Full statement By Reliance Industries

Reliance Industries Ltd. (RIL) has noted the comments made by Shri Anil D Ambani with the care and concern they deserve.

RIL welcomes this statement, and hopes that it is a positive change in the negative, calumnious and malafide campaign launched by R-ADAG against RIL. RIL believes that there is no contentious issue in the world that cannot be resolved satisfactorily through mutual dialogue, provided the proposal for reconciliation is anchored in good and honest intentions RIL has always maintained that the dispute under litigation is not merely a family matter, as Shri Anil Ambani’s statement once again tries to make out to be. Vital national interests in terms of securing government’s revenue from the natural gas, the government owns and GoI’s sound policy framework for promoting India’s energy security, are at stake. The interests of RIL’s shareholders are also at stake. RIL does not belong to a family. It belongs to shareholders, to those associates who have made this journey possible and most importantly to the nation, India.

Issues which arise out of a decision of the Bombay High Court transcend any private differences between two brothers or two corporate entities, can now only be decisively resolved by a decision of the Highest Court. RIL sincerely hopes that any overture for rapprochement to end acrimony are sincere and in no way related to the ongoing hearing of the case in the Honorable Supreme Court.

Sadly, the conduct of R-ADAG so far makes it difficult for RIL to believe that Shri Anil Ambani has had a real change of heart. For last many years, Sh. Anil Ambani has indulged in a malicious campaign against RIL and its chairman. The campaign reached its nadir in recent months through a vicious series of advertisements, unprecedented in India’s corporate history. RIL while denying all the false accusations has responded to this campaign with dignified silence.

What is both saddening and perplexing is that Shri Anil Ambani has yet again sought to communicate to RIL and its Chairman through the public domain
, whereas he could have easily contacted his elder brother directly. In order to demonstrate that his intentions behind the latest overture are bonafide, we urge Shri Anil Ambani to put his sentiments into actions. We can now only hope, that the deeds of Shri Anil D Ambani and his associates are reflective of the emotions expressed in the statement. In the last 48 hours itself, Shri Anil Ambani & R-ADAG have made allegations against the Group and its directors which are not only untrue but increasingly hurtful. Hopefully this way of engagement shall also change. On its part, both the RIL Chairman as also RIL have always wished him well and will continue to do so.

Finally RIL welcomes this positive indicator and will not be found wanting in responding to them constructively.

Reliance Industries Limited (RIL) is India's largest private sector company on all major financial parameters with a turnover of Rs. 1,50,771 crore (US$ 29.7 billion), cash profit of Rs. 21,566 crore (US$ 4.3 billion), and net profit (excluding exceptional income) of Rs. 15,607 crore (US$ 3.1 billion) as of March 31, 2009.

RIL is the first private sector company from India to feature in the Fortune Global 500 list of 'World's Largest Corporations' and ranks 103rd amongst the world's Top 200 companies in terms of profits. RIL is amongst the 30 fastest climbers ranked by Fortune. RIL features in the Forbes Global list of the world's 400 best big companies and in the FT Global 500 list of the world's largestc ompanies. RIL ranks amongst the 'Worlds 25 Most Innovative Companies' as per a list compiled by the US financial publication-Business Week in collaboration with the Boston Consulting Group.

Source: Economic times
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Gas MoU not binding on company, says RIL

Reliance Industries (RIL) on Tuesday told the Supreme Court that its chairman, Mukesh Ambani, had signed a memorandum of understanding (MoU) containing provisions promising supply of natural gas to the Anil Ambani Group in his personal capacity. The company’s board of directors had not seen the MoU and had not approved it, an affidavit filed by RIL claimed, an assertion backed by seven company directors who filed separate written statements.

The affidavit goes on to say the provisions of the MoU were not binding on RIL. Mukesh Ambani’s firm sought permission of the court to place the minutes of two board meetings of August 2, 2005, and August 5, 2005, on record to support this claim.

According to the MoU signed in 2005, as part of a settlement dividing the Reliance empire, RIL is to supply 28 million standard cubic metres per day (mmscmd) of gas to RNRL at $2.34 per million British thermal unit (mmBtu). This price is at a 44% discount to the price of $4.20 per mmBtu fixed later by the government for sale of gas by RIL to some power and fertiliser companies. RNRL says it has a binding contract for supply of gas at a price of $2.34. RNRL officials said they would not be able to comment as the matter was sub-judice.

The point about the Ambani family members signing the family MoU in their personal capacity is only one among a litany of arguments put forth by RIL in response to a special leave petition filed by RNRL in the Supreme Court.

RIL also moved a separate application in the apex court on Tuesday to place on record the ‘Listing Particulars’ dated August 23, 2006, of RNRL’s Global Depository Receipts (GDR) which are listed in the Luxembourg Stock Exchange.

RIL said the information contained in the ‘listing particulars’ strengthened its case in the dispute with RNRL over supply of KG gas. “RNRL has sought to create an impression in the SLP — in the apex court on supply of KG gas from RIL at discounted price — that the benefits of the lower gas price will be passed on by RNRL to the consumers of electricity, i.e. the common man. But the contents of the listing particulars reveal that RNRL will sell the gas to its affiliated power companies at prevailing market price,” said RIL, in its application.

“At such market price of gas in India, RNRL would make a windfall trading profit exceeding Rs 21,000 crore per year aggregating to an astronomical amount of Rs 3,50,000 crore over 17 years without RNRL making any investments whatsoever,” the affidavit alleged. “If RNRL’s demands were granted, the government would lose large sums of money in profit sharing, royalties and taxes. RNRL would reap a windfall at the expense of the government and RIL and its shareholders,” said RIL in the affidavit.

RIL also said it is merely a contractor and bound by the government’s policy on gas and it thus could not sell gas to RNRL at $2.34. “Marketing freedom under the PSC (Production Sharing Contract) is not absolute, but rather circumscribed by the provisions of the PSC and the policies and directions of the government,” said RIL in its affidavit. It added that “what RNRL demands in this case is contrary to the provisions of the production Sharing Contract — PSC entered into between the Union of India and RIL — and the gas utilisation policy promulgated and the consequent directives of the Government of India”.

It further said, “RNRL seeks to obtain a lion’s share of the KGD6 gas despite the fact that it has not built a single power plant since the de-merger and the ADAG Group owns just one gas plant which consumes a minuscule quantity of gas”.

The apex court is scheduled to take up the issue on October 20. The ministry of petroleum and natural gas had moved the apex court seeking quashing of a Bombay High Court order directing RIL to supply gas to RNRL at $2.34 per mmBtu. RIL had also moved the Supreme Court challenging the Bombay High Court order that asked it to supply 28 mmscmd of gas to RNRL at $2.34 per mmbtu.

RNRL, on the other hand, approached the apex court against a part of the Bombay High Court judgment. RNRL had said the high court while directing that the Gas Supply Agreement ought to be amended should have given final and effective directions for amendment of such agreement to make it bankable.

Source: ET
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RIL justifies levy of marketing margin on gas sale

Reliance Industries has justified the levy of marketing margin on gas sale saying it was essential to cover risks and costs incurred in marketing of gas.

"The marketing margin being charged by RIL on sale of KG-D6 gas is fair and justified consideration for the risks and costs undertaken in the GSPA including such risks and costs beyond the delivery point," RIL President (Gas Business) wrote to Power Secretary H S Brahma.

