate entity under MoPNG). Functions of a regulatory nature (review of hydrocarbon reserves and reservoir management, laying down of norms for declaration of discoveries, laying down safety and related norms and conducting safety inspections, audits etc.) should be discharged by an autonomous body, with an arm’s length relationship with GOI.

  (Para 7.1)

  MoPNG has assured that conclusions and recommendations drawn by CAG would be considered for appropriate action.

  APPENDIX 7

  Deen Dayal West: No Gas, All Lucre

  By Paranjoy Guha Thakurta and Jyotirmoy Chaudhuri

  The operations by Reliance Industries Limited to extract gas from the ocean bed in the Bay of Bengal off the Krishna-Godavari basin was not the only activity of its kind that created considerable controversy. A company set up by the state government of Gujarat in western India got embroiled in a messy dispute after its operations were severely criticised by the Comptroller and Auditor General of India, the media and political activists. This company, the Gujarat State Petroleum Corporation (GSPC), had links with RIL. Activists pointed to this company to claim that there was little to choose between the two largest political parties in India who are supposed to be opposed to each other, the Congress and the Bharatiya Janata Party, or, for that matter, between the Congress-led United Progressive Alliance government in New Delhi and the BJP government in Gandhinagar, the capital of Gujarat, when it came to questionable business practices. What prompted the comparison was the fact that one of the companies associated with GSPC was linked to individuals close to the Congress -- this fact was used to argue the contention that cronyism ran deep in India’s political circles.

  On 8 March 2013, a blog post titled ‘Narendra Modi’s Rs 9,000 crore gas misadventure’ was posted on the Times of India portal. The post, written by Kingshuk Nag, the resident editor of the publication in Hyderabad, claimed that a natural gas site in the KG basin being explored by GSPC actually had reserves of just two trillion cubic feet (tcf) which was one-tenth of what had been announced by Gujarat chief minister Narendra Modi in 2005 with much fanfare. Not only that, Nag, who has also written a political biography on Modi, wrote that opinion was divided over whether the gas was recoverable. According to an unnamed expert cited by the author, the cost of recovery from GSPC’s gas field was high, and required superior technical expertise which the state government company lacked. Meanwhile, the company had run up ‘debts of over Rs 9,000 crore, possibly closer to Rs 10,000 crore’. On 26 June, an editorial in the Times of India newspaper by Abheek Barman said that it was only by 2012, that the Directorate General of Hydrocarbons could ‘vouch’ for the presence of two tcf of gas in the site where GSPC was operating.

  It was apparent that the GSPC had spent a great deal of money on gas exploration without having delivered much in terms of production till 2013, nearly eight years after Modi’s grandiose announcement. The finances of the company were also doubtful. GSPC had not posted its annual report for 2011-12 at the time the blog post was written by Nag in March 2013, which was almost the end of the financial year 2012-13. The latest annual report on the company’s website was for the financial year that ended on 31 March 2011. According to this report, GSPC had loans aggregating Rs 7,126.68 crore, of which a significant portion (Rs 2,980.32 crore) was unsecured, that is, not backed by any collateral. The total loans taken by the company was somewhat lower as on 31 March 2010 at Rs 6,383.83 crore. When the authors of this book looked up the GSPC website a few months later in July 2013, the company’s annual report for 2012-13 was still not available. The latest report that was available was for a subsidiary of GSPC, Gujarat State Petronet Ltd (GSPL), a subsidiary company of GSPC.

