Just at a time when Mukesh Ambani led Reliance Industries Limited
(RIL) had become the first private sector company to clock a turnover of Rs 1 lakh
crore in just three months for the quarter ended September, it has been slapped
with a notice by the Supreme Court (SC) for failure to honour its commitment
made to the government under a production sharing contract (PSC) for gas supply
from Krishna-Godavari D-6 block. On September 29, the Supreme Court issued
notice to the Centre, Reliance Industries and others on a public interest
litigation (PIL) filed by a non-government organization (NGO) Common Cause and
others seeking a direction to the Union of India to cancel the production
sharing contract (PSC) between Reliance Industries and Niko Resources for extracting
gas in the KG-D6 block.
The petition sought a thorough investigation by a separate investigating
team or the Central Bureau of Investigation (CBI) under the supervision of the Supreme
Court — into the alleged high-level collusion between RIL and the political
establishment, including lack of action against RIL for hoarding of gas,
increasing the gas price to $4.2 mmbtu amid a subsisting bid to National
Thermal Power Corporation (NTPC) for 17 years at $2.34 mmbtu and subsequently
doubling the price to $8.4 mmbtu, giving retrospective tax benefit and not
insisting that RIL relinquish the area.
Ever since the Cabinet Committee on Economic Affairs (CCEA) had approved
the doubling of domestic gas prices from $4.2 to $8.4 per mmbtu on June 28,
there have been growing murmurs of RIL being favoured despite its failure to
honour previous commitments. A Bench of Chief Justice P. Sathasivam and Justice
Ranjan Gogoi, after hearing counsel Prashant Bhushan, has issued a notice to
the company returnable in four weeks. The Bench, which had earlier issued
notice to the Centre on July 29, on a PIL filed by member of Parliament from
Communist Party of India (CPI) Gurudas Dasgupta, has directed the present
petition to be tagged with that case. Dasgupta has challenged the Cabinet
decision to raise natural gas prices. The higher prices, to be effective from 1
April 2014, will adversely impact power, fertilizers, minerals and steel sector
and benefit gas producers including RIL and state-run Oil and Natural Gas Corp
(ONGC).
The petition questions the acceptance of higher prices without strict
scrutiny of its impact on the economy in general and the petroleum and
fertilizer sectors in particular. It seeks an additional penalty of $4.1 billion
on the stakeholders in the KG D-6 block for alleged suppression of gas output
in anticipation of higher prices. RIL has initiated arbitration proceedings
against the decision saying its contract allows full cost recovery and that
output fell because of geological complexity. Arguing for Dasgupta, senior
advocate Colin Gonsalves, has said that the new minister had also put an end to
arbitration seeking recovery of huge penalties from RIL. The petition alleges
that the Cabinet hastily raised prices from next April as it would put an
unreasonable burden on the next government after general elections.
Dasgupta’s petition
The KG-D6 controversy arose after the Comptroller and Auditor
General (CAG) of India said in a report that RIL had breached some terms of its
contract with the government. The company had failed to meet its own target for
gas generation in the KGD6 fields, despite having claimed associated costs as
deductions before estimating the profit to be shared with the government.
The petroleum ministry has proposed to deny RIL $1.24 billion in
costs. It wants to stop RIL from recovering this cost from the deepwater KG-D6
fields in the Bay of Bengal for 2010-11 and 2011-12. The issue is in
arbitration. Dasgupta’s petition also requests the court that arbitrators,
earlier appointed by the government and RIL “appoint a third arbitrator
(umpire) and proceed with the arbitration expeditiously and complete the
arbitration within six months”.
The CPI petition alleges that, “when the present petroleum
minister took charge he stalled the arbitration thus preventing the recovery of
this amount from the sale of natural gas”. Suggesting that an exception had
been made in RIL’s case for the D6 block, CAG had earlier said the explorer was
allowed to retain the entire 7,645 sq. km area and enter the second and the third
phases without “relinquishing 25 per cent each of the total contract area at
the end of phase I and phase II in June 2004 and 2005, respectively,” in
contravention of the production sharing contract.
Welcoming the court’s decision mto send a notice to RIL, Dasgupta
said that in earlier discussions in the Lok Sabha, he had pointed out that when
the failure of the executive was bound to make room for the judiciary. “The
manner in which arbitrarily prices were fixed on (the basis of the) Rangarajan
Committee formula, is a matter of grave concern,” he said. He added that he had
already written a letter to the Prime Minister, apprising him of the increase
but “no assurance was given (by the Prime Minister) to review the decision.
This insensitivity of the government is undermining the democracy”.
A panel headed by C. Rangarajan, head of the Prime Minister’s economic
advisory council, had suggested a pricing formula based on which the
controversial gas price decision was taken.In a press statement issued
on 26 July, Union petroleum minister Veerappa Moily had said, “the government
needs to move ahead and take bold decisions and should not be bogged down by
the fear of CBI or CAG.” He had also stated that there was an urgent need to
cut bureaucratic delays, saying “the process should not dominate; instead the
focus should be on delivery”.
Dasgupta’s letter to PM
Dasgupta has alleged that Moily helped RIL increase the
price of gas produced from the KG-D6 offshore gas field. Moily,
on his part, has alleged that import lobbies were trying to exert
pressure on India— even intimidating ministers—not to raise the
domestic prices of gas and not to reduce overseas purchases. In September,
Dasgupta had written to Prime Minister Manmohan Singh seeking an
immediate decision to impose $2.4 billion penalty on RIL due to
deliberate hoarding of gas production from KG-D6 block.
Dasgupta, a Lok Sabha member from West Bengal, also asked Singh to
direct the petroleum ministry to take immediate steps to ensure that RIL was made
to pay $4.2 mbtu price for the shortfall of gas from KG-D6 facility even after
April 2014.
