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Oil and Gas Forum

December 27, 2012

No need for CAG audit of CBM blocks, says Rangarajan panel


In the wake of a row over Comptroller and Auditor General ( CAG) audit of Reliance Industries Ltd’s (RIL’s) KG-D6 block, a panel headed by Prime Minister’s Economic Advisory Council Chairman C Rangarajan has said CAG need not audit RIL’s coal-bed methane (CBM) blocks, as those were governed by a different contractual regime.

The panel said in its report last week that CBM blocks did not have elements of cost recovery, so a CAG audit “may not be required”.

In conventional oil and gas blocks, such as the eastern offshore KG-D6, companies are allowed to first recover their cost before the government gets a share in profit. CAG had earlier criticised this cost-recovery model and said it encouraged operators to keep raising costs to defer government profit.
However, the government had bid out CBM blocks, for extraction of gas from coal seams, on the basis of output share a company offered from the first day of production. A block was given out to the company offering the highest share.

“As the element of cost recovery is not applicable to CBM blocks and nominated (oil and gas) blocks (given to ONGC and OIL), CAG audit for such blocks may not be required, and production monitoring through field surveillance might be considered adequate,” the panel said in its report.

RIL, which has over the past few months bickered over the scope of a second round of audit of its spending on the flagging KG-D6 fields, has two CBM blocks in Sohagpur, Madhya Pradesh, for which it has been seeking a price of almost $13 per million British thermal unit.

Even for conventional oil and gas blocks, the panel said, CAG should carry out audit “with a period of two years” of closing of annual accounts.

RIL had contended that the government can appoint an auditor, including CAG, to verify its expenses within two years of the spendings, as had been provided in the production-sharing contract (PSC). Last month, it agreed to allow CAG to carry out scrutiny for 2008-09 and 2009-10, though it was time-barred.

“Audit by CAG may be carried out within a period of two years of the financial year under audit, as specified in PSCs,” the Rangarajan panel said. “Further, where investment is huge (a $1 billion threshold may be adopted), a suitable mechanism of concurrent audit may be considered,” it added.

It upheld RIL’s contention that CAG audit should be in line with Section 1.9 of the PSC that provides for only a financial scrutiny and not a commentative performance audit that can question technical decisions.

“Audit by CAG under Section 1.9 of the PSC should be prior to performance audit of the (petroleum) ministry, so that corrective actions emerging from CAG audit could be taken by the government in order to protect the government revenue,” it added.

Source: PTI

December 26, 2012

Cash transfers will lead to better functioning of oil and gas markets: R S Butola



Three months after the government decided to cap the number of subsidised liquefied petroleum gas (LPG) cylinders and allowed oil marketing companies to raise diesel prices, Indian Oil Corp is finding the going tough. In an interview withJyoti Mukul, the company’s chairman and managing director, R S Butola, says the cap and direct cash transfer are indicators of better-functioning markets. Edited Excerpts:



Do you think capping the number of subsidised LPG cylinder was a good decision, given that the government could even have gone for a price hike?

The government’s decision on capping was in view of the larger macroeconomic scenario. Last year, we had an underrecovery of $26 billion. Of this, $16 billion was on diesel and the rest on superior kerosene oil and LPG. Global LPG prices have shot up. It is the only commodity that is imported. We have surplus of all other products. The burden on account of LPG alone is going up. The principle of pricing the product at the market level would help, irrespective of whether the number of subsidised cylinders is capped at six or nine. The sheer notion of either having market price or limited subsidy puts resources to an optimal use. If something is available cheap, there is no restrain. Capping and direct cash transfers are some indicators that enable better functioning of markets.


How prepared are oil marketing companies for cash transfer of LPG and kerosene subsidy?
For kerosene, pilots are being done. In 51 districts, we are working out the mechanism for LPG. It is a challenge. The idea in these districts is that LPG cylinders are sold at market rates and the price differential is credited in the accounts of the consumers who have taken delivery. We hope the subsidy should be directly passed on by the government. We do not want any burden on us. We have requested the government. Since we would be selling at market price, the government should directly credit. In the case of kerosene, we have done the funding. We transferred the differential of market and subsidised rates to the state government for those to be credited to consumers’ bank accounts. But that’s not our job. The grant would be given by the government for the first time.


Do you see diesel deregulation or differential pricing happening in the near future?
Diesel deregulation is a big issue, and difficult, too. But, going forward, the government would have to think what could be done on that. Differential pricing will be difficult in a big system. But those who need to be subsidised should get this directly.

The government is revisiting the underrecovery figures and there is also a suggestion that the pricing for companies should be cost-plus. What are your views on this?


Till the administered pricing mechanism was dismantled, it was cost-plus. We would be happy if we are given cost of production plus a certain assured rate of return. After the administered price mechanism, the whole debate was around efficiency and that the company should be given market prices — the reason why we invested in expanding marketing facilities. The industry spent Rs 32,000 crore when we moved to Euro IV (emission standards).


There have been concerns on refining margins. In which direction do you see those going?
The refinery industry is in a serious problem. One is a problem of subsidy, but our major problem is that refinery margins are shrinking. Refinery margin may be good in an odd month, but the prognosis is that these margins are going to be under pressure. Consumption of petroleum products is coming down and even in China, the demand is not growing. In India, except for diesel, demand is not growing in respect of other petroleum products. ATF (aviation turbine fuel) demand has also fallen because, the industry is not consuming. Worldwide, margins are depressed. It is a worrisome game for refinery companies. On top of that, the impact of subsidy and interest is aggravating our problems. We are doing everything possible to reduce our cost. Unfortunately, all our refineries are land refineries. We need to invest so that we can process heavier crude. We invested sufficiently in the past to process high sulphur crude oil. We have to invest to the extent it is possible and till it is viable. Our refineries are at par with the best and all this happened because the refinery industry was doing well. Last year was bad because of entry tax. Many refineries in Europe and America have shut.