  In September 2012, GSPC had raised Rs 3,000 crore through bonds to finance its exploration and production activities and also to re-finance higher-cost short-term loans that been taken earlier. The bonds were for three periods, eight, ten and 60 years, and the company received total bids worth Rs 10,100 crore. Earlier, in November 2010, the company had tied up a Rs 3,000-crore term loan through a consortium of 15 banks, led by the Bank of Baroda in order to finance exploration and production activities of field in the KG basin that was named the Deen Dayal West (DDW) field after Pandit Deen Dayal Upadhyaya, an important ideologue of the Bharatiya Jana Sangh, the right-wing, Hindu nationalist political party that later become the Bharatiya Janata Party. The company had in June 2010 drawn up plans to raise Rs 3,000 crore through an initial public offering (IPO) of its shares which got delayed due to adverse market conditions. At that time, the company had submitted to the regulator of the country’s capital markets, the Securities and Exchange Board of India (SEBI) that the estimated cost of developing DDW – the facility and the drilling costs of 15 wells – would be Rs 8,464 crore till fiscal year 2015.

  In April 2012, a 37-page report on the company by the Comptroller and Auditor General (CAG) of India was tabled in the Gujarat state assembly which indicted for incurring losses of an estimate Rs 5,000 crore, largely due to ‘faulty operations’ in the KG basin. The auditor noted that GSPC had taken a lot of time to conduct environmental impact assessments in eight blocks. The CAG report alleged that GSPC had submitted its bid for exploring gas in the KG basin without proper financial and technical estimates which had led to escalated drilling costs. The drilling depth had gone up from 45,348 metres to 77,395.07 metres resulting in costs jumping more than forty times from an estimated $102.23 million to $41302.88 million. The CAG levelled a serious allegation: Reliance Industries Ltd (RIL) had unilaterally installed a control and riser platform in an area of the KG basin licensed to GSPC without the latter’s consent. This meant that GSPC would have to be responsible for the rig through its lifetime.

  Not just RIL, the CAG also indicted the Modi government for extending favours to the Adani group of companies in this connection. While GSPC failed to produce gas, the state government went and bought gas in the open market and ‘sold’ it to the Adani group at a cheaper price. This led to a loss of about Rs 70.54 crore for the government.

  The crux of the case was that GSPC had chased an expensive mirage and at the end of it, had no gas to show. In the company’s 2010-11 report, GSPC described the Deen Dayal filed as ‘a high temperature, high pressure, tight and deep gas field with a complex structural/stratigraphic trap involving separate fault blocks associated with rift geology…’ Extracting the gas would not be an easy task. Apparently to garner revenue and possibly to cover up its failure to extract gas, GSPC branched out by setting up eight subsidiary companies for gas trading, gas transmission and city gas distribution. Such companies included GSPC Gas, Sabarmati Gas (a joint venture with the public sector Bharat Petroleum Corporation Limited), Gujarat State Energy Generation Limited, GSPC
Pipapav Power Company Limited, GSPC LNG Limited, Gujarat Energy Research and Management Institute and even an information technology company called Gujarat Info Petro Limited. Before moving ahead, it would be useful to go back to the beginning.

  The year: 2005. On 26 June, Narendra Modi, who by then had served as chief minister of Gujarat for four consecutive years, suddenly convened a press conference. He announced that GSPC had made a significant discovery of gas, 1,700 km away off the coast of Andhra Pradesh. He claimed that GSPC had made ‘the biggest ever discovery of its kind in the country’ of estimated reserves of 20 tcf of natural gas worth $50 billion. This was the same area where RIL was operating. While naming the block after Deen Dayal Upadhyaya, the elated chief minister said the gas discovery would double the country’s production of gas. The Press Trust of India reported from Ahmedabad that day that the chief minister had said that the money generated from the project would be used for the education of children living below the poverty line. He told reporters on that occasion that the natural gas find would be worth Rs 2,00,000 crore after an investment of about Rs 250 crore was made on the project.

  The GSPC website declares that the KG offshore block KG-OSN-2001/3 measures approximately 1,850 sq km, and was awarded under the third New Exploration Licensing Policy (NELP) bid round held by the government of India in 2003. A 78-month petroleum exploration licence (PEL) was granted by the ministry of petroleum and natural gas in March 2003. GSPC was appointed as the operator with an 80 per cent working interest, Jubilant Offshore Drilling Private Limited held another 10 per cent working interest in the block while GeoGlobal Resources (India) Inc held the remaining 10 per cent interest in the block -- more on these two companies a little later. According to GSPC’s website, the production sharing contract (PSC) with respect to the block has been effective from 12 March 2003.

