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Reliance Industires LTD may be allowed to raise gas prices

MUMBAI — Reliance Industries Ltd (RIL) may finally get its way and be allowed by the government to increase the price of gas from its D-6 block in the Krishna-Godavari basin from 1 April, after petroleum minister Veerappa Moily said on Tuesday that he is confident of securing bank guarantees from the company for a potential settlement of any claims that arise from the shortfall so far in the supply of gas.

In June, India approved a move to higher, market-related rates for locally produced gas from April 2014, but the finance ministry later said prices should be capped because the company’s gas production from the offshore D6 block was far below its supply commitment.

RIL, which operates the D6 block off India’s eastern coast, has reported a sharp decline in gas output since 2010. RIL and partner BP Plc. have cited geological complexities for the fall in output, but the oil regulator believes they failed to drill enough wells.

Falling output has already prompted the government to disallow proportionate cost recovery to RIL, leading to arbitration proceedings over the issue.

“They have come forward with the proposal for bank guarantees. There are some arbitration proceedings pending. Till that is settled, they will submit bank guarantees,” Moily said at an industry event on Tuesday in Mumbai.

He added that a proposal would be put before the Union cabinet on this and the matter resolved in the next 15 days

The event is a part of India’s efforts to ensure that investors participate in the 10th auction of the country’s oil and gas assets under the New Exploration Licensing Policy (Nelp) in January.

Moily and officials from his ministry spent two days in Mumbai to meet oil and gas companies, investors and analysts to ease concerns about oil and gas exploration in the country.

All the immediate concerns of oil and gas firms in India will be addressed in the next two months, the minister said.

Some of the issues around which the oil ministry is forming new and better policies appear to be inspired by its tussle with RIL.

For instance, one of the most significant initiatives taken by the oil ministry is to come to an understanding with the Comptroller and Auditor General (CAG) of India that there won’t be any performance audits of individual oil and gas contractors, unless the ministry specifically calls upon it to conduct one.

The CAG had sought to conduct exhaustive audits of RIL’s operations in the D6 gas reservoir on grounds of alleged inflation of costs by the Mukesh Ambani-led company.

In the wake of falling gas output from D6, the government has since moved to disallow a substantial portion of the costs incurred by the company for the purpose of recovery before calculating the government’s share of profit — a matter that is under arbitration.

RIL had maintained that in accordance with the provisions of the production-sharing contract (PSC) — the legal agreement signed between the government and itself — he CAG could only conduct a financial audit and not one on its operational decisions.

During the Mumbai visit, oil secretary Vivek Rae said the controversy surrounding cost recovery and CAG audits was one that was “bedevilling” the sector.

He explained that the CAG had the constitutional responsibility to conduct a performance audit of the Directorate General of Hydrocarbons (DGH) — the nodal agency of the oil ministry vis�”a�”vis upstream oil and gas exploration and under which the PSCs are administered. But the DGH is not meant to do a performance audit of individual companies unless the government appoints it as an auditor to do so.

“The CAG has accepted this as a legitimate way forward and the audits CAG is doing today are all within the scope of the PSC,” Rae said.

Over the last few months, development of several oil and gas blocks that had been earlier bid out has been stalled due to lack of clearance from other ministries like defence and environment. This time around, the oil ministry has decided to secure all necessary approvals for the 86 blocks that are up for auction in the ensuing Nelp round before putting them on the block.

Rae said that all in-principle approvals for around 53 blocks had already been secured. To better coordinate with other ministries in the government while securing approvals, the DGH is also employing professionals including retired officials from agencies like Defence Research and Development Organization, the environment ministry, and the Navy, who are helping with inputs around where and why approvals are getting stalled.

Another recent policy announced by the oil ministry pursuant to which companies can follow an integrated plan to develop a hydrocarbons block also appears to stem from its dealings with RIL.

To stem the decline of gas output from D6 and augment production from other satellite fields within the reservoir, it was RIL and its partner BP that had suggested an integrated field development plan. The policy formulated by the ministry means that companies can develop an entire hydrocarbon block as a whole without having to worry about getting work and investment plans for each individual discovery within the area approved separately, which is more time-consuming.

“In the last three-four years, the oil and gas sector has been pretty dead. Today, we see a lot of movement and there is cautious optimism,” says Ashu Sagar, secretary general of the Association of Oil and Gas Operators. “The policy initiatives that have been taken are still in the process. For instance, a decision to raise gas prices has been taken but is yet to be notified. The proof of what has been achieved will lie in what is done in the next two months, but there is definitely a positive attitude.”

Despite the efforts of the oil ministry, its officials were candid about some lingering concerns that remained, which were voiced during its meeting with the oil and gas operators.

One of the major concerns is around the recent recommendation of a committee headed by C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, of moving from a cost recovery mechanism to a revenue-sharing mechanism while calculating the government’s share of earnings from the sale of oil and gas in the country.

Under the current mechanism, a contractor has first charge on the revenues arising from the sale of oil and gas from a block it operates and whatever costs it incurs in the development of these assets is recovered upfront before calculating the government’s share. The new formula has proposed that the contractor will straightaway have to part with a portion of revenues to be shared with the government.

“They (oil and gas companies) have expressed concerns about the fact that the geological profile of sedimentary basins is not well established. Therefore, moving away from cost recovery to revenue sharing will lead to higher risk,” Rae said.

Moily said that this was a key concern that stakeholders had and one that would need to be addressed at the earliest, before Nelp 10 begins.

The ministry is also trying to address the concerns of individual local and global investors. For instance, Australian energy firm BHP Billiton had surrendered all its hydrocarbon blocks in the country barring one after failing to secure a clearance from the defence ministry.

Moily said the government was trying to woo back BHP Billiton by exploring the possibility of a joint venture with state-run Oil and Natural Gas Corp. Ltd, though the nature of the potential tie-up isn’t immediately clear.

Despite the initiatives taken by the oil ministry, analysts are sceptical of the level of interest that the forthcoming Nelp round will generate, especially since there are other regions in the world, like Africa, where there are significant hydrocarbon assets and a benevolent policy regime.

“There is no doubt that the oil ministry is trying hard to attract investments, but the challenge is that there hasn’t been great success in exploring and producing oil and gas in India,” said Debasish Mishra, senior director at Deloitte Touche Tohmatsu India Pvt. Ltd. “Bombay High and Barmer (in Rajasthan) are the only significant oil fields that are in production in the country and even gas production from D6 has fizzled out.”

Reuters contributed to this story.

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