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Govt says open to review of profit-sharing formula

Govt says open to review of profit-sharing formula
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First Published: Mon, Jun 20 2011. 11 25 PM IST
Updated: Mon, Jun 20 2011. 11 25 PM IST
New Delhi: In an attempt to deflect criticism by the country’s apex auditor, petroleum minister S. Jaipal Reddy on Monday said the government was open to revisiting its profit-sharing formula for awarding hydrocarbon blocks and will strengthen the office of the oil regulator.
The Comptroller and Auditor General of India (CAG) had criticized Reddy’s ministry and regulator Directorate General of Hydrocarbons (DGH) for allegedly allowing Reliance Industries Ltd (RIL) to inflate development costs on the D6 block in the Krishna-Godavari (KG) basin.
RIL has denied the charge.
Under India’s new exploration licensing policy (Nelp), companies win exploration blocks in a competitive bidding process that involves revenue-sharing (or production-sharing) agreements with the government. According to this contract, the government’s share from hydrocarbon blocks, known as profit petroleum, comes only after the companies recover all their costs.
“Today’s formula of investment multiple was evolved in 1995. If (a) more foolproof formula is possible, why not look at that,” said Reddy. “If there is an alternative formula which is less controversial and is fail-safe, then why not?”
Reliance Natural Resources Ltd (RNRL) had earlier alleged that RIL had “gold-plated” exploration costs in KG D6 by almost four times—from $2.47 billion in 2003 to $8.83 billion—to undermine its demand for cheaper gas.
RIL, an oil-to-yarn conglomerate, is controlled by Mukesh Ambani. RNRL is controlled by his brother Anil.
The accusations were made at a time when the brothers were at loggerheads, before patching up in May 2010.
The Communist Party of India (Marxist), or CPM, and the main opposition Bharatiya Janata Party have criticized the Congress-led United Progressive Alliance (UPA) government over the findings in the CAG’s draft report. The CPM has demanded “immediate amendment of the present pricing formula in the production-sharing contract in consultation with CAG” and “immediate action” against the officials involved, including former director general of hydrocarbons V.K. Sibal.
It has also demanded that the price of gas be “delinked from international dollar price of crude” and the price of KG basin gas “be revised on the basis of actual cost of production and a cost-plus formula.”
CAG’s draft report also states that the British Gas Exploration and Production India Ltd-operated Panna/Mukta and Tapti fields, which have other partners such as RIL and state-owned Oil and Natural Gas Corp. Ltd (ONGC), too, increased development costs, and that Cairn India Ltd was allowed to carry out exploration in areas not covered under its RJ-ON-90/1 block in Rajasthan. “The institution of DGH is not capable of handling the technical and financial issues of this size,” Reddy said.
The ministry of petroleum and natural gas has sought eight weeks to submit its response to CAG’s draft report. “Our ministry will approach the subject with an open mind... we will not hesitate to correct ourselves,” Reddy said.
Reddy declined to comment on whether CAG’s draft report will affect approval for RIL’s proposed move to offload a 30% stake in its hydrocarbon blocks to London-based BP Plc., only saying the deal “was under consideration.”
In a separate development, Reddy said the cabinet committee on economic affairs (CCEA) may take up this week Vedanta Resources Plc.’s proposed acquisition of a majority stake in Cairn India Ltd.
A group of ministers (GoM) set up to vet the deal has recommended that CCEA approve the transaction but with riders to protect the interests of Cairn’s partner, ONGC.
The state-owned company had made the resolution of a royalty payment dispute with its partner a precondition for approving the deal. The ministry had placed the issue before CCEA, which, in turn, recommended it to a GoM. An external spokesperson for RIL and a Cairn spokesperson declined comment.
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First Published: Mon, Jun 20 2011. 11 25 PM IST