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Why have we failed?
Every country that is endowed with petroleum reserves has suffered the ‘natural resource curse.’ One exception may be Norway.

After the gas discovery in Krishna-Godavari basin in the Bay of Bengal by Reliance Industries in 2002, India has been hit by the ‘resource curse.’ However, unlike other oil and gas rich countries, the bonanza of KG basin reserves, has been a cherished dream for India.

If India can learn lessons from the success and failure of the international oil industry, there is still a chance to develop the KG basin to contribute richly to energy security.

 

Claims on stunning reserves...

 

As Chief Minister Narendra Modi announced, in 2005, that the Gujarat State Petroleum Corporation (GSPC) hade made a discovery of 20 trillion cubic feet (TCF) in the KG basin. His announcement came soon after claims on a stunning discovery of 14 TCF by Reliance Industries. In 2009, ONGC, which has been exploring in KG basin since 1980, also announced that it had discovered 10 TCF. Unfortunately, every one of these estimates turned out to be wrong.  Currently, the downgraded reserves of these three discoveries are at best 6.6 TCF!

Though it is easy to blame the companies for their overly optimistic estimation, one should also appreciate that these may be honest errors. In the international oil industry, there have been several such initial mind- boggling estimates which turned wrong: soon after the collapse of Soviet Union, experts had predicted that Caspian Sea region will become the next Persian Gulf with oil reserves exceeding 250 billion barrels. It is more than 25 years, and we have only 30 billion barrels proven.  A shocking error on the part of oil experts!


Kazakhstan goes wrong...

The recently discovered prolific oil field called Kashagan in Kazakhstan, is another perfect example of how initial estimates can go wrong. When Kashagan opened up in 2000, it was considered the largest successful exploration oil field in three decades. ONGC’s attempts at buying shares of Conoco in Kashagan were unsuccessful. The cost estimated to develop Kashagan exceeded $50 billion. After missing several deadlines, production started in 2013 and was stopped a few days later. Currently, it is hoped, production will begin in 2017, a full decade behind schedule and spending several billion over the budget. This, despite the fact that many well-known international oil companies are developing Kashagan.  

 

Failed to take oil explorers as partners

 

Unfortunately, both the UPA and the NDA have been unable to appreciate the nature of petroleum exploration. Driven by political compulsions of trying to ensure that oil companies do not take undue advantage, they have failed to consider oil companies as partners. This has resulted in oil companies going for international arbitration. Not only is this expensive, but it also deters potential investors; many oil majors are reluctant to enter India. Even those like Petrobras and ENI with expertise in deep offshore exploration, have decided to leave India. It is to the credit of the NDA government that it is engaged in developing better relations with British Petroleum which has rich experience in developing difficult fields.

A serious blunder of successive governments was to control gas prices, though recently, NDA in a few cases has allowed free market pricing. If the government had taken the advice of experts and liberalised the gas market, KG basin would have developed like the North Sea.

 

GSPC – babe in the wood?

 

Instead of trying to find the real reasons for the failure of the KG basin, political parties are seeking to get political mileage from a highly technical issue of which they seem to have little knowledge.

    In the case of GSPC, there are some legitimate issues that the company should try to respond. Why did it give 10 per cent interest to a one-man company (Geo-global Resources) of doubtful credibility? Why did it give multi-billion dollar contract to a company, Tuff Drilling, which had no expertise in the oil industry?

When the major asset of GSPC was only doubtful gas reserves, on what basis did public sector banks lend Rs. 19,000 crore? Did they realise that if GSPC could not monetise those ghost reserves, they will stand to lose massive amounts?

Even more important is the role of Directorate General of Hydrocarbons, responsible for regulating the upstream oil sector of India.  Why did the DG fail to question GSPC when it agreed to bring one man Geo-global as a partner? How could it allow a little-known company, Tuff Drilling, to be given a multi-crore contract to build platforms?

The three examples of