A deal questioned

Print edition : March 07, 1998

A writ petition in the Delhi High Court challenges the deal that the Central Government signed with a private consortium in 1994 for the exploitation of the Panna-Mukta oil and gas fields.

THE Delhi High Court is hearing a writ petition against a deal that the Government of India struck in 1994 with a consortium comprising Enron Oil and Gas India Limited (EOGIL) and Reliance India Ltd (RIL) for the exploitation of the Panna-Mukta (Gujarat offshore) oil and gas fields. The petition challenges the deal on the grounds, among others, that the entire process leading to the award of the contract was "thoroughly irregular, illegal and highly suspicious". A report submitted by the Comptroller and Auditor General of India (CAG) in December 1996 has been cited by the petitioners in support of their case.

It was in response to the wishes of the World Bank -- which the Government and the ONGC, or the Oil and Natural Gas Commission (now Corporation), approached for loans in 1991 -- that India decided to open up oilfields for development through indigenous and foreign private sector participation. In August 1992, the Ministry of Petroleum and Natural Gas invited bids for the further development of the Panna-Mukta oil fields -- discovered and partially developed by the ONGC. On December 22, 1994, a 25-year production-sharing contract (PSC) was signed with the Enron-RIL consortium (Frontline, July 11, 1997).

The writ petition names the CBI as one of the respondents, the others being the Union of India, the ONGC, RIL and EOGIL. According to an affidavit filed by the CBI, the agency registered a preliminary enquiry on June 2, 1996 against "some unknown officials" of the Ministry of Petroleum and Natural Gas, RIL, Enron and others. The registration report says that the Ministry officials allegedly colluded with the Enron-RIL consortium and "placed Panna-Mukta discovered oilfields under the production sharing contract".

The petition prays for a criminal investigation, departmental action against officials and the cancellation of the PSC. At present the petitioners are giving top priority to getting a criminal investigation supervised by a retired judge instituted. They envisage that the judge will select the members of the proposed CBI team.

The CBI conducted only a preliminary inquiry although, according to the petition, a recommendation was made in March 1996 by Y.P. Singh, then Superintendent of Police in the Anti-Corruption Branch of the agency in Mumbai, to the effect that a first information report (FIR) be registered and a regular case launched. The petitioners allege that the file containing the recommendation was withheld by the then Joint Director, CBI, and not sent to the agency's headquarters in Delhi.

An offshore rig of Reliance Industries Ltd. and Enron in mid and south Tapti, Mukta and Panna areas of the Mumbai offshore region.-BY SPECIAL ARRANGEMENT

Initially, the CBI told the court that no such file existed. It then took the position that the file was untraceable. Finally, in the course of a hearing on February 2, it apparently tried to impress on the court that Y.P. Singh himself was responsible for the disappearance of the file.

The CBI submitted to the court on February 2 a status report of the inquiry stating that there was nothing irregular about the award of the Panna-Mukta contract, and referred to the report of an expert committee in this connection. After perusing the status report, the bench, consisting of Justices Y.K. Sabharwal and M.K. Sharma, said that it would proceed with the hearings only after it had ascertained whether or not extraneous considerations had influenced the award of the contract.

Adjourning the hearing to March 3, it directed the CBI to furnish the expert committee's report by that date and the Government to make the original records pertaining to the award of the contract accessible to the court on that date.

The writ petition, filed on behalf of the Centre for Public Interest Litigation, New Delhi and the National Alliance of People's Movements, Mumbai, says: "It seems likely from the facts and circumstances that the contract has been procured by giving bribes to top officials of the Government." Without explicitly dismissing this allegation, a counter-affidavit filed on the Government's behalf questions the petitioners' understanding of the issues involved and says that their sole intention is to malign the Government.

The signing of the PSC brought into being an unincorporated joint venture, with the ONGC having a participation interest of 40 per cent and EOGIL and RIL having an interest of 30 per cent each. The Government's case is that the contract was awarded to the Enron-RIL consortium because, of all the eight bidders, it offered the highest project net present value (NPV) to accrue to the Government (including the ONGC, which has surrendered the 1990-2010 mining lease held by it in favour of the joint venture. The NPV was arrived at by discounting future net cash inflows to the present value at 10 per cent per annum.

