[Economy] Reliance KG Basin Issue : Reason, Controversy, Crux of Matter

MK Pandey Fast track to objective arithmetic

Before dwelling into Reliance KG Basin Issue, get some foundations clear

  1. New Exploration Licensing Policy (NELP)
  2. Conventional Mining and Royalty
  3. Production Sharing Contract (PSC)
  4. The crux of Reliance KG Basin controversy
  5. Dateline of Reliance KG Basin Controversy
  6. War of Words

New Exploration Licensing Policy (NELP)

Under this policy, government auctioned potential oil and gas field areas to private players such as Reliance, Cairn etc.
These companies would take all risk of discovering the oil/gas, drilling it out and sell to to make profit.

Conventional Mining and Royalty

  • if you are involved in Iron-ore mining, the Indian Bureau of Mines ( IBM) will determine its present market value and you have to pay 10% royalty of that, to the Government.
  • For example you digged 1 kilo (!) iron ore, its present market-value is Rs.100, you’ve to give Rs.10 as royalty
  • It does not matter how much profit you make out of this, you’ve to pay 10% right from the day one of your mining activity.
  • But for the gas-exploration, the system of royality is different, it is called:

Production Sharing Contract (PSC)

  • But here in case of gas, first you’ve to do “Exploration”. It may happen that you drill in a potential area but still donot find any gas, and yet you’ve to purchase expensive drilling instruments, vehicles, hire engineers and monthly salary to staff etc.
  • So there is a “gestation” period involved, before you actually discover the gas, start selling it, recover your costs and then see the profits.
  • If there is a direct “royalty” sharing formulas like conventional iron-ore mining, then private players will not be interested in taking the risk in this gas exploration activity.
  • Hence government came up with a concept called “Production Sharing Contract (PSC)”
  • Under this scheme, the company will have to share royalty, according to the profit made.
  • Initially company makes low profit, government gets extremely low share, later company discovers more and more gas fields, its production increases and costs go down, then it has to share more profit to the government.
  • This is not the standard royalty model as seen in mining systems, where revenue is shared regardless of profitability. This PSC model allows the operator (RIL) to substantially recover his costs before the sharing of revenue.
  • However, once these costs are recovered, the sharing with the government is often large.
  • But As you can understand Private contractors (RIL) have virtually no incentive to minimise capital expenditure and a substantial incentive to increase capital expenditure (they’ll buy more and more vehicles, machines etc) to keep their operation-cost high, which would result in low/lowest share of profit for the government of India

The crux of Reliance KG Basin controversy

  • It is alleged that Reliance used false accounting-methods to show huge-costs and operating expenses to keep the profit low so that they have to pay less money to the Government.
  • CAG found this out after auditing, media started reporting, right now matter in PAC (Public accounts committee) of parliament.
  • Also, RIL had to take permission of government before raising the sale price of Gas.
  • So citing the heavy cost and low-profit, Reliance also increased the sale price of gas with Government’s permission.
  • And then this (expensive) gas was sold ot fertiliser companies, power plants and thus snow-balling effect: price of fertilisers, electricity also increased = inflation.
  • Director-general of hydrocarbons (DGH) was responsible for looking after this exploration-activity, how much gas is generated, what is the operating cost, is there any real loss etc. (but as the common sense suggests) he might have taken “suitcases” to turn a blind eye to all this.

Dateline of Reliance KG Basin Controversy

  • 1999 Vajpayee Government introduced NELP (NEw exploration licensing policy)
  • 2000 Reliance got the licence to explore gas in Krishna Godavari Basin
  • 2002 Reliance Industries discovered huge reserves of natural gas – and some small reserves of crude oil – in a block called D6.
  • 2007 CAG starts auditing
  • 2011 CAG submits audit report and media starts reporting this controversy.

War of Words

CAG

Oil Ministry and its technical arm, the Directorate General of Hydrocarbons, “did not pay adequate attention to protecting the government’s financial interest.

Reliance Industry’s response

CAG has not found any false inflation of the cost or any dishonesty in developing the nation’s largest gas fields.
Corporate rivalry motivated a few people with vested interests to indulge in a vicious smear campaign against us
CAG neither had any expertise in hydrocarbon exploration

Ashok Chawla Committee on “Pricing of Natural Resources”

Production Sharing Contracts like the one Reliance Industries signed for the gas-rich KG-D6 are designed to benefit private players at the government’s expense.

Tapan Sen, a Rajya Sabha MP

  • if your production is increasing, then your expenditure per unit must come down. But, here, production cost almost quadrupled.
  • even if you take into account the trial and error method of digging here and there, even if you take into account your wasted efforts of searching gas and exploring,
  • your development cost cannot triple or quadruple.
  • Reliance can’t charge the country like this. It’s a clear case of gold-plating the cost.’
  • It would incur the government a big loss because only after recovering the cost of production would the government start getting a return on the national asset.
  • inflated cost of Reliance has national ramifications. If the cost of gas exploration is too high, then it will affect the prices.
  • Reliance, the company that had ‘gold-plated’ the expenditure of exploration
  • Then Reliance hiked the price from $2.34 mmBtu to $4.2 mmBtu. So, fertilisers companies, power plants and common consumers are paying more to Reliance. This collective loss by the nation and to 1.2 billion people should be calculated.
  • Whatever the money Reliance has to make, they have made.
  • The government should have quantified the loss to the exchequer. The government should have calculated when would Reliance recover its cost and when would the government start sharing profits.
  • The same Reliance sold 30 per cent stake to British Petroleum for $7.2 billion. It was approved by the government.
  • Director General of Hydrocarbons should be prosecuted. The production-sharing contract should be re-written and price level should be revised.
  • It will make electricity cheaper, fertilisers cheaper and industries would benefit.
  • I don’t blame Reliance. If I get the opportunity to steal, am I going to leave it? It is the duty of the government to see that nobody takes people for a ride.
Lucent General Knowledge Objective English

