Around a decade ago, Reliance Industries Ltd’s oil and gas exploration efforts were being celebrated. It struck gas towards the end of 2002 in the Krishna-Godavari basin, the reserves being big enough to be declared that year’s largest find. To a country suffering from crippling gas shortage, this came as a relief. Power and fertilizer plants operating on expensive naphtha could hope to switch to gas that cost one-third or less, in turn, reducing the subsidy outflow for the government. There were clear knock-on effects—it raised the prospects of finding oil and gas in India, and got big global companies interested. It is another matter the interest didn’t last, owing to changes in the exploration policy that made investors shy away.
While the original production-sharing contract allowed explorers freedom to price and market gas, the government clamped down on this in 2007. A gas utilization policy now determines the customers in the queue, as a result of which, free pricing became a chancy affair.
But now it appears that the risk of doing business has been bumped up further. The government is mulling options to initiate arbitration proceedings against the very company whose success it celebrated a while back—Reliance. The law department is arguing that the company shouldn’t be allowed to claim a part of the total amount the company says it spent on infrastructure to bring the gas to the shore. This is because the production target—the basis on which the assets were allowed to be created by the government—has been missed by a wide margin; output is half of that originally estimated. If this indeed happens, the government’s share of oil and gas will move closer to the amount it had estimated originally while awarding the field in 2000.
So, is the government being penny wise and pound foolish? After all, not only do investors have to contend with high exploration risks—there has been no large find since the 2002 strike—they also have to deal with production risks. Especially those that relate to the behaviour of a gas reservoir a few kilometres below the surface.
However, given that the government approvals to double the production target and investments were given hastily and in a manner that clearly lacked scrutiny, the latest moves may not be entirely out of place.
Should the government start arbitration proceedings on KG basin gas? Tell us at email@example.com