Terming as illegal the market margin, Anil Ambani group firm Reliance Infra had refused to pay the levy prompting RIL to issue a notice for suspension of fuel supply for "default". NTPC has sought to know whether the margins levied by RIL had government's approval.

RIL said the USD 0.135 per mmBtu marketing margin over and above the price was to cover risks like sellers liabilities in case of non-supply, customers drawing less than their quota, non-payment of dues and settlement of disputes and claims on quality, quantity or terms of the GSPA.

While marketing margin is a charge for creation of market and servicing sale contracts, RIL had undertaken extensive activity to identify customers, execute and manage gas sales and purchase agreements (GSPAs), gas sales planning, daily gas sales operations, gas accounting and invoicing and collection, Sharma wrote.

Reliance Infrastructure had from this month stopped paying the levy to RIL, leading to the Mukesh Ambani firm RIL slapping a discontinuation notice.

Other gas marketers like state-run GAIL India also charge marketing margin. It charges USD 0.18 per mmBtu margin on sale of regassified-LNG and about USD 0.12 per mmBtu for gas from fields like Panna/Mukta and Tapti and Ravv.

"GAIL is negotiating to increase the marketing margin these fields to about USD 0.18 per mmBtu to bring it at par with marketing margin it charges on sale of R-LNG," Sharma wrote.

RIL said it had in its application to the government for approval of the price of KG-D6 gas had indicated that marketing margin would be charged separately to cover costs and risks in sale of gas.

"It has also been clarified by Petroleum Ministry that marketing margin has to be discussed and settled between seller and buyer of gas in settlement of the terms of the Gas Sales and Purchase Agreement," Sharma wrote.

Quantum of marketing margin is agreed between seller and buyer of gas based on the cost and risks perceived under the PSC.

For KG-D6 gas, RIL had initially proposed USD 0.12 per mmBtu as marketing margin but when customers sought multiple changes to increase RIL's risks and liabilities, the levy was raised to USD 0.15 per mmBtu.

The same was again discussed with buyers in the fertiliser sector (who were given the top most priority to receive KG-D6 gas) and the Department of Fertilisers and finally a marketing margin of USD 0.135 per mmBtu was agreed with the buyers, it added.

Source: ET

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RIL speaks out on the gas war

This is KG-D6, the deepwater block in the Bay of Bengal, which has the potential of reducing India’s fuel import bill by 20% or Rs 55,000 crore. Seven years ago, in 2002, Reliance made the largest gas discovery here. This gas field can produce 550,000 barrels of oil equivalent or nearly 40% of India’s current oil and gas production. Spread across 330 square kilometres, the reservoir of KG-D6 is located 2 kilometres below seabed, which is another 1.2 kilometres below sea-level, far too deep for humans to access.
So, almost straight out of a sci-fi movie, high precision operations are carried out by robots. A single mistake, as simple as that of a screw or a valve being ill-fitted, can result in a loss of billions of dollars. While Reliance has won kudos from the world’s E&P industry, the commissioning production in six and a half years from the time of discovery versus the average of nine years and at a cost that is the third lowest in the world.

Not too many people know, this platform was actually preassembled in Morgan City in Louisiana and Dubai before being installed here. With no in-house expertise, Reliance had to go in search of global talent. Soon 200 consultants from 12 locations around the world were on board for engineering, procurement and construction. Almost 18,000 expats have worked at the KG-D6. None of this comes cheap. Neither do the 85 marine construction vessels, and 4 deepwater rigs that were deployed by Reliance.

For instance, this rig costs USD 1 million a day and USD 1 billion over five years. Reliance says it realised the capex would have to be hiked and that too at a time when commodity prices were spiralling. Anil Ambani has publicly questioned Reliance’s capex claims and has even asked the Prime Minister’s Office to order an audit by the Comptroller and Auditor General of India or the CAG.

So, as I make my way to the floating production storage oil vessel where oil is collected before being shipped out, I talked to PMS Prasad about the charge of inflating the capex.

Prasad: Our drilling costs have gone up by 300-400%. But that’s not the only thing, even the engineering services costs, per man hour costs have gone up USD 100-200 or even more. So the engineering man hours and some of the installation crew, we pay them USD 2,000 to 2,500 a day and this was not the kind of rates that were being paid in 2003-04 that is simply because the world didn’t have enough experienced people to do this kind of work. So people were scarce and we had to attract them to come here by incentivising them and by paying higher salaries.
In addition, all the installation vessels, there are very few installation contractors in the world of the quality that we needed and we have employed some of the best. On this field we had Allseas, we had Technip, we had Helix. These are some of the best installation contractors in the world. Technip is from France, Allseas is from Netherlands and Helix is from the US, and to get them to work here and considering the weather vagaries and the downtime that we have had because of the weather.

Q: Didn’t you factor all that in 2003?
A: We didn’t know much about this in 2003 and unfortunately just one year after the discovery we didn’t know much and we could not foresee a kind of increase that was going to happen. In 2003, we thought drilling rig and services per day would cost maybe USD 225,000 to USD 250,000 a day. But in reality when we ended up paying a million dollars a day, we were shocked. The same thing the peak of the commodity cycle that happened between 2005 and 2008, still prices went up and everything went up, steel prices, installation expert costs, engineering costs, installation spread costs and the fact that the steel costs went up by about 100%. So, we were kind of caught in this upward spiral.
So, the costs were not under our control and I think this was a universal phenomenon. Why only talk about Reliance. Look at the other comparable field costs. Everybody had to go through the same price spiral. But even today, though the commodity prices have somewhat softened, but the services cost we still pay USD 1 million a day for drilling rates. They have not come down.

Q: You made the largest gas discovery back in 2002. You have constructed this engineering marvel. But do you think that since the commissioning, how do you feel about the fact that it has been a little hijacked by the entire controversy? Has that overshadowed the engineering marvel?
A: In fact if there is any regret, that is really my regret. We think that we have built a great asset and as you rightly said it is an engineering feat and something that the country and the E&P industry in the country should be proud of. It has added so much value. Unfortunately, it is this avoidable controversy that kind of overtook all the glory and the shine off. I am really unhappy about this because this is not the right level or the right kind of recognition that all the Indian professionals that having worked very hard and created something like this, they don’t get recognised. I am not happy about it, but that is the way life is.
So, I do believe that once the controversy blows over one way or the other that there will be recognition and I am happy that atleast people like you are coming and seeing this. This way atleast there is an opportunity for us to showcase this to a much larger audience who otherwise would not know about this. The fact that we have doubled the production of the gas in the country goes unnoticed because of the media controversy.

Q: So, how much are you producing today?
A: Right now about 36-37 million cubic metres. We had started production on April 1 and we are about 4 months into production. Check any other comparable field start-ups, in four months I am sure they would not have reached the near 50% capacity that we have managed. We are very happy about the smooth ramp-up in production. This is something that speaks for the quality of the engineering and equipment and the installation that has been done.

This is the onshore terminal, built on part of the 200 acres belonging to Reliance. It is here in this giant facility that the gas is separated from its impurities. This is the central control room or the nerve centre of the KG-D6. Since everything is automated, only 250 people are required at any given time to manage all offshore and onshore operations.

