Energy/ Oil Sector

Crude treatment

Print edition : February 05, 2016

Mukesh Ambani, Chairman of Reliance Industries (right), with Arun Shourie, Union Minister for Disinvestment, at a press conference to announce the government's offer to sell shares in IPCL in Mumbai in 2004. Photo: PAUL NORONHA

ONGC's Mumbai High South production complex. Photo: ONGC

The D6 block in the Krishna Godavari basin.

Liberalisation of the oil sector has enabled private interests to reap huge profits from India’s reserves while top upstream companies like ONGC have been neglected.

One of the most important announcements Dharmendra Pradhan, Union Minister of State (independent charge) for Petroleum and Natural Gas, made last year was that India’s crude oil imports would be reduced by at least 7 per cent and brought to around 67 per cent of the country’s total demand. This would be done by boosting domestic production by increasing investments in the sector, he said, adding that a high-powered committee headed by an Additional Secretary would be constituted to create a road map to achieve this target.

In his announcement, he said the government would start identifying more hydrocarbon reserves but did not clarify whether the target would be achieved by enhancing the capacities of India’s biggest upstream companies such as Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) or by attracting private investments in crude oil production, a policy that the previous United Progressive Alliance (UPA) governments or the earlier National Democratic Alliance (NDA) government had so strongly espoused. Private exploration was allowed in India in 1991, but the auctioning of big reserves began only after the New Exploration Licensing Policy (NELP) was passed in 1999. Of the many private national and international drilling companies that bid for the oil blocks in subsequent years, Reliance Industries Ltd (RIL) has benefited the most, and in most cases at the cost of India’s top profit-making public sector enterprise (PSE), ONGC.

ONGC accounted for more than nine-tenths of the total crude oil production and until 2012 sat on accumulated profits of more than Rs.80,000 crore. As a PSE, its high profits also turned it into the biggest contributor of cross-subsidies across all business sectors. However, ONGC’s profits have been waning in recent years. Most of its earnings come from the oil and gas blocks it struck before 1999, with almost 70 per cent of its production coming from the Mumbai High fields.

From the 130 blocks it acquired after 1999, ONGC has not been able to produce any oil or gas so far. Successive governments since 1991 have allowed private interests to reap huge profits from India’s oil reserves while ONGC was never provided with a level playing field. Privatisation of the sector also meant that government interests in spending on the sector drastically went down. As India’s energy demands have almost tripled since 1991, the neglect of ONGC has been a story in itself.

In recent years, ONGC has suffered mainly on two counts. Firstly, successive governments have targeted it for divestment to reduce the fiscal deficit. The Narendra Modi government in 2014 announced that it would divest 5 per cent of ONGC’s shares. As of now, the government holds around 69 per cent of the company’s shares. According to industry experts, the government plans to reduce its stake in the company as and when it finds credible buyers. For ONGC, which is only second to Reliance by a whisker when it comes to profits and has a market capitalisation of over Rs.2,00,000 crore, the move to divest it continually has been disastrous and demotivating for its management.

Secondly, allowing privatisation in the sector has resulted in corrupt practices in bidding and allocations, as has been reported several times. In most cases, ONGC has lost to private bidders, especially Reliance. While ONGC is expected to cross-subsidise the government’s welfare schemes, private companies have no such compulsions. In addition, private companies such as Reliance have reneged on many of its liabilities towards the government.

Industry experts have alleged that Reliance has been lobbying with the government extensively in the past 20 years to corner the country’s oil reserves. For instance, the Panna-Mukta oilfields were discovered by ONGC in 1994, but the government handed the Reliance-Enron consortium a 25-year lease on and 60 per cent stake in the fields.

Later, British Gas (BG) bought Enron’s 30 per cent shares and the Reliance-BG consortium currently enjoys profits from the fields without having invested a penny in the discovery.