The Government's share of this includes its quota of profit petroleum, income tax and levies such as cess on oil and royalty, and the ONGC's share, "signature bonus", production bonus and its quota of profit petroleum (net of income tax). The lower the operating expenditure (OPEX) and the higher the oil and gas production levels, the higher the NPV, other things being equal. These parameters, and the capital expenditure (CAPEX), were among the main criteria on the basis of which the Government worked out NPVs for comparison of bids. But OPEX has not been incorporated in the PSC as a firm commitment, and there are no disincentives for exceeding the OPEX indicated in the consortium's bid. Nor does the contract provide for guaranteed production in line with the profile presented in the bid.

The Government is probably right in stating that in view of the uncertainties the oil industry is subject to, it is not feasible to incorporate commitments with regard to production and OPEX in a 25-year contract. But this leads to the logical conclusion that the project NPV - and its 'take' of it - is at the mercy of more or less arbitrary figures for OPEX and production presented in the consortium's bid.

Part of the Government's answer to this is that no deviation from the production profile presented in the bid can be made without the approval of the managing committee in which the Government and the ONGC are represented. But the managing committee is not insulated from the effects of the uncertainties of the oil industry. As for the Government's argument that the managing committee would also exercise control over OPEX, the CAG report asserts that such control cannot be effective in the absence of clear "principles of computing cost escalation and control".

In sum, the 'take' the consortium offered the Government, which purportedly clinched the contract for it, is "unduly flexible and uncertain", as the CAG report puts it. The Government affidavit virtually admits as much. The NPVs worked out for the bids received, it says, "are based on the parameters available/assumed at the time of bid evaluation... and should not be seen as a cast-iron guarantee of Government NPV from the project over the contract life." The NPVs are a "useful construct".

Analysis of documents indicates that the Government did not bargain with the consortium to maximise individual elements of its take. "To assign benchmarks on individual elements of cash flow would have only served to vitiate the NPV criterion (of bid evaluation)," says the Government affidavit. "For example, are we to reject the bid that offers highest NPV of Government take just because it may not meet the benchmark on one of the elements of the... take?"

In contrast to this, the CAG report says: "As a matter of prudence, all the elements comprising the... Government take should have been carefully benchmarked and expected returns from these elements diligently evaluated before initiating the bidding process. In the absence of such an exercise, PSCs would appear to have been drawn up purely on the basis of bids received from the investors, who would... have framed them at terms most favourable to themselves."

The CAG report notes that the ONGC received from the consortium only $3.6 million by way of 'signature bonus'- an amount payable to the existing holder of a mining lease for the right to carry out exploration and drilling activities in a given contract area. There is no evidence on record, it says, to indicate that the bonus quantum was negotiated in the light of estimates of what would have accrued to the ONGC had it not surrendered the lease.

Nor was the consortium's bid for the production bonus payable to the ONGC considered with reference to any benchmarks that might have been worked out in the light of Panna-Mukta's oil production potential. As a result, the PSC entitles the ONGC only to a bonus of $6 million when the joint venture achieves a cumulative production level of 50 million barrels and a further $9 million when the 100-million-barrel level is reached.

While the contract does provide for an even further bonus of $15 million at a cumulative production level of 200 million barrels, the maximum production envisaged from the field is only 145.67 million barrels.

According to the CAG report, the Government has sold itself short on two other elements of its take - the cess and the royalty payable to it by the partners in the joint venture. The PSC freezes these payments, for the entire contract period, at the March 1992 rates of Rs. 481 a tonne for royalty and Rs. 900 a tonne for cess. It may be true, as the Government says, that the freezing of levies is in line with the practice of many countries to provide private enterprise in oil and gas production with fiscal stability. Even so, it is surprising that the royalty payable in respect of Panna-Mukta was frozen on February 23, 1994, the day the Government approved the PSC; for on that very day the Government notified an increase in the general rate of royalty to Rs. 528 a tonne with retrospective effect from April 1, 1993.