Gas production at KG-D6 commenced in April this year. After traveling through all the major facilities I felt the time was right to ask Prasad when production would be ramped up from the current 37 mmscmd to the 80 mmscmd. After all, another allegation made by Anil Ambani is that Reliance is hoarding gas and creating an artificial scarcity.

Q: When are you going to hit that 80?
A: We are ready to produce more than 60 million and we are waiting for the government to give us more linkages to customers. Right now, they have given us linkages up to 40 million. We have signed all agreements with National Thermal Power Corporation (NTPC). We are also almost delivering gas to people except one or two customers like Essar and Gail who will be taking gas probably next week. Dabhol, Ratnagiri Gas and Power Pvt (RGPPL) would start taking gas from October 1. But otherwise we are almost there at 40 million. So, now we are eagerly waiting for the new EGoM to be formed so that the government can give us more linkages.

Q: Is the government giving you a timeframe? Do you lose money if you do not ramp up?
A: We do, a lot. The Rs 35,000-36,000 crore that we have invested is Reliance’s money. It is Reliance’s shareholders money, the money that Reliance borrowed from the banks and if we are not able to earn revenues from these investments, it is a loss of present value.

Q: One of the allegations that you are purposely not ramping up production, you are holding gas, you are artificially creating a scarcity, what are your thoughts on that?
A: I can only laugh because no-one after having invested this much money would want to not produce. For the next five years, the gas price is fixed. So, how does it help me? Secondly, I have to repay my debt, so how does it help me not to get the revenues today. The only reason that we are not able to produce more is because of the procedural delays in forming in new EGoM and then giving us more allocations.

Q: Because of what the government is not being able to fastrack, you are not able to ramp up the capacity?
A: Absolutely. So in a light of view, it is the government which decides to hold the gas not Reliance.

Q: The other thing which has gone against you in the recent few months has been the clarification that has come that now seven year income tax holiday does not stand, what does that mean for you? What kind of a big hit you will take?

A: It is a big hit because in the production sharing contracts and also in other supporting documentation, it is very clearly mentioned that both oil and gas are eligible for tax holiday. We can give a new definition to the mineral oil just for the sake of 80IB and then say, this doesn’t include gas. But I think it is unfair and we have been made a promise based on which we all took so much risk and then put in these big investments and then when the investments are about to fructify, saying that the gas is not entitled to a tax holiday, I think is a bit unfair.

Q: Can you give us a broad range, what could it mean for Reliance Industries?
A: It would be of the order of a couple of billion dollars over seven years, but I need to re-check the numbers. You are a financial channel, so you love to have the numbers but I hate to give out numbers because these are very sensitive information.

Q: But if you don’t get that income tax holiday, would you consider arbitration? What would be the next step?

A: Yes, arbitration is the last resort but right now the government has said that since this matter is subjudice, let the courts decide. So, we will wait for the courts to decide in some of the pending issues. But if that decision doesn’t come through, then we do have to look at other means including arbitration.

Q: Are they inviting you for partnership overseas, for new projects?
A: I can only say that if there is an opportunity it has to be good for both. So I am sure some of them may want to partner us here and equally we may want to partner them but then that is a different discussion. Right now, we are just focusing on getting the production.
Q: Is there anything on the table?

A: I cannot talk about this now. It is not that there is anything on the table. Opportunities do come all the time but then they need to be good for both. What is not good today may be good tomorrow or what was not good yesterday may be good today.

Q: After commissioning the - if you are looking to sell stake in six of your overseas blocks, which I understand is part of the regular farming out of stake and things like that but not looking to expand also at the same time?

A: The upstream industry typically people hold – it is a very rare thing that we have done here holding 90% participating interest. Typically they are all around 30-40-50%. So in our overseas blocks that is what we are trying to do. We are trying to reduce our exposure and be under industry guidelines of around 30-50%. As far as the Indian blocks are concerned, we will look at that opportunity at the right time but at this point of time, we are focusing on stabilizing the operations and increasing the production and the reaching the 60 and maybe some time later 80 million cubic meters.
Q: While you are stabilizing these operations, it also happens to coincide with the first phase of NELP VIII. Does NELP VIII excite you?

A: NELP VIII is a good opportunity but at the same time, I have to look at my portfolio. How much of risk appetite that I have. When you look at a portfolio of all your properties and assets, how many oil explorations, how many discoveries you have that need to go into development and how many producing properties. You need to have a fair balance between the producing properties, between the discoveries that need to be developed and the rank exploration purpose. We already have a lot of exploration properties. So our portfolio today is biased towards exploration, so we need to get more discoveries and discoveries into production.

Q: We might not see you bidding at NELP-VIII?
A: No, not that way. We will selectively in NELP-VII. I am waiting for the assessment from my geoscientists. Once they give their assessment, we will look at it how does this fit into our portfolio in terms of the risk exposure that we are willing to take and then make that decision. But I have never said that we will not bid for NELP-VIII. We will certainly look at the NELP-VIII properties.

http://www.moneycontrol.com/news/business/exclusive-ril-speaks-outthe-gas-war_413881-3.html
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RIL on its KG-D6 capex increase

PMS Prasad counters the allegations made by the Anil Dhirubhai Ambani Group (ADAG) and clarifies RIL’s stand. Prasad countering ADAG’s allegation, said that the capex had not been inflated.

Explaining the reasons behind the fourfold increase from USD 2.47 billion in 2003 to USD 8 billion, he said, “The drilling costs have gone up by 300-400% but that’s not the only thing. Even the engineering services costs per man, has gone up to USD 150-200 or more. So we pay USD 2,000 to 2,500 a day to some of the installation crew. This is not the kind of rates that were being paid in 2003-04. That is simply because the world didn’t have enough experienced people to do this kind of work. And we had to attract them to come here by incentivising them and by paying higher salaries.”

“In addition, all the installation vessels, there are very few installation contractors in the world of the quality that we needed and we have employed some of the best installation contractors of the world from France, Netherlands and from the US and to get them to work here and considering the weather and the downtime that we have had because of the weather,” he added.

Source: Money control

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RIL says has lost $400 mn due to delay in gas use

Mukesh Ambani-led Reliance Industries Ltd (RIL) says it has suffered a $400 million (Rs 1,960 crore) revenue loss since May this year and continues to take a hit of $100 million (Rs 490 crore) per month by keeping the gas production from its D6 gas block in the Krishna-Godavari basin lower than its potential.

RIL needs government approval to sell its gas. The company, whose fortunes are tied to the government's gas use policy, currently has the potential to produce over 60 million standard cubic meters of gas per day (mmscmd) from its KG-D6 gas block but is producing 36 mmscmd. Government has allocated 40 mmscmd to key sectors like power, fertilisers and steel.

We have been suffering a lack of demand since May and at present, we are producing 60 per cent of what we can produce from the block," RIL's executive director P.M.S. Prasad, who was recently appointed to the company's board, told Hindustan Times.


Analysts say that the government may be dragging its feet on account of RIL's court dispute with Anil Ambani's Reliance Reliance Natural Resources Ltd and public sector NTPC over the supply of 40 mmscmd of gas.

Prasad said the interest burden was mounting. "We had a certain schedule for repayment of debt, which will now get deferred and we will have to pay $17-18 million per month higher as interest cost," he said.