In his letter Dasgupta, while enclosing a copy of the report of Gopalakrishnan
Committee, set up to study the decline in gas production from the KG basin
block, said the report clearly nailed the lie of geological uncertainty being
used by RIL. Since this report had been accepted by both the Directorate
General of Hydrocarbons (DGH) and the petroleum ministry, the government
should not succumb to the devious ploy of the petroleum minister to reopen the
issue to give undue benefit to RIL and weaken the government case in
arbitration.
“You are aware that the government had imposed a penalty of $1
billion on RIL for deliberate default in production. I had pointed out that this
amount works out to $1.8 billion for 2012-13 and $2.4 billion for the current
year due to continuing shortfalls. It is learnt that DGH has agreed with my
contention and recommended penalty of $1.8 billion for 2012-13. However, the
petroleum ministry has not issued a fresh notice to RIL based on DGH’s
suggestion and the petroleum minister is stalling the matter. I would urge you
to the direct the petroleum ministry to issue a fresh notice to RIL
immediately, both for last year and current year,’’ Dasgupta added.
CAG reported CAG reported breach first
At the heart of the controversies was CAG report submitted in
September 2011. The national auditor had castigated the oil ministry for
allowing Reliance Industries to retain its entire eastern offshore KG-D6 block in
contravention of the production sharing contract. It faulted the oil ministry
and DGH for allowing Reliance to retain the entire 7,645 sq km KG-DWN-98/3
(KG-D6) block in the Bay of Bengal after the giant Dhirubhai-1 and 3 gas finds
were made in 2001.
As per the PSC, Reliance should have relinquished 25 per cent of
the total area outside the discoveries in June, 2004, and 2005, but the entire block
was declared as a discovery area and the company was allowed to retain it. CAG
was also critical of the government oversight, particularly on high value
procurement decisions, and sought an "in-depth review" of 10
contracts, including eight awarded to Aker Group by Reliance on a single-bid
basis.
On charge of gold-plating
by RIL, CAG gave a breather to the contractor. Notably, CAG had sought review
of the PSC signed under New Exploration Licensing Policy (NELP), evolved by the
BJP-led NDA government in 1999, saying the regime provided inadequate incentives
to contractors like Reliance to reduce capital expenditure. On the contrary, it
provided "substantial incentive to increase capital expenditure or
'front-end' capital expenditure" so that government take from the blocks
is lower.
"Given similar conclusions that two independent agencies have
reached as regards the adverse impact of the profit sharing mechanism in
protecting Government of India's share designed in the late 1990s, there does
seem to be enough ground to revisit the formula," it said. For future
PSCs, CAG recommended that the investment multiple linkage with the profit
sharing formula be removed.
Rangarajan committee
In the backdrop of the spat between RIL and petroleum ministry,
the government on May 30, 2012, announced the constitution of a committee under
the chairmanship of Prime Minister's Economic Advisory Council’s (PMEAC) Chairman
C. Rangarajan to review the existing PSCs.
The committee submitted its report in December 2012, wherein it recommended
that production sharing contracts with oil companies in future should be based
on the amount of oil or gas output that the company was willing to offer to the
government. Under the new system of bidding, the company that was willing to offer
the highest amount of oil or gas produced from the field would get the
contract.
Issues over CAG audit
In September, Rajya Sabha member from CPI, Tapan Sen, had also sought
Prime Minister Manmohan Singh’s intervention to enforce RIL’s cooperation with
CAG in the KG D-6 audit exercise, and impose penalty for shortfall in gas
production. In a letter to Singh, the CPI (M) member had said he was seeking
corrective intervention from the Prime Minister so that the contractor (RIL)
was disciplined and made to act as per the approved development plan and
production sharing contract, pay for its failure for shortfall in gas
production and allow smooth audit of its KG D-6 block.
“In case of failure to do
so, the national assets at its (RIL’s) disposal be taken back for exploitation
under direct control of the government-owned company in the larger national interest,” the letter added. Accusing RIL of
stonewalling the audit exercise, Sen referred to CAG complaints that RIL had
not been cooperating in the audit process in the KG-DWN-98/3 block since April
/ May 2012, by not providing access to relevant documents.
“I had in my previous letter sought to impress upon you that RIL's
plan to block the audit process by CAG was linked with its strategy of scaling down
production in the name of geological complexity on the one hand and its gold
plating cost estimate for the field-development on the other. The entire game
plan is to create pressure on getting the natural gas prices revised upward
without any reference to its actual cost of production to ensure windfall gains
out of handling this national assets as well as natural resources,’’ he added. It
may be noted that the audit had hit a roadblock in 2012 after RIL refused to
accept the “exceptional circumstances” argument advanced by the petroleum
ministry for the performance audit and sought an assurance that it would be
kept completely confidential and done under the PSC provisions. It has also
sought an assurance that the audit would not adversely affect its economic
interests. The audit had resumed in January 2013, only to be suspended once
again in February following differences with RIL over scope and extent of the scrutiny.
RIL had claimed that CAG cannot contractually do a performance audit on it and
that the PSC only provides for a government-appointed auditor to verify the
reasonableness of all charges and credits. In April 2013, CAG had once again agreed
to resume the audit of KG D-6 block following assurances by the petroleum
ministry that the audit team will have full access to all records, documents
and accounts as provided under Article 25 of the PSC. The KG-D6 block is,
without doubt, the biggest and most prolific gas reservoir in India. It is in
everyone’s interest that gas available from this field is brought out to meet
the staggering demand in the country. It now remains to be seen if the D-6
field lives up to its full potential, and expectation, or not.
InfralinePlus Editorial Team
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