Reliance’s Krishna Godavari D6 Basin venture: Multi-Layered Cronyism From Day One

“You should not do anything illegal. First of all, the law should be changed”- Dhirubhai Ambani, quoted in the book Polyester Prince by Hamish McDonald.

Natural resources like hydrocarbon reserves are a sovereign wealth of the nation which belong to the people of the country and state is supposed to be their custodian. It is Ministry of Petroleum and Natural Gas (MoPNG) which is in charge to ensure the exploration and production of natural resources while an office of Directorate General of Hydrocarbons (DGH) was created in 1993 to act as the regulator for the petroleum business in the country. As neo-liberal juggernaut rolled on, the New Exploration Licensing Policy (NELP) 1999 during the NDA-Vajpayee rule threw open the country’s oil and natural gas basins for private players. In no time, the undivided RIL cornered the contract for exploring deep water D6 block of the Krishna Godavari (KG) river basin in Andhra Pradesh stretching over an area of 7645 square kilometres and a production sharing contract (PSC) was struck in April 2000 between the government and RIL and its minor (10 percent) partner, NIKO Resources Ltd (a Canadian corporation), for exploration and production of gas and oil.

The PSC has two key features: (a) provision of gradual surrender of exploration area back to the government as the contractor ‘discovers’ gas for commercial production in specific pockets while certain other areas become less promising and (b) a profit sharing formula based on an investment multiplier criteria: for Investment Multiplier (IM) less than 1.5 govt.’s share is 10%, for IM between 1.5 and 2 it is 16%, upto 2.5 it is 28% and when investment multiplier is expected to go above 2.5, the government share in profits will jump to 85%. Also, the Reliance was supposed to supply gas to public utility industries like National Thermal Power Corporation (NTPC) at agreed upon prices.

On the all these 3 counts, Reliance have manipulated key decision-makings to its unfair advantage. In fact, the 2011 Comptroller and Auditor General (CAG) report on Performance Audit of Hydrocarbon Production Sharing Contracts has indicated shocking anomalies of Reliance’s KG Basin operations in all the three aspects - explorations, investments, as well as pricing contracts- with active co-operation of the DGH and petroleum ministry!

With regard to the Exploration Area, of the 7645 square kilometres given to Reliance, only 5 per cent was the ‘discovery area’ and the rest should have been surrendered back to the Government. Thumbing its nose at this clause of progressive return of the basin area to the govt, RIL started claiming that the whole basin is full of gas through ‘continuity’ of hydrocarbon bearing channels citing some dubious ‘seismic evidence’ and the govt ever willing to comply, gifted the entire area as ‘discovery area’ to RIL in 2009!

On profit sharing too, predictable subterfuges of ‘gold-plating’ investments were used to deny and delay royalty to the public exchequer. Initially, in May 2004, Reliance had placed a ‘field development plan’ to produce 40 million standard cubic meters per day (mmscmd) of gas at an capital expenditure of $2.47 billion. After some time by 2006, they submitted a revised ‘field development plan’ claiming to produce 80 mmscmd at a capital expense of $8.84 billion. So in the name of doubling the production capacity, they showed an capital expenditure plan which was inflated almost four fold. Such inflated cost estimate meant a huge loss to the govt exchequer, because it is only after Reliance had ‘recovered’ its inflated costs that the government would start getting its return! Yet, neither the petroleum Ministry nor the DGH undertook any autonomous assessment to ascertain RIL’s cost claim; on the contrary, the government approved the proposal with an unusual alacrity within just 33 days!

On pricing, once again, RIL indulged in flagrant violations of its contract. In 2004, following an international competitive bidding, RIL entered into a contract with the NTPC to supply gas at a price of $2.34 per unit (mmBtu) for its Kawas and Gandhar power projects for 17 years. But soon RIL reneged on its contract, forcing NTPC to file a suit against RIL in Bombay High Court in December 2005. The case is still continuing. In the meantime, the company started lobbying to get the rate revised to $4.25 per unit. In 2007, the then Finance Minister Pranab Mukherjee as the head of the EGoM, fulfilled RIL’s wish, ringing in a bonanza atleast to the tune of Rs.10,000 crore for the company! Not just this, with the Union govt itself agreeing for the higher price for RIL gas, NTPC’s court case against RIL for its originally contracted price too stood seriously compromised. It is now an open secret how in 2006, the then petroleum minister Mani Shankar Iyer was removed for resisting RIL’s wish list and Murli Deora brought in! When the public sector unit of ONGC was getting only $1.83 for per unit of gas till 2008, it is anybody’s guess what could have led the EGoM to accept RIL’s wish price.

And since October 2012, RIL has been pushing for a further hike to $14.2 per unit (in the name of import parity price). This clamour for higher price is to be seen in the context of Reliance systematically reneging on its promised quantum of gas supply to the user PSUs producing power and fertilizer. The gas production from KG D6 has been steadily reduced from 61 mmscmd in 2010 to 31 mmscmd in 2012 against RIL’s promised target of 80 mmscmd by 2012-13 as a ploy to starve the power and fertiliser producing PSUs till its demand for higher price its met by the govt! When Jaipal Reddy as the Petroleum Minister confronted by slapping a $1 billion fine on RIL for failing to meet its production/supply targets and resisted its price hike agenda, in a repeat show of 2006, he too was shunted from his office and Veerappa Moily took over. With the present hike in gas rates and change in pricing regime via the so called “expert” Rangarajan Committee, UPA seems to have accomplished its mission of ensuring unfettered loot in the all-too-critical petroleum and natural gas sector by the Reliance at the cost of people’s interest and country’s future!


The KG basin price hike socialises costs and privatises profits...It is bizarre that such an imprudent proposal should be mooted at a time when the producing company’s recoverable gas deposits, as well as annual gas availability from its franchise area, have dipped - with no plausible justification - to less than a fifth of the originally assured levels. This has caused debilitating power shortages and idling investments made on gas-based power generation units downstream. Should the producer not be penalised for this mayhem?” “- E A S Sarma (former Secretary to Government of India in Ministries of Power and Finance and Principal Advisor (Energy), Planning Commission), in his article in the Business Standard June 3, 2013.

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