RIL's internal target is to reach 80 mmscmd by December, but it could stretch to March or beyond on account of uncertainties, he said.

Reliance Industries claims that it already has 25 to 30 customers from that are ready to buy up to 82 mmscmd gas. It also has an internal demand for 17 mmscmd.
Source:http://www.tmcnet.com
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RIL has strategic partners for oil blocks

For good blocks we have partners

On the change in strategy for future bidding under NELP
Perhaps we went too fast in completing KG-D6, unlike other multinational companies. We have realised that it is better to have stakes along with other joint venture partners to be at peace than to take huge risk and feel helpless at the end. So under NELP-VIII, if we can identify good blocks, we will go in partnerships and may not stress for the role of an operator.

On potential partners

We have been in talks with various companies. If there are good blocks, we are ready with partners.

On new greenfield projects

We are waiting for the new fertiliser policy and are very keen to set up a gas-based fertiliser plant. Whether it will on KG-D6 gas or any other gas or even in India are decisions we still need to firm up. But yes it will be a large scale project.

On overseas asset acquisition strategy

Now we have come off an asset building program and already have a number of exploration blocks in various countries. In order to balance our portfolio, we are looking at discovered assets which would go into production and need capital. Producing assets are something we are always looking at but those available are more of gas than oil. We are looking at the rights assets.

On countries on the radar

We are looking at a decent sized oil and gas assets in North and South America besides scouting for opportunities in Canada. Gulf of Mexico and Brazil have been on our radar for long
Source: Hindustan times
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Reliance Losing $100 Million in Gas Sales a Month Amid Lawsuit

Reliance Industries Ltd., India’s most valuable company, said it is losing $100 million of sales a month from the nation’s biggest gas field because of a government delay in allocating buyers for the fuel.

Reliance has been producing 60 percent of the 60 million cubic meters daily capacity in the KG-D6 field since May, P.M.S. Prasad, president of the company’s oil and gas business, told reporters yesterday at the field in the Bay of Bengal. Reliance needs government approval to sell the gas.

The company, controlled by the world’s seventh-richest man Mukesh Ambani, is fighting a lawsuit over output from the field with Mukesh’s estranged younger brother Anil Ambani. Reliance’s earnings may be affected by the limited output as the government awaits a resolution of the suit before naming additional buyers, said Deepak Pareek, a Mumbai-based analyst with Angel Broking Ltd.

“The government may be going slow on allocating additional gas because half of the peak output is under litigation,” Pareek said. “Reliance’s estimated earnings may be hit for a quarter and it could be longer till the court decides in its favor.”

Reliance shares fell 0.3 percent to 2,140.85 rupees at the end of trading in Mumbai on Sept. 11. The stock has gained 74 percent this year, giving the company a market value of $69.5 billion. The key Sensitive Index of the Bombay Stock Exchange has risen 69 percent since January.

Cost of Debt

The cost of paying interest on 280 billion rupees ($5.7 billion) of debt raised to develop the field is increasing because Reliance is unable to repay the borrowings as rapidly as it would like and cut interest costs, Prasad said.

“We would’ve liked to repay the loans quicker,” he said. “We can’t and that is increasing our interest costs. We will service the debt, not default on it.”

Through the 11-year life of the field, Reliance aims to invest $8.8 billion, of which it has spent about $5.8 billion, Prasad said. Beside the debt raised from local and overseas lenders, Reliance will use its own money, he said.

The KG-D6 field may hold as much as 9.2 trillion cubic feet of gas, according to Reliance’s partner Niko Resources Ltd., based in Calgary, Canada.

The government designated fertilizer and power producers as priority customers for the fuel from the field. India’s Oil Minister Murli Deora said on Aug. 31 he asked the prime minister to form a new panel of ministers that will decide the additional allocation of natural gas from the KG-D6 field, following national elections in May.

“We hadn’t expected we’d be held up from producing,” Prasad said. Reliance is also buying liquefied natural gas for its own needs because the company hasn’t been allotted any gas from the field, he said.

Reliance is producing just 37 million cubic meters from the gas field, Prasad said yesterday.

Price Accord

Anil is trying to enforce a 2005 agreement requiring Reliance to sell natural gas from the field off the country’s east coast to his Reliance Natural Resources Ltd. at 44 percent less than the price set by the Indian government.

The accord also distributes all future gas from the KG-D6 basin between the brothers, with Reliance Industries getting 60 percent of the fuel, according to Oil Secretary R.S. Pandey. The agreement between the brothers requires Reliance Industries to sell 28 million cubic meters of gas per day at $2.34 per million British thermal units for 17 years to Reliance Natural.

Reliance Industries has said gas from the field in the Krishna Godavari basin can’t be sold at less than the $4.20 per million Btu set in 2007 by the government, which controls prices of the fuel.

Pipeline Constraints

Efforts to reach peak production of 80 million cubic meters may also be deferred to April next year because of pipeline constraints, Prasad said yesterday. The company aims to drill wells in six months in locations such as Oman, Kurdistan and East Timor, he said, adding it may take five years for Reliance to recover its expenditure on the KG-D6 field.

Production at the KG-D6 field, which started in April, may increase India’s oil and gas output by 44 percent and help save 10 percent of the country’s oil import bill. The development of areas in the Bay of Bengal will offset shrinking supplies from ageing domestic fields that force fertilizer-makers and power producers to use more expensive naphtha and imported gas.

Reliance currently produces 12,000 barrels of crude daily from the field and plans to raise output to as much as 30,000 barrels a day by December, Prasad said. It also plans to produce as much as 9 million cubic meters a day of gas from the area.

India is betting that gas output from the KG-D6 field will help attract investors for its biggest auction of 70 exploration blocks, for which bids close Oct. 20.

Source:http://www.bloomberg.com/

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Private disputes over national property

The most significant aspect of the recent Bombay High Court ruling on the sharing of gas from the KG basin between RIL and Reliance Natural Resources Ltd (RNRL) is that the judges completely refrained from making any value judgement on the government’s formal claim before the court that “the Appellant and Respondent cannot settle between themselves how gas, which is a national asset, to be utilised for the welfare of the nation, is to be distributed...”

The high court merely examined the legal validity of the memorandum of understanding (MoU) between Mukesh Ambani and Anil Ambani on how gas from the KG basin is to be shared between RIL and RNRL as per the family settlement. It could be argued that the court’s mandate was limited to examining the MoU arising from the family settlement after the group assets were allocated to the two brothers under their mother’s guidance.

However, common sense would tell anyone that the bigger question which perhaps the court deliberately did not go into was one of whether a national and sovereign resource can be a subject of a commercial agreement between two private parties.

If one were to resort to some exaggeration, it is a bit like two men deciding to share the ownership of Taj Mahal in Agra and then they go to court to determine the validity of the price at which parts of the Taj will be sold by one to another!

Now, even if the high court did not go into the paramount question of whether the Ambani brothers have the unmitigated right, through a private agreement, to share a substantial portion of gas from the Krishna-Godavari basin, the government will soon have to publicly take a call on this aspect of the controversy. This has serious implications for the credibility of the UPA government. The President’s address to Parliament has clearly outlined strong governance as a major plank on which the UPA promises to run this country for the next five years.

How the government, through a strong and credible policy and regulatory framework, deals with national resources such as gas, spectrum, iron ore, coal, etc., is something the people of this country will watch carefully.