  Like Modi, his officials were excited. From 2006, GSPC, on its own and through joint ventures, went about acquiring stakes in 11 oil blocks in different countries across the world, in Egypt, Australia, Yemen and Indonesia. Currently, GSPC holds working interest in 64 onshore and offshore exploration and production blocks, 53 of them located in India. Of these, the company is operating in 15 producing fields in the Cambay basin of Gujarat, off the west coast of India. The company’s ‘primary asset’ is said to be the Deen Dayal West field, a part of KG-OSN-2001/3, which was still being developed for commercial production, according to the company’s website when accessed in June 2013. According to an article written by Ashish Khetan and published in Tehelka magazine (8 December 2012), which will be discussed in detail, sources in the Directorate General of Hydrocarbons (DGH), which analyses and certifies all gas finds, stated that GSPC would start gas production by July 2013 and was scheduled to drill 11 deepwater wells by then. In a completely different context of highlighting Modi’s alleged penchant for exaggerating the number of lives saved after the natural calamity in Uttarakhand in June 2013, Abheek Barman wrote in a blog post in the Times of India portal on 26 June 2013 that the Gujarat chief minister’s claim that GSPC had found 20 tcf of gas in 2005, 40 per cent more gas than what had been claimed by Reliance, was a lot of ‘hot air’. He wrote that this could not be said in 2005 in the ‘absence of evidence’ but seven years later in 2012, the DGH had stated that the field had only 2 tcf of gas, or one-tenth of what had been claimed.

  The situation was indeed curious. GSPC had little gas to sell and was asking the government of India’s MoP&NG to approve its plans of selling gas at a price between $13 and $14 per mBtu, a price at which gas in its liquefied form – LNG – was being imported into India. It was the second hydrocarbon company in India to have asked for that high price after Reliance Industries. GSPC claimed it had plans to produce 5.24 million standard cubic metres a day (mscmd) of gas from the Deen Dayal West (DDW) gas field. The PressTrust of India reported on 23 June that GSPC managing director Tapan Ray, in a letter to petroleum secretary Vivek Rae, dated 10 June 2103 had stated that the company (and its partners) had already spent some $2.8 billion on developing the DDW gas field, and that the ‘arms-length’ assessment of market prices arrived at through an electronic-tender in February be accepted. Ray added that more capital would be required to develop the gas field ‘owing to geological complexities like high temperature and high pressure (HTHP), low porosity, many faults in the block and high sulphur content.’ The company had set a minimum floor price of $8.85 per mmBtu (or the oil equivalent of $65 per barrel) for its arms-length price determination exercise. The GSPC managing director claimed his company had received 34 bids from different buyers, all of whom were willing to pay above $8.5 per mBtu.

  The 8 December 2012 issue of Tehelka magazine published a detailed article by Ashish Khetan on GSPC’s operations in the Krishna-Godavari basin titled ‘Sweet deals are made of gas’. He traced the history of the case which began in 2003 when the Gujarat government company sold ten per cent stakes each to two companies, the Barbados registered GeoGlobal Resources (GGR) and Jubilant Enpro Private Limited, who became members of a consortium with GSPC to provide technical expertise for the venture. Each ten per cent stake was worth almost $20 billion by GSPC’s own estimates. Not only that, GSPC even agreed to pay GGR’s share in a venture fund that had been set up for exploration activities, which would be recovered after the joint venture started earning profits from the sale of gas. GeoGlobal had not paid anything for its stake although consulting fees had been paid to the company’s representative, Jean Paul Roy, Tehelka claimed, citing unnamed sources.

