Reliance Response

Witch-hunt, says Reliance

Print edition : March 21, 2014

The Reliance Industries Ltd. logo. Photo: Bloomberg

Reliance rebuts allegations made against it by the AAP and others.

COURTING controversy is nothing new for Mukesh Ambani or his flagship company, Reliance Industries Limited. So, what is different this time that has rattled the company and its billionaire owner?

In RIL’s own words—at stake is the reputation of the two.

Arvind Kejriwal and his Aam Aadmi Party (AAP) may not be raising any fresh issues that have earlier not been flagged by Communist Party of India leader Gurudas Dasgupta. But, Kejriwal is attracting more attention because of his mass appeal.

The first allegation: RIL is not a company for the aam aadmi (common man).

RIL believes otherwise and says for no fault of its, it is being a target of a witch-hunt. It maintains that it has contributed immensely to the development of the nation and all its stakeholders.

Influencing the government: Another allegation is that Ambani ran the United Progressive Alliance government for a decade and if the National Democratic Alliance were to come to power, it will enjoy the same dispensation. RIL dismisses it as “totally absurd and baseless”. “If Ambani was running the government, nobody would dare to impose about $1.8 billion as cost recovery penalty, delay the sanctions of future development and seek bank guarantee for allowing increased gas price for natural gas output from KG-D6 block during the last three years,” says the company.

Money laundering: How about allegations that foreign direct investments (FDI) in certain Indian companies by Biometrix Marketing, a Singapore-based company, are “laundered monies” invested in India. RIL says that these false and baseless allegations are being repeatedly made in the media and in judicial proceedings and it had already responded to them.

In fact, RIL says the allegations made by AAP leader Prashant Bhushan are highly defamatory, false, irresponsible and devoid of any merit or substance whatsoever.

The company adds that the investments by Biometrix were open, transparent and perfectly legitimate transactions in full compliance with regulations. These investments in the Indian companies, it says, were made by Biometrix out of loans raised from ICICI Bank’s Singapore branch.

The regulatory authorities have investigated the matter fully and have found no substance in the allegations of money laundering, RIL says. “The insinuation that this money was from ‘gold-plating’ KG-D6 is completely irresponsible and false,” it says, responding to Prashant Bhushan’s charge.

“Our legal adviser Atul Dayal was neither the owner nor the director of Biometrix and Biometrix has filed its balance sheets and income tax returns each year with the regulatory authorities in Singapore.”

“Hoarding of gas”: On the allegations of “hoarding of gas” at KG-D6, RIL says: “Hoarding is technically impossible. Any attempt to hold back production in an existing field immediately shows up in pressure anomalies in the affected wells.... Simply put, if gas is being hoarded, pressure in all producing wells cannot decline uniformly because pressure decline is a sure sign that the pressure cooker is running out of steam.”

Hoarding of gas also does not make any commercial sense, argues RIL. Any delay in production defers the recovery of costs and subsequent revenues for the contractor. No prudent operator will risk present cash flows for uncertain future benefits, it asserts.

It reiterates that the decline of production in D1 and D3 fields in the KG-D6 block was due to reservoir complexity and geological surprises and not because of hoarding. “The issue can be easily settled by getting the existing reserves assessed and certified through any expert international reserve certification agency,” the company says.

Production costs: As for the cost of production of gas, the company says: “We are not sure where the $1/unit [gas is measured in million British thermal units, or mBtu] number has come from. The figure of less than a dollar being quoted as cost of production of gas from Block KG-D6 is factually incorrect.”

The letter by RIL to the Directorate General of Hydrocarbons referred to in the first information report (FIR) filed by the Anti-Corruption Branch of the Delhi government is not about the cost of production but limited to post-production costs between the well head and the delivery point—a small portion of the total cost — which was estimated at $0.89/unit for financial year 2009-10. The figure was required because royalty was to be paid at the well-head value, which had to be derived by subtracting the post-well-head cost ($0.89/unit) from the approved price of $4.2/unit.

Today, the D1-D3 post-production cost between the well head and the delivery point stands at $3.6/unit at field level as the reserves have reduced from 10.1 tcf (trillion cubic feet) to around 3 tcf, according to RIL.

Post-production cost between the well head and delivery point is only a small component of the total cost of production. To calculate the production cost for KG-D6 for 2009-10, in addition to the post-production cost between well head and delivery point (that is, $ 0.89/unit), the expenditure incurred in discovery, appraisal, development production, and maintenance will need to be considered: for example, the cost of drilling of wells, production expenditure including work-overs expenditure, exploration and appraisal cost, etc.

In addition, RIL says, along with its partner, it has spent around $4 billion on non-KG-D6 blocks, $1.9 billion on relinquished blocks (failed exploration) and is expected to spend another $1.8 billion on other NELP (New Exploration Licensing Policy) blocks until the end of fiscal 2014 when there is still no certainty of recovery. RIL has already relinquished 39 of its 45 blocks as it did not find commercial hydrocarbons in them and the money spent on exploration on these blocks is not recoverable under the production sharing contract (PSC).

In case prices are to be fixed on the cost of production, this additional cost of $7.4 billion will also need to be reimbursed, it says.

“Gold-plating”: On the “gold-plating” charge, the company says the investment costs rose because of increase in reserves as well as the 200 to 300 per cent increase in the prices of commodities, goods and services internationally between 2003 and 2006. The audit report of the Comptroller and Auditor General (CAG) for the years 2006 to 2008 never even once mentions the word “gold-plating”. It also does not quantify any excess expenditure but only comments on the procurement processes. The Public Accounts Committee (PAC) has asked the CAG to quantify the so-called excess expenditure upon which , RIL says, the CAG has assured that it will do so during the audit of the following years.

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