Coming back to the KG basin gas controversy, it is useful to recall what the government has formally stated before the Bombay High Court. The court order records all the claims made by the government.

In respect of the gas from the KG basin, the government has said: “It is not the property of the Appellant or Respondent and any understanding arrived at between them is not binding on the government of India. The gas has to be distributed in terms of the EgoM approved gas utilisation policy.”

Summing up the government’s stand in the court, the additional solicitor general stated in no uncertain terms that:

a) The government of India continues to be the owner of the gas till the delivery point;

b) The gas is to be produced and utilised in terms of the gas utilisation policy;

c) The government has a dominant role in the matter of approval of gas prices; and

d) By private negotiations, no party can decide how the natural resources which are national assets are to be dealt with.

Since none of these strong assertions by the government was treated by the Bombay High Court as relevant to the dispute between RIL and RNRL, the UPA government will be left with no choice but to assert its sovereign claim over the gas resources in the KG basin. Clearly, the high court chose not to go into the more difficult question of whether the RIL and RNRL had the unmitigated right, through a private agreement, to share gas from the KG basin in a 60:40 ratio at all.

Getting into the nitty-gritty of various agreements and their contestation in the court of law would be missing the wood for the trees. The real issue, and a legal-constitutional one at that, is — Can the government afford to compromise its publicly declared stand that private parties cannot settle among themselves the basic rights over a sovereign asset?

The whole commercial dispute over the sharing of Krishna Godavari gas is clearly assuming a new dimension. In his own typically muted manner, Union petroleum minister Murli Deora has said the government will fully defend its rights over national assets. The government is currently watching how the one-month period given by the courts to RIL and RNRL to arrive at a compromise over the pricing of gas unfolds. As one said earlier, the issue has now gone beyond pricing and other legal-technical issues.

The state may have to challenge the very basis of an MoU which cosily divides up large portions of national property among two entities. The government has already made its stand very clear in the high court. This stand will have to be reiterated even more strongly in the Supreme Court, as and when an appeal is made there. An ordinance can always be the last resort.
Source:ET
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What is the Krishna-Godavari (KG) basin?

As the name implies, this refers to the area broadly enclosed by the deltaic basins of the two major rivers in Andhra Pradesh Krishna and Godavari. It includes part of the Bay of Bengal into which these rivers drain.

The area has been identified as one of India's biggest oil and gas fields, several times the size of Bombay High.

Onland, the KG basin has an area of about 28,000 sq km, while the offshore area is estimated at 21,000 sq km till a depth of 200m and another 18,000 sq km between 200m and 3000m.

How is Reliance Industries involved in the KG basin?

Under the government's New Exploration and Licensing Policy (NELP), various blocks in identified oil and gas fields were offered to private operators on lease for exploration and production. RIL won the bids for 12 such blocks in the KG basin in 2000.

Under the NELP, private operators sign a production sharing contract (PSC) with the government, which sets out the terms and conditions under which they operate their lease, including the share of revenues that would accrue to the government.

The PSC for block D6, which is at the heart of the current controversy, was signed between RIL, the government and Niko, which is partnering RIL, in April 2000.

How is the Anil Ambani group involved?

When the Reliance group was still a unified entity with both brothers sharing management responsibilities, RIL had announced in 2003 that group company Reliance Energy Ltd (REL) would be setting up a gas-based power plant at Dadri in western Uttar Pradesh for which gas would supplied from RIL's KG basin production.

In 2005, however, the group broke up with each brother acquiring control of different business areas. While the oil and gas business went to elder brother Mukesh, Anil had control of the power business.

As part of the division of the group, RIL was demerged and Reliance Natural Resources LTD (RNRL) was formed to act as a conduit for the gas from the KG basin to REL.

All RIL shareholders were made RNRL shareholders, except that Mukesh's holding in the parent company was substituted by Anil in the new firm. Thus, RNRL was part of the Anil Dhirubhai Ambani group (ADAG).

What is the MoU often referred to?

In 2005, RNRL and RIL signed a memorandum of understanding (MoU) on the terms under which gas would be supplied for the Dadri project . This MoU specified that the price at which the gas would be supplied would be the same as the price at which RIL would supply gas to an NTPC project. NTPC had invited global bids for supply of gas in 2003 and RIL finally won the bid and was issued a letter of intent by NTPC in June 2004.

The price quoted by RIL in its bid was $2.34 per mmbtu (million metric British thermal units). So what’s the dispute about? RIL argues that the $2.34 per unit price is not applicable to its deal with RNRL for various reasons. First, gas prices had since the 2005 MOU risen sharply.

Second, it has not concluded a deal with NTPC on that price, since it had some issues pertaining to damages it would have to pay in case of failure to supply the agreed quantity of gas. Hence, it says, there is no NTPC price to be followed as per the MOU with RNRL. Third, it says under the PSC signed with the government, the government has the final say on the price at which it can sell gas to third parties and in fact can even dictate to whom the gas should be sold.

RNRL contests each of these claims. It argues that international gas prices have historically been much higher than Indian prices and so that can't be a benchmark . Further, the bid price for the NTPC project must be followed under the MOU irrespective of whether or not RIL and NTPC have finalized their deal. Finally, it maintains that the government only has the right under the PSC to fix the price at which gas will be valued for the purpose of determining the government's share of revenues from the project. RIL, it insists , is free to sell its share of the gas at whatever price it decides.

Where did the price of $4.2 per unit come from?

In May 2007, RIL invited bids from various gas users like power and fertilizer companies and on that basis arrived at a price of $4.2 per, which was then approved by the petroleum ministry as a market-determined price.

RNRL alleges that this was an eyewash and an orchestrated auction between small time users and that the ministry has been partisan towards RIL in the whole issue.

How did the government get involved?

When, after sustained pressure from RNRL, RIL sought approval of the government for the price of $2.34 per unit, the government refused. It said the price was not marketdetermined and in any case gas was a national asset and its allocation could not be decided by some private agreement between two brothers.

ADAG points out that the ministry's stance in the matter which suits RIL's current position — has been a feature since Murli Deora became the petroleum minister in 2006.

How are courts involved? Following RIL's refusal to supply gas at the terms specified in the MOU with RNRL, the Anil group company went to the Bombay HC seeking an order to RIL to follow the terms of the MOU.

The Bombay HC finally in June this year passed an order that RIL must renegotiate a deal with RNRL that would make suitable arrangements for supply of gas. It also added that the basis for such an arrangement must be the scheme of demerger agreed between the brothers in 2005.

RNRL has now gone to the Supreme Court seeking a direction from the apex court that the HC order on renegotiation should be set aside and RIL should be asked to supply gas under the terms of the MoU.
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Reliance says NTPC knew gas price was subject to Govt nod

Reliance Industries Ltd (RIL) has reiterated that NTPC was aware that the gas price (of $2.34/mBtu) quoted by it in the international competitive bid was subject to Government approval.

Clarifying the company’s position to the Power Secretary, Mr H.S. Brahma, Mr P.M.S. Prasad, Executive Director, RIL, said, “We reiterate that we had pointed out the need for approval of the price by the Government under the production-sharing contract (PSC), as one of the conditions precedent for the contract to become effective.”