  GeoGlobal was in fact controlled by Roy, a geologist who is a citizen of Guatemala who has worked in a number of oil companies. The company had been formed just six days before it signed on to become part of the consortium with GSPC and Jubilant to bid for the block in the KG basin. On 27 March 2002, GeoGlobal was for all intents and purposes a paper company with a capital base of only $64. Soon after the consortium was formed, Roy transferred half of his ten per cent stake to a company he had incorporated (and fully controlled), now in Mauritius – called the Roy Group (Mauritius) Inc. -- whereby 50 per cent of the benefits and obligations of the production sharing contract pertaining to the stated stake of 5 per cent as participating interest, was transferred to that offshore company.

  The story did not end there: Roy’s company, GGR, took over an American company Suite101.com, whereby all outstanding capital stock of GGR was exchanged for 34 million shares of Suite101.com. Roy was paid $2 million, he also got 14.5 million shares of Suite101.com, and the remaining 19.5 million shares were held in escrow (to be released on the occurrence of certain specific events related to offshore exploration of gas in the KG basin). On 2 February 2004, Suite101.com changed its name to GeoGlobal Resources Inc. Two years later in January 2006, the trading rate of the share price of GGR rose to $14.92, the nominal value of the shares having been one-tenth of a US cent ($0.001) earlier. Incidentally, while making disclosures before US authorities, GGR informed shareholders that the company had no exploration experience before venturing into India and that the GSPC-led joint venture was its first foray into the oil and gas business.

  Yet, Jean Paul Roy and his companies continue to dredge in Indian waters. After the GSPC deal Roy got nine more contracts. As of 31 December 2010, the website Geoglobal.com lists ten blocks in the KG basin, the Cambay basin, the Deccan Syneclise basin and the Bikaner Nagaur basin where the company is involved. Roy had been the geophysical expert for the Canadian firm Niko Resources Limited which had been hired by GSPC to develop five small discovered oil and gas fields awarded to it in 1993-94. GSPC and Niko were to explore the Hazira gas field. This is the same Niko which would later team up with RIL for developing the KG D6 field. Roy is said to have advised RIL as well, according to Khetan’s article in Tehelka.

  GSPC’s activities were evidently complex and wrapped in layers and layers of firms with overlapping stakes. There were many inconsistencies in the story. The Comptroller and Auditor General of India had caught on to these. The CAG noted that G
GR had submitted a deficient and erroneous geological model that delayed exploration activities and led to a steep escalation of costs. The model had failed in properly estimating well-depths, location and exploration costs. Another company had to be hired for a reassessment. It pointed out that GGR’s work had been deficient and as a consequence, GSPC had to engage an expert whose services cost the state government Rs 2.64 crore. The CAG took the GSPC to task for underestimating the cost of exploration so that it could qualify for the bid. Khetan wrote that by underplaying the cost of bidding, the GSPC could justify its joint venture with GGR. The total net worth of the consortium between GSPC, GeoGlobal and Jubilant was $60.5 million. The consortium had submitted that the estimated cost of drilling during the first phase would be $59.23 million. At the time Khetan’s article was published, the state government company had spent

  $3.069 billion towards exploration costs, more than 60 times the estimate it had given at the time of bidding!

  GeoGlobal should have contributed $306.9 million out of the total cost incurred by GSPC but since the Gujarat government paid for GeoGlobal’s 10 per cent stake, the private firm was able to walk away with the entire ten per cent participating interest becoming its profit. Khetan quoted an unnamed retired senior officer of the Indian Administrative Service who had worked with GSPC saying that in 2006-07, the state government realised that the deal was scandalous and could become a source of embarrassment and tried to correct the situation with retrospective effect. GSPC had written to GeoGlobal and asked it to contribute towards the escalating exploration costs. The public sector unit had said that the excess amount spent towards exploration costs was not ‘within the terms of the Carried Interest Agreement, as per which GSPC had agreed to spend GeoGlobal’s share of 10 per cent towards the project costs and recover the same from the company only after the commencement of commercial operations’. GeoGlobal, however, refused to pay up citing the original contract it had signed with GSPC.