Whereas the national oil companies are paid for the crude oil they produce at an administered price, the joint venture receives international-market prices for its output. According to a report on the Panna-Mukta deal submitted on January 16, 1996 by Y.P. Singh and cited in the writ petition, the Government had been buying crude from the joint venture at $24 a barrel, including a premium of $4 over the international price. Terming this a gross overestimate, the Government affidavit says that the average price that would have been paid to the joint venture in June 1997 - had work in the oilfield not been suspended that month on account of a planned shutdown - was about $19 a barrel.

The report also says in effect that the field was handed over to Enron and RIL at a throwaway price. On the one hand, it says, there is oil worth Rs. 17,280 crores (200 million barrels at $24, or Rs. 864, a barrel) and a past investment made by the ONGC having a net present worth of Rs. 3,000 crores. On the other, this asset was given to the consortium for Rs. 15 crores -- in the form of 'token' signature and production bonuses.

The Government affidavit says that the net present worth of the ONGC investment would work out to only Rs. 600 crores, and that, too, on a non-depreciated basis. It asserts that the worth of the oil reserves to Enron and RIL should be estimated not on the basis of gross oil reserves but net of CAPEX, OPEX and the Government take. It estimates the gross project revenue at Rs. 13,338 crores and the revenue net of CAPEX and OPEX at Rs. 8,224 crores.

An elaborate set of assumptions underlies the estimates. Besides notional figures for CAPEX, OPEX and production, the assumptions include the following:

An oil price of $18 a barrel for the period of the contract, when even the Government-computed average price for June 1997 is about $19 per barrel. An exchange rate of Rs. 36 to a dollar, also for the duration of the contract. A Government take of profit petroleum ranging from 5 per cent to 50 per cent (whereas Y.P. Singh's note says the formula for the take has been so devised that it can never rise above 5 per cent).

The calculations based on these assumptions have led to an absurd outcome. The total take of the Government (including the ONGC) is estimated at Rs. 6,780 crores. The subtraction of this from the estimated net revenue of Rs. 8,222 crores yields a figure of only Rs. 1,442 crores for the Enron-RIL share of the projected net revenue of the project. The affidavit adds: "To generate this revenue over the 25 years the companies have to incur a capital expenditure of Rs. 1,247 crores in the initial two or three years of the project."

The petitioners' rejoinder says: "If this were indeed the case, the rate of return for the companies would be substantially negative... Rs. 1,247 crores invested even in a post office account for 21 years, doubling in seven years, would fetch about Rs 10,000 crores."

The Government affidavit claims that it pays the joint venture not $24 a barrel but at the rate of 10 cents per barrel less than the international-market price of Brent crude prevailing at any given time. But whereas the Government affidavit says a price of $18.969 a barrel would have been payable to the joint venture in June 1997, Reuters, Dow Jones and other agencies reported that the average daily closing price of Brent crude in the international market that month was only $17.57 a barrel, according to the petitioners' rejoinder.

To go by data contained in a document -- a copy of which has become available -- that Enron Oil and Gas Company has filed with the Securities and Exchange Commission (SEC) of the United States, the average crude oil price for the first half of 1997 under the head "India" was $22.99 a barrel. Panna-Mukta and Mid and South Tapti are the only Indian oilfields in which Enron has a stake and, according to an ONGC spokesman, Mid and South Tapti is producing only gas.

It is a fair inference, then, that the average price that Enron realised for Panna-Mukta crude during the first half of 1997 was $22.99 a barrel. During the same period, the average FOB cost of all U.S. imports of crude oil, to go by U.S. Department of Energy figures, was $17.71 a barrel; the average FOB price of Brent crude, derived from wire services figures, was $19.59; the administered price paid to the ONGC, according to the Government affidavit, was $13; and the average price realised by Enron from its Trinidad operation, according to the data submitted to the SEC, was $18.86.

These figures indicate that in the international market the price of Brent, to which the price payable to the joint venture by the Government of India is linked, is well above the average international price of crude; that during the first six months of 1997 the joint venture received on an average $3.5 a barrel (or nearly 18 per cent) more than what the "Brent minus 10 cents" formula would have entitled it to; and that this received amount was $4.13 a barrel (or 21.9 per cent) more than what Enron Oil & Gas Co. realised from its Trinidad operation, and nearly $10 a barrel (or 76.8 per cent) more than the administered price that the ONGC got.