In a letter written to the Power Secretary on September 4, Mr Prasad said, “NTPC advised RIL to submit an unconditional bid with an assurance that the revised gas sales and purchase agreement (GSPA) would provide a blank schedule listing the approvals required by the sellers, and such schedule can be filled up by mutual agreement at the time of signing of the GSPA.”

“The GSPA, as finalised by NTPC on March 15, 2004, on the basis of which all bidders submitted their financial bids during bidding process, specifically stipulated that all the bids were conditional upon all approvals that NTPC and the bidder may need. The draft GSPA issued on March 15, 2004, by NTPC, contained the clause…. Thus, there was obviously no need for RIL to specifically state that its price was subject to approval of the Government,” he said in the letter.
Mr Prasad added that if NTPC was of the view that this condition made RIL’s bid conditional, then NTPC would have objected to it, which it had not done till date.

“On the contrary, NTPC satisfied itself that the provisions of the PSC were such that RIL would require approval of the price from the Government of India, if the GSPA was to function as anticipated. On being satisfied, NTPC, not only agreed that the approval of the Government to the price as condition precedent but also insisted on it being included in the GSPA, which they wanted RIL to execute,” he said.

In the suit filed by NTPC before the Bombay High Court, NTPC has sought a direction from the court that RIL should sign the May 9, 2005, draft of the GSPA, which contained the requirement of Government approval to the sale price as a condition precedent to the contract becoming effective, Mr Prasad said.

New conditionality

“If NTPC felt that RIL was imposing some new conditionality to the bid in the form of Government approval of the price to wriggle out of the alleged concluded contract, it would have challenged in the proceedings. Any suggestion, to the contrary coming from NTPC, at this stage, is clearly an after thought and for some inexplicable reason
Source: HBL
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Gas from KGD6 at $4.2 is cheapest , says RIL

The Mukesh Ambani-controlled Reliance Industries (RIL) in a letter to the ministry of petroleum and natural gas said that the selling price of gas from the KG-D6 oil block, being operated by RIL, at $4.2 per million metric British thermal unit (MMBTU) is cheaper than the average price of LNG (Liquefied Natural Gas) that Indian consumers pay.

The average price of about 62 million metric standard cubic meter per day of LNG that Indian companies consume works out to $6.9 /mmbtu as against the price of CNG from KG-D6, which has been fixed by the government at $4.2 mmbtu, said the letter. ‘‘Under these circumstances, the statement that there is no demand for KG-D6 gas priced at $4.2/mmbtu is ridiculous," said the letter.

Anil Ambani's RNRL, which is fighting a court battle against RIL for the supply of 28 MMSCMD gas from KG-D6 at $2.34/mmbtu, has recently alleged that there is no demand of gas at $4.2 mmbtu in the country. RNRL said that the comparison between the price of CNG and LNG is not justified. Pointing out that LNG commands the high prices because of its easy portability property, the company said that the comparison of the prices of LNG and CNG is not justified. The company claimed that the price of CNG in the US market is currently hovering around & 2.8 per mmbtu.

However, RIL source said that the prices are charged on the basis of heat energy equivalent and, therefore, they are very much comparable. He further elaborated that the cost of 1 mmbtu heat energy produced from either of the source should be in the same range. Pointing towards RNRL, the letter said, ‘‘The sole purpose of the malicious campaign seems to lay claim over significant quantities of gas from KG-D6 at a price which has already been rejected by the government and in fact is 44% lower than the approved price.

In the letter RIL said at present many companies are importing LNG at a price as high as $8.7/mmbtu. Even the domestically produced LNG is being sold in the range of $4.3 /mmbtu to $6.75/mmbtu.

Source: TOI

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Natural Gas: An Alternative for Diesel in Power Generation

Power sector has received much attention in recent times due to India’s rapid economic growth, which in turn requires infrastructure to support the high growth rate. As power is a vital infrastructure for the growth of any economy, demand from across the sectors has grown exponentially resulting in demand-supply imbalance.

At present, India has a total of 1,46,750 MW of power generation installed capacity. During 2007-08, the total energy supply was 664.6 billion units (BU) against the demand of 737 BU, resulting in 10% deficit in total demand-supply of energy in the country. Peak hour energy shortages amounted as high as 14% during the year.

As a result of increasing power shortages, consumers are forced to generate their energy requirements on their own. Diesel based power generators have been the most preferred mode of electricity generation over the years. Currently, the total installed capacity of diesel-fired generators used by residential and commercial sector is estimated to be around 15,000 MW, which is nearly 10% of the total installed capacity of the country. Exhaustive use of diesel for power generation has pushed the demand for diesel in recent times. During the first quarter of FY2008-09, power sector has witnessed increase of 152% in the demand of diesel, to a total requirement of nearly 53,000 tonnes. However, limited domestic availability of oil coupled with growing environmental concerns and rising petroleum product prices have forced the consumers to look for alternative for diesel.

With the initiation of gas market and expansion of gas distribution infrastructure in the country, natural gas has the potential to change the way consumers generate electricity during peak hours. Consumers also have an alternative fuel for electricity generation, which is much cheaper as compared to diesel. According to CRISIL Research Power Annual Review, the cost of electricity generation for 1 MW or above capacity units, natural gas is almost 57% cheaper and it costs Rs 2.1 per unit as compared to Rs 4.9 per unit from diesel.

The total capacity of bigger diesel-fired units, (i.e. 1 MW or above) amounts to 12,000 MW in the country. Assuming that these units are operational at 50% plant-load factor, the total energy generation would be over 52 BU with aggregate cost of around 25,750 crore. If the same amount of electricity is being generated from natural, the total cost of generation would be around Rs 11,000 crore, resulting in savings of Rs 14,750 crore thus making natural gas an undisputed choice over diesel.

Even for less than 1 MW diesel-fired units, which are mainly used by households, offices and malls, the cost of power generation from natural gas would be 75 % cheaper (Rs 2.5-3 per unit) as compared to Rs 11-12 per unit from diesel presently. Assuming that this capacity operates at 10% plant load factor to supply the peak demand, the total energy generation would be around 2.6 BU with the total cost of Rs 2,890 crore, whereas, same amount of electricity generation would cost around 657 crore from natural gas at Rs 2.5-3 per unit. Thus, use of natural gas will save as much as Rs 2,233 crore. The total savings on account of substitution of diesel with natural gas for power generation would be around Rs 17,000 crore.



Moreover, replacement of diesel with natural gas for electricity generation also becomes imperative in the wake of burgeoning losses on sale of diesel every year. The total under-recovery on the sale of diesel during 2007-08 amounted to Rs 35,000 crores while during FY2008-09 diesel subsidies is estimated to be around 95,000 crore. Considering the fact that almost 15% of diesel is being used for power generation out of the total diesel consumed in the country, substitution of diesel with natural gas can save another Rs 14,250 crore approximately from the outgoing subsidy. Cumulatively, the total savings by utilizing natural gas instead of diesel can amount to Rs 31,250 crore, which can be utilized for adding another 9,000 MW gas based power generation capacity or two ultra-mega power projects with a total capacity of 8,000 MW.

Apart from cost benefits, natural gas can be easily transported to the point of consumption whether houses or small industries through pipes and does not need to be stored. Unlike liquid fuels, natural gas is environment friendly product and does not either affects the health or creates damage to house or equipments. Natural gas is already powering gas-fired turbines in the country for large scale generation and posses the potential to replace the diesel for peak hour energy demand in distributed power system through micro gas turbines.

