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Sale to unit may add to RIL’s troubles

Sale to unit may add to RIL’s troubles
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First Published: Fri, Nov 11 2011. 12 57 AM IST

Mukesh Ambani, chairman, Reliance Industries Ltd. Photo: Bloomberg
Mukesh Ambani, chairman, Reliance Industries Ltd. Photo: Bloomberg
Updated: Fri, Nov 11 2011. 12 57 AM IST
New Delhi: The directorate general of hydrocarbons (DGH) has expressed concern on the sale of condensate from Reliance Industries Ltd’s (RIL) lucrative D6 block in the Krishna-Godavari basin to the company’s own refinery in Jamnagar.
The development may bring further trouble for the Mukesh Ambani-promoted company that is already under the lens for alleged irregularities in its development of the D6 block.
Mukesh Ambani, chairman, Reliance Industries Ltd. Photo: Bloomberg
DGH’s opinion was sought by the ministry of petroleum and natural gas after state-owned Hindustan Petroleum Corp. Ltd (HPCL) complained to its parent ministry about the manner in which RIL had called for bids for sale of the condensate around three months back, and then awarded them. HPCL and RIL’s Jamnagar refinery participated in the bid. The latter won the bid.
Even as it sought DGH’s opinion, the ministry also asked the petroleum planning and analysis cell to estimate the fair price for the condensate, of which an estimated 10,000 tonnes a month is being produced. The condensate can be distilled to obtain petroleum products such as petrol.
According to the production-sharing contract signed between RIL and the government for the offshore block, any such sale and the price at which the sale is made requires government approval and needs to be at arm’s length (which means that even if the sale is made to an associate firm, it is on terms similar to a sale to an unrelated entity).
“The production-sharing contract has clearly defined provisions for pricing of crude and condensate. These provisions state that in the event sales are to be made to an affiliate, the parties to the contract have to agree on a price which is internationally competitive and reflects fair market value,” said Gokul Chaudhri, partner at BMR Advisors, a tax advisory firm.
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Mint’s Utpal Bhaskar says the DGH is concerned about the pricing of hydrocarbons that RIL sold from its D6 block.
to its own refinery.
“The guy who is the producer is selling to his own company. How can it be at arm’s length?” said an HPCL executive, who did not want to be identified.
In a communication dated 24 October to the petroleum ministry, and reviewed by Mint, DGH states: “The pricing and sale of condensate is approved by the government of India as required under article 19.4, 19.5 and 19.9 of the production-sharing contract... Sale of condensate by the joint venture to RIL’s Jamnagar refinery is not at arm’s length... Pricing of condensate at a price much less than the price of Brent is an issue pointed out in the meeting taken by the additional secretary (of the ministry) on 16 August.”
The letter refers to the meeting attended by the officials from the ministry, DGH, petroleum planning and analysis cell, and HPCL.
DGH added that because “issues involving mode of transport, sale of condensate, pricing” were beyond its purview, the ministry needs to “take a suitable view on these issues”.
While a petroleum ministry spokesperson declined comment, S.K. Srivastava, director general of hydrocarbons, didn’t respond to phone calls or to a message left on his cellphone.
A spokesperson for RIL said the company “has followed transparent process and always kept partners and governments appraised”, and that the company has “complied with the relevant provisions of the production-sharing contract”. He declined further comment because he said the company is not privy to the communication.
RIL recently offloaded a 30% stake in 21 hydrocarbon blocks, including D6, to London-based BP Plc for $7.2 billion (around Rs35,860 crore today). A spokesperson for BP declined comment.
“We participated in the bid as logistically we have a refinery nearby. We planned to distil it for getting fuel. The price should have been fixed in line with international prices. The government has to take a final view on this,” added the HPCL executive.
A second HPCL executive claimed that the bidding process was not transparent and said that he was confident that his company had “quoted the best price”.
“In the interests of transparency, the government needs to clarify the rules or framework for appropriate price discovery or determine the price formulae for condensate,” added Chaudhri of BMR Advisors.
The latest development comes at a time when the government is concerned at the decline in gas production from the D6 block and in the wake of the Comptroller and Auditor General of India (CAG) beginning an examination of RIL’s books to see whether there has been any loss to the government on account of the way the company has developed the D6 block in 2008-09 and 2009-10.
In a previous audit that covered the period up to 2007-08, CAG found that RIL had breached some terms of its production-sharing contract with the government, and blamed the petroleum ministry and DGH for their failure to provide adequate oversight of the process.
The auditor also said the current production-sharing contract encouraged firms to front-load expenditure as it correspondingly reduces the share of the government in profits.
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First Published: Fri, Nov 11 2011. 12 57 AM IST
More Topics: RIL | Reliance Industries | Mukesh Ambani | HPCL | Oil |