We declared 14 cents as refinery margin for H1. We have approximately slightly less than $3 operational cost, including depreciation. The impact of interest is $1, so we need refinery margin of $7-8 but as against that we had only 14 cents. While we are doing our best, we hope if 100 per cent subsidy is provided, we should be able to manage our affairs well. The impact of interest is beyond us.

What kind of investment plan has Indian Oil chalked out?
This year, we are investing Rs 10,000 crore. A major portion of this will go to the Paradip refinery, for which we have tied up funds. During the 12th Plan, we will be investing Rs 56,000 crore. Some additional funds would be required if we go for acquisition but it looks difficult as of now, due to heavy borrowings.


When are you likely to complete the west coast refinery?
It is at the concept stage. There is a group within the company working on this. It will come up only in the 14th Plan. Although there is a surplus of petroleum products right now, post 2019-20, there will be a need for another refinery. Indian Oil refineries are land-locked, which gives us the advantage of being closer to market, but there is the disadvantage that we have to incur costs to move crude oil. This also impacts the ability to push heavy crude. We realised that in the east coast, we will have Paradip but in the west coast we do not have any refinery. The nearest we have is the Gujarat refinery. The west coast refinery will be a modern refinery, capable of processing any crude and will be feeding Indian as well as export markets.


Another major project on your agenda is the regasification terminal. When is that expected to come up?
We have got clearance from the government of Tamil Nadu to set up a terminal at Ennore. We have also got fiscal incentives from the state. It will be a joint venture with the state government but we will have the major equity. Environment clearance is being pursued. We are in talks with the Ennore port for land allocation. Once that happens, we will go for award of contracts. The state government will be the anchor partner, but we are open to other partners as well. Any partner should be able to help us in sourcing gas. We will invest Rs 4,500 crore.


How do you plan to get over the issue of tying up gas and also selling imported gas in the domestic market since it is expensive?


We are not in a hurry to get into long-term contracts. The current LNG market is volatile. In the given circumstances, we either first tie up the source of gas and then spend money on construction or go in for construction rather than taking the risk of signing the gas sales purchase agreement right now. The structure of pricing will change over a period of time. We will adopt the second option even if we do not tie up long-term; we will go ahead with construction and maybe tie up a small quantity. We had earlier expected the terminal to come up by December 2015, but (now) it seems it will come up by 2016. It will have a five million tonne capacity initially, with the option raising it to 10 mt.

As far as sale of gas is concerned, we are the largest marketing company. Gas buyers are customers to whom we are supplying fuel oil and naphtha. Besides, we market our share of gas from Petronet LNG Ltd. Our CPCL refinery also uses natural gas and in Tamil Nadu, there are other industrial units who need gas. Price is an issue, but marketing will not be an issue. We have an MoU (Memorandum of Understanding) with customers who have expressed interest.

Source: Business Standard



December 25, 2012

Rangarajan panel moots new plan for gas pricing


A committee headed by C Rangarajan, the head of the Prime Minister's Economic Advisory, has suggested linking the price of domestically-produced natural gas to international benchmarks such as US' Henry Hub as well as the average wellhead price at which India imports gas, government officials said. 

"The formula balances interests of gas producers and consumers. Produces should have enough incentive to produce, but they should not be allowed to exploit consumers because gas is a scarce commodity," said an official with direct knowledge of the matter. 

The government had asked the committee to examine the pricing of gas after Reliance Industries BSE -0.36 % and its partner BP wrote to the Prime Minister earlier this year, demanding that they be allowed to charge market price of KG-D6 gas. 

RIL is selling gas at the government-determined rate of $4.20 per unit, which is about one-fourth the price of imported gas. The panel has suggested that a formula should be used to fix prices of domestically produced gas till a competitive gas market comes into being in India. 

The panel accepted the principal of linking domestically produced gas rates with the price of a substitute, imported liquefied natural gas (LNG) but only after excluding liquefaction, transportation and re-gasification charges. 

The committee has ruled out any immediate change in the price of natural gas produced from the Reliance-operated D6 block because the government had fixed its gas price for five years, a period which will end in March 2014, officials with direct knowledge of the matter said. 

"The formula would apply prospectively and not for prices already approved," a source in the committee said. The committee has submitted its report to the Prime Minister. The panel's suggestion is in line with the oil ministry's thinking, a ministry official said. 

"Former Petroleum Minister Murli Deora had rejected RIL's demand to raise gas price in October 2010 and the new Petroleum Minister Veerappa Moily has already said that no revision of gas price could be considered before 2014," an oil ministry official said. 

The PM's office may seek the oil ministry's view on the report before placing it before the cabinet or the empowered group of ministers set up to decide on gas pricing, government officials said. 

The PM had set up the panel to examine gas pricing besides reviewing the existing contracts following adverse comments from the Comptroller and Auditor General of India. 

The CAG had said last year the oil ministry had not enforced contracts effectively and had overlooked lapses that adversely impacted the state's share of profit from fields. 

Source: Economic Times