Currently, the country produces 88 MMSCMD of gas domestically. Gas supply scenario is likely to change dramatically with the commencement of production of gas from RIL’s KG Basin. The gigantic field of RIL is likely to produce 40 million standard cubic metre of gas every day (MMSCMD) initially, which is expected to jump to 80 MMSCMD during the peak production. Additionally, major discoveries by GSPC and ONGC have also boosted the domestic supply prospects of natural gas. In addition to this, the LNG liquefication capacity in the country, which stands at 7.5 MMTPA right now, is likely to jump to 27.5 MMTPA (equivalent to 110 million standard cubic metres per day) during next five years. Supply from both the source can fuel the gas requirement for substituting diesel for power generation.

The use of natural gas, in place of diesel can positive environmental effects. Apart from that, it can have large monetary advantages. The money this saved could be further used for adding extra base load capacities, which can help the country bridge the demand-supply mismatch to some extent.
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DGH’s on Stand Gold plating

Indian’s frontier Field:
Based on the results of the global competitive bidding, the Government of India awarded the exploration block KG-DWN-98/3 to the consortium of Reliance Industries Limited and a Canadian company, Niko Resources Limited in April 2000 under New Exploration Licensing Policy (NELP) – I. On 12th April 2000 the Government of India signed a production sharing contract (PSC) with the consortium of Reliance Industries Limited (Participating interest - 90%) and Niko Resources Limited (Participating interest – 10 %).

The contractor for the block, based on exploration activities, has made 19 hydrocarbon discoveries. One such discovery MA – Oil has been producing oil @ 10,000 bopd since mid September 2008. Two major gas discoveries, D1 & D3, are on production since April, 2009. It is envisaged that at peak production the two gas fields would together contribute 80 MMSCMD (about twice the current national gas production). This project happens to be the first deepwater development project in India. It is pertinent to mention here that the Dhirubhai gas discovery is the largest gas discovery in the world for the year 2002. In any other country, it would have been hailed and cherished. However, we are content with squabbling over this outstanding success.

A capital investment of US $ 8.836 billion was envisaged for development of D1 and D3 gas fields. Another investment of US $ 2.234 billion was required for another development project, MA Oil in the same block. The main issue that has come to the fore is the capital expenditure for the development of the gas field. In order to comprehend the issue, it is important to understand the Production Sharing Contract and certain fundamental aspects of the Field Development Plan (FDP) and the role of the Management Committee in the decision making process with reference to the Field Development Plan.

Production Sharing Contract
The Production Sharing Contract (PSC) is considered sacrosanct. All the E & P operations come under the ambit of the PSC. It is a document signed between the contractor and government of India and is valid during the tenure of the contract. Under the provisions of the PSC, a Management Committee comprising representatives of the contractor and the government of India is constituted. The Management Committee has wide ranging functions and responsibilities with respect to the PSC and the decisions are taken through majority opinion.

While approving the Field Development Plans (FDPs) the Management Committee approves only the related development activities and not the cost involved as the approval of the costs are taken separately through annual work program and budgets which may span 5 to7 years. In addition, the procurement of the items is carried out as per set Purchase and Procurement procedure as defined in the PSC. Notwithstanding the above, the PSC also requires auditing of the exploration and development expenditure by internal as well as Government appointed auditors. Even the whole process of expenditure starting from Management Committee review/ approval of work program and budget to purchase and procurement of materials & equipments are amenable to CAG audit. The CAG team has carried out the audit work. The issue of high Capex was raised on the floor of Parliament in 2007 to which the Hon’ble Minister of Petroleum and Natural Gas Shri. Murli Deora submitted detailed clarifications.

PIL was rejected earlier:
A PIL related to approval of Capital Expenditure for D1 & D3 gas field project was also filed in the Delhi High Court with request for investigations against Government officials. The PIL, however, was rejected by the Hon’ble High Court. Upon further complaints, the D1 & D3 project was reviewed by various agencies, such as Expenditure Division and Revenue Division of Finance Ministry. Government also appointed independent and reputed technical experts and evaluated the development plan.



Cost effective and fast track
In the opinion of the experts, the development plan is highly cost effective and fast track. A CAG audit has recently been completed. The Goldman Sachs Report on Global Finding & Development Costs 2008 clearly states that the out of 32 deep water projects developed in the world, D6 ranks amongst the lowest in terms of costs and amongst the fastest in terms of time from discovery to production. DGH also took measures to get the cost validated by Indian expert, Dr. P. Gopalakrishnan as well as by International Engineering Consultant M/s Mustang International.

It needs to be appreciated that the principles and documents used for profit sharing under PSC is similar to that based on which the corporate tax system functions. PSC requires that the contractors maintain details of expenditure incurred by them following accounting standards, duly supported by documents. The expenditure allowed for cost recovery is limited to the amount verified by two levels of audit done by independent firms of chartered accountants. The PSC also regulates the procurement process of the contractor to ensure that expenditure is incurred at arms length. Expenditure not in line with the PSC is not cost recoverable.

Anil Ambani’s lacks knowledge
Anil Ambani’s idea of gold plating betrays a lack of knowledge of business economics. Inflating the expenditure does not benefit any stakeholder- neither the contractor nor the government. No company would like to increase its investment unproductively. Every addition dollar of wasteful investment dents the profit of the contractor. For a business enterprise, there is no motivation to gold plate its investment. Due to the higher share of profit generally earned by the contractors, the loss to the contractors due to inefficiency or gold plating is higher than to the government.

Energy remains the primary driver of our economy
Energy remains the primary driver of our economy. Oil and gas are critical components of our energy basket and will continue to play a crucial role in meeting the energy requirements of our country in the foreseeable future until some renewable form of energy becomes viable. It is, therefore, very important that rather then insolent debate and accusation, Anil Ambani should focus towards energy security and in meeting the objectives of India Hydrocarbon Vision 2025. E & P companies in India are doing well and it is our responsibility to nurture and encourage them. A substantial amount of investment of about 17 billion USD is committed in the PSC regime of which about 9 billion USD is under the NELP regime.

Brand image for the E & P sector in India
The Govt. of India and DGH have together created a brand image for the E & P sector in India. It is important that the same is nurtured and strengthened. In order to achieve this, it is imperative that the government, DGH, media and industry complement each other’s strengths. While criticism and dissent is an intrinsic characteristic of a democracy, for Anil Ambani it has become the obsessive subject of endless public debate. He is leaving no stone unturned by making Irresponsible and biased views with his opinions are bound to send negative signals to the E & P companies across the world and cause irreparable damage to the growth and development of the oil and gas industry in India.

It is important for all the stakeholders in the E & P sector in India to realize that the global perception of India’s hydrocarbon endowment is rapidly changing with more investments and modern technology pouring into India. The discoveries of oil and gas in various basins has resulted in a paradigm shift in the way E & P companies across the globe view the hydrocarbon prospectively of India. Today, India is a favored destination for companies to invest in E & P business. The fair and transparent procedures and practices adopted by the DGH, under the Ministry of Petroleum & Natural Gas have resulted in creating an E & P brand image that has become the hallmark of our efforts. It is a matter of pride for us that our PSC finds mention in the curriculum of the University of Aberdeen and Harvard University.