The allocation of the Krishna-Godavari basin D6 block to Reliance has been the most controversial decision for more than 10 years. The Comptroller and Auditor General Report in 2011 stated that the government went out of its way to create suitable conditions for Reliance to harvest underserved profits. An ONGC official told Frontline that Reliance wrested the D6 block after extensive lobbying with the government. “ONGC should have been the natural choice for exploration in the D6 block. It came as a shock to many of us when Reliance was awarded the contract. Later, we found that Reliance fudged geophysical details to get additional points on which the bidding process is undertaken. Similarly, Reliance has also inflated its capital expenditure artificially to prevent sharing of profits with the government, as has been allowed in the production sharing contract [PSC],” the official said.

“In the PSC between the government and RIL, a parameter termed the investment multiple (IM) has been defined as the ratio of the total revenue to the total investment. “According to the PSC, as long as the IM is below 1.5, RIL is entitled to more than 80 per cent of the profits and the government gets 20 per cent. It is only when the IM is more than 2.5 that the government gets 85 per cent of the profits. Therefore, RIL is said to have an incentive in keeping the IM below 2.5 by artificially increasing expenditure. The CAG, in a detailed report in 2011, had found that RIL exaggerated its capital expenditure for this very reason…. RIL raised its capital expenditure from the proposed $2.4 billion in 2004 to $8.8 billion in 2006,” Frontline had reported in 2014. (See “The gas price fix”, Frontline, March 2014.)

Amid various such dealings of the government with Reliance and other private companies, ONGC, despite performing stupendously over the years as the mainstay of India’s energy demands, has been grossly neglected.

Until the mid-2000s, ONGC was compelled by the government to sell subsidised fuel. However, there was no such compulsion for players like Reliance. While this flaw in the privatised model of oil and gas production has been rectified now, ONGC had to bear its burden for long. Constant government apathy and ill treatment has created conditions that may cause the company to post losses in the years to come.

“The Union government’s reasoning that the profits of ONGC have gone down over the past few years is true. But the government itself is to blame for it. What happened during the 2010 Cairn India-Vedanta deal in Rajasthan smacks of corruption. The Mangala oil rig in Rajasthan was the largest onshore discovery of crude oil—25 per cent of the total crude oil in India. When Cairn wanted to withdraw, ONGC, as a 30 per cent stakeholder, was the natural inheritor of the oil rig. Instead, the government did not permit ONGC to take over and created favourable circumstances for Vedanta to buy it off,” Tapan Sen, general secretary of the Centre of Indian Trade Unions, told Frontline last year.

The ONGC official said that ONGC’s top management has cautioned the Union government against indiscriminate divestment.

“Out of the many issues we raised with the government, the two most important ones were that we are being undervalued and that we did not want to share our profits with private investors as most of the oil rigs and natural gas blocks were struck by us,” the official said.

The official also said that given proper administration and government support, ONGC could meet most of the country’s energy demands.

On the issue of the company not having been able to drill the blocks it acquired after 1999, the official said: “There has been no support from the government in the last few years. If you remember, Mumbai High was developed with extraordinary speed. After it was discovered in 1972, we developed it in less than 24 months. We are in a much better position to do that kind of work if the government supports us. Unfortunately, Reliance is the government’s blue-eyed boy now.”

ONGC has pressed charges on Reliance of stealing gas from ONGC-owned Bay of Bengal block, adjacent to RIL’s D6. It moved the Delhi High Court in June 2014 accusing Reliance of stealing about 18 billion cubic metres of gas worth Rs.30,000 crore from its reservoir close to the common boundary of the blocks in the KG basin.

Former ONGC managing directors Subir Raha and R.S. Sharma have said that the stepmotherly treatment of ONGC has led to a significant dip in its market valuation and thus a loss of thousands of crores of rupees for the government.

The government’s plan to further boost the energy sector is welcome. However, any plan that ignores past failures and the unpredictability of indiscriminate privatisation can create more problems than solutions.

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