The figure of $22.99 a barrel mentioned in the data submitted to the SEC is 27.72 per cent higher than the price of $18 a barrel assumed by the Government for the calculation of project revenue. If the gross project revenue be worked out on the assumption of an oil price per barrel of $22.99 instead of $18 as in the Government affidavit, it would be much closer to Y.P. Singh's estimate of Rs. 17,280 crores even if all the other assumptions of the Government, including a stagnant exchange rate of Rs. 36 to a dollar, be left intact.

The CAG report observes that the reserve estimates on the basis of which the Government proceeded kept varying at different stages leading to the finalisation of the PSC. The feasibility report of the ONGC mentions a figure of 31.35 million tonnes; 25 million tonnes is the figure mentioned in the ONGC's economic recovery plan; and according to the ONGC's revised recovery estimates, the figure is 14 million tonnes. Whereas the information docket furnished to the bidders spoke of 31.35 million tonnes, the bids were evaluated on the basis of the lowest of the three figures.

By way of justification, the Petroleum Ministry explained to the CAG in July 1996 that carrying out three-dimensional seismic survey and obtaining international agencies' opinion on it were time-consuming and "involved certain costs with uncertain benefits." The Government affidavit, however, attributes the vast disparity in the figures to a lower reserve base for the Mukta field indicated by interpretation by the ONGC of the three-dimensional data acquired by it.

The CAG report states implicitly that the absence of firm estimates of reserves weakened the Government's bargaining position. "In the absence of a reasonable assessment of reserves," it says, "it would be difficult for the Government to anchor negotiations properly for obtaining higher Government take."

The report found inadequacies in the Petroleum Ministry's tender invitation procedures. It says that the generally accepted Government procedures require the maintenance of a record of the dates of receipt of bids, the details of bidders and the names of the officials present at the time of opening of the bids. The procedures also require these officials to authenticate the bids opened on the same day to rule out change of bids at a later date. The documentary record does not establish that any of these steps was taken, according to the report. Nor did the Ministry adopt the procedure, which would have made for transparency, of bids being read out in the open in the presence of bidders.

The Government affidavit responds to only one of these observations. A public opening of bids, it says, might well have made it easier for the bidders to arrive at a "collusive understanding" to the Government's detriment.

The PSC does not provide for the reimbursement to the ONGC of the cost of Rs. 546.39 crores incurred for the development of Panna-Mukta, whereas the PSC signed with the Videocon-Command consortium for the development of the Ravva field provides for partial reimbursement of such costs. The CAG report notes that past cost compensation was not included as a biddable item in the case of Panna-Mukta, adding that there is nothing on record to substantiate the Government's claim that the bidders were pressed during bid negotiations to compensate the ONGC for past costs.

The Government affidavit expresses the view that where there is open competitive bidding the intrinsic value of a field being offered is essentially market-determined and that there need be no correlation between a field's market value and the costs incurred in developing it. It adds that the only reasonable basis for bid evaluation and selection is the total Government take (which includes the ONGC take) and not past cost reimbursement or any other individual element of the take.

In reply to audit queries on this issue, the Petroleum Ministry had contended that the provision in the PSC for signature bonus and production bonus was intended to meet a part of ONGC's past costs. Citing provisions of the PSC itself, the CAG report asserts that the bonuses "are not in any way related to past costs."

Dealing with another assertion of the Ministry -- that Panna and Mukta were relatively uneconomic fields -- the report points out that exercises carried out by the Ministry "showed a 13.44 per cent internal rate of return (IRR) to the companies on their investments on development of the Panna-Mukta field." Nor had the Ministry ruled out the subsequent upgradation of the reserves -- which would increase the IRR further.

On the subject of past-cost compensation, the Ministry had also told audit that the entire issue must be viewed in the perspective of the overall national interest rather than from "the limited angle of the ONGC's interest." The CAG report says this assertion "is an unacceptable generalisation, especially in view of the manifest infirmities of the bidding and contract finalisation process brought out by audit."

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