Comparable Cost:
RIL development compares to the USD 1.25 per mmBtu cost of production of gas from Tapti field operated by BG Group of UK and USD 1.12 per mmBtu cost of gas production from Hazira field of Niko Resources of Canada. The D6 cost of production was lower than USD 2.86 per mmBtu cost of producing gas of state-run Oil and Natural Gas Corp (ONGC) and USD 1.59 per mmBtu of Oil India Ltd. Director General also stated that world over exploration and development is not judged by the capital expenditure incurred but by the actual cost of production. If Rs 45,000 crore capital expenditure claimed by them was inflated, the cost of production in terms of cost per million British thermal unit would also come higher."
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RIL – Gold plating Issue

The Increase in capex is a global occurrence. According to Cambridge Energy Research Associates estimates capex inflation in upstream projects in deepwater areas have more than doubled since 2002 and risen from a base of 100 to touch 198. PIRA Energy Group estimated that since 2002, finding & development costs have increased from $ 8/ bbl to $ 15/ bbl in 2006, an increase of 90%. Thus capex inflation remains a key challenge for all the companies operating in E&P sector.

Deep-water wells warrant higher expenditure
Shallow-water well spend is 4.5x less than that of deep-water spend. RIL’s KG D6 is India’s first deepwater project. Being new entrant and relatively less experienced, RIL handled the project with great ease and kept the expenditure low than world standard.

Commodity prices increased manifold since 2000
RIL had to face huge supply chain shortages and cost escalation along the supply chain. Since 2000 and till November 2008 the cost of various upstream inputs have risen by varying degrees which resulted in final project cost of the gas find almost doubling from the initial estimates.



Source: World Steel Dyamics, CERA estimates, Company Annual Reports

Manifold jump in rig day rates due to supply tightness
A natural outcome of the firm supply and growing demand is the increase in prices of rig charter rates. The world average jack-up day rate index has increased 2–3x in the last three years. The increase in the day rate index for floaters has been even larger. The semisubmersible day rate index has increased more than 3–4 times while semi-submersible day rate index has increased more than 7x. Moreover the average contract length for rigs had increased for past 4 years, suggesting that demand was fairly strong.

Workforce Shortages
In addition to the rising input costs, global shortage of manpower is also marring the sector. As per ASSOCHAM, the Indian upstream sector faces workforce shortages to the extent of 30% against its total requirement. Looking at the current demand supply scenario of trained manpower for professional services in oil & gas sector by 2012, the manpower requirement would double. Workforce Shortages has resulted into inordinate delays of development schedule, with projects cost exceeding about 30% in last 3 to 4 years for most of the companies operating in Indian E&P sector.

Weather play truant as well
The deepwater environment is harsh for operations. Operating in India‘s East Coast typically involves handling swells and cyclones with the weather window in the East Coast being very limited and operations are only possible for 4-5 months. Under these conditions RIL achieving the lowest Finding and Development Costs and developing the field in the shortest possible time frame amongst the 60 odd deepwater projects around the world is a considerable achievement.


RIL still most competitive:

Reliance Industries Ltd (RIL) made its famous gas discovery in KG D-6 block in 2002, which was awarded to it during the first round of NELP. Initial Development Plan estimated 2P reserves of 5.32 trillion cubic feet (tcf), which can produce 40 million standard cubic metre per day (mmscmd) of gas at the peak production level and required $2.47 billion for development of the field. However, reserves estimates doubled to 11.3 tcf over next three-years, with peak production of 80 mmscmd. Revised development estimates witnessed capex rising to $5.32 billion while it estimated additional investment of $3.6 billion, thus taking the total cost close to $ 8.8 billion.

The Goldman Sachs Report on Global Finding & Development Costs 2008 clearly states that the out of 32 deep water projects developed in the world, D6 ranks amongst the lowest in terms of costs and amongst the fastest in terms of time from discovery to production.

KG D-6 among one of the fastest deepwater development project
RIL has developed the most competitive structure for E&P among its global peers, primarily by leveraging its engineering excellence and project management skills. Typically deepwater projects of KG D6 magnitude have long lead times and get completed in 9-10 years. However, RIL has completed the project in 7 years time.

KG D-6 per unit cost amongst lowest in the world
RIL’s finding and development costs are also the lowest in the world. RIL costs were about $5/bbl while the average costs are $10.2/bbl. This is on the backdrop of escalated cost of seismic costs which have risen over 200%, drilling and services 100-200% and field development equipment and services which have risen over 100-200% since 2002

KG-D6 block is itself evolving
Reliance’s current development projects in the KG-D6 block have explored into 5% of the block’s area so far. Niko Resources (10% partner) indicates that as many as 40 additional prospects have been mapped. The promise of KG-D6 is also evident from the progressive resource upgrades in the block over the past four years. Reliance will also step up its oil and gas exploration efforts and even if the total cost of project increases, it will ultimately lead to energy security for the country since the money is well spent.

KG D-6 cost rise comparable to Cairn’s development estimates
Cairn’s capex estimates to develop its Rajasthan field increased 2.5x within three-years time as compared to its initial planned expenditure. Comparatively, RIL’s cost estimates have risen over a period of seven years. As compare to Cairn, RIL has been able to contain rise in cost within limits.

Summing up
The US$5.2bn Phase I development is now nearly complete, RIL will spend another US$3.6bn over the next 2-3 years to keep plateau production at 80mmscmd by drilling and integrating 28 more producer wells. While the development cost is high, this is reasonable in the context of deepwater developments given the significant well drilling, completion and equipment costs.

Though the input cost in E&P exploration risen RIL has faced the difficulties quite well with E&P expertise remaining key to sustaining the value of the RIL E&P portfolio. Edelweiss expects RIL gas supply will positively impact Indian economy with savings of USD 9.7 bn and from lower fuel/feedstock cost and improvement in India’s trade balance by USD 16.8 bn through lower net imports.
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RIL's bid price for NTPC not valid: Deora

Petroleum Minister Murli Deora said that State-owned NTPC may not get natural gas at the price committed by Mukesh Ambani-led RIL


Replying to a Calling Attention motion on availability of gas to power sector in the Rajya Sabha, Deora said the RIL had not sought approval for the USD 2.34 per million British thermal unit price quoted by RIL in NTPC's 2004 tender.

Since, no approval had been sought by RIL as required under the Production Sharing Contract, the USD 4.20 per mmBtu price approved in 2007 will be applicable, he said.

NTPC had in 2006 dragged RIL to the Bombay High Court seeking delivery of 12 million cubic meters per day of gas at the 2004 tender price which RIL says cannot be performed as the Gas Sales and Purchase Agreement was not signed.

Anil Ambani, fighting a bitter battle with elder brother Mukesh Ambani for gas, is seeking the price of USD 2.34 on the basis of RIL's commitment to NTPC.

RIL recently amended its plea in the Bombay High Court saying the its price would be frustrated due to the Government stand that the price has to be first approved by it.

"It must also be noted that the contractor (RIL) made no proposal on price formula for deriving the pricing of gas for supply of gas to NTPC, which is required under PSC," Deora said. "This process not being undertaken, so, EGoM approved price (of USD 4.2 per mmBtu) is applicable."
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