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अब तक 33 कमेंट्स लिखी गयी

  1. Abhishek kumar says:

    fantastic as always

    • Richa says:

      Hi Mrunal,

      Your blog is simply awesome. The way you have explained things for a layman to understand is highly commendable. I have subscribed to your blog & I thank you for writing such an amzing blog

  2. Pradip Jadhav says:

    Hi Mrunal,

    Thanks a ton for your help through ur blog.
    I find it very interesting (even for Economics) for a IT techie like me. I have no access to blogs in my office. As you suggested I am using extensively internet of my office. :)
    Having no access I have subscribed to ur blog from cafe, so that I can get your mails in my Outlook mailbox atleast. :) Smart way right? ;-)
    For some mails you have provided a link as "Read More" which stops me reading further because of not having access to bogs, I cannot open them in office.
    Could you please provide a full blogs in a single mail instead of saying "Read More…" link?
    This will saves me trapping by my managers as I am simply reading a mail… which is 30% of our daily work.

    Good luck for the exam!

    Thanks,
    Pradeep

  3. Maddy...a Maverick says:

    Very Informative, and i like the way you put across things, very understandable.

  4. rejorocks says:

    great work.
    can you bring out how exactly spectrum is allocated in bandwith and circles

  5. Kiran@Hyd says:

    As usual Mrinal….U explained the concept in a simple manner. Thks

  6. Swati says:

    fantastic

  7. Abhay says:

    ..you are the "Great Interpreter" of complex facts!!!
    God bless you…!!!

  8. manish aryan says:

    VERY NICELY WRITTEN THIS WHOLE THING WAS BAFFLING ME LOT….U ATTACT AT THE CONCEPT DUDE..AWSME MAN…!!

  9. basist nandan says:

    brilliantly explained sir…u r of great help..better than what coachings offer
    may god keep u in good health always!!

  10. munny says:

    thank you sir :)

  11. Tharun says:

    Hi sir,

    Nice article.
    Could you please explain how spectrum is allocated and the different bands in the spectrum?

  12. tashi wangchhu says:

    what an article(KG basin) . atlas i am clear about the situation
    thank you

  13. Sai Naik says:

    Hello Sir,
    I have read many articles to understand what the real picture is, but didn’t get much. Thanks very much for making complex picture very simple. Thanks you sir…

  14. ksuresh says:

    awesome, even a layman can understand.

  15. Shashank Shekhar Roy says:

    i salute you sir for the efforts you put in for the welfare of the student like us who can’t afford coaching classes in Delhi or elsewhere because of financial problems.

  16. Amit says:

    Mrunal, you rock
    This will be my last attempt in 2013.
    You are helping a lot. Thanks

  17. Vinay S says:

    All the required info is in one place..and very well narrated.. I really appreciate the efforts you have put to share everything in a very simple format..

    Thanks a ton :)

    -Viny

  18. VIJI K says:

    Beautifully explained for a layman . A commendable job indeed ! thanks a lot !

  19. Amit Vijayan says:

    Hi that was a great read out.. superb articulation, would love to know if… you can put in some light where in how Govt & companies like ONGC/Bharat petroleum/HP decide on the pricing for fuels. how do they regulate fuel prices based on movement on international Oil prices ($/barrel)..!
    Thanks again..! keep such articles rolling..!

  20. arpit says:

    excellent..gud job

  21. V N Pawar says:

    Just One Suggestion.. Please try to mention date of publishing/writing on every article you write.So that it becomes useful to take the relevance of matter in congnisance..

  22. V N Pawar says:

    Just One Suggestion.. Please try to mention date of publishing/writing for every article you write.So that it becomes useful to take the relevance of matter in cognizance..

  23. M says:

    6. c

  24. Dr Rajamohan says:

    beautifully written.complex issue explained in a simple style and language.I suggest you also suggest some remedies to save the country from RILs drain of natural resourses

  25. alkishore says:

    Very useful. Easy to understand. Good presentation.

  26. Dr Rajamohan says:

    nice presentation

  27. ANKITA says:

    I have to say mrunal sir that I expected much better explanation in here, as is done in most of your articles(and helps us all a LOT!)
    I hoped that you would give a much detailed account of this.
    For anyone who isn’t satisfied like me, I suggest you all look through this page that I found…
    ww.countercurrents.org/varman050313.htm

    Best of Luck to all…..!

  28. Ratikanta says:

    Hi Mrunal,
    Thanks for this nice article.

    I am little confused whether CAG can audit reliance accounts. As far as i know CAG can only audit govt accounts and PSU account. Please explain how CAG can audit reliance accounts.

    Thanks and Regards,
    Ratikanta

    • Sailesh says:

      DGH is liable for what Reliance is doing and DGH comes under Ministry of Petroleum & Natural Gas.So CAG can audit.

  29. SAGAR says:

    nice explaination and keep it up

  30. Rhishikesh says:

    Its really well explained….thanks a lot

  31. Reshmi says:

    Hi Mrunal

    well explained in simple terms …the background of the issue is well elaborated …pls keep continuing ur posting ..its gives me a wider understanding of what ,when and how it happened …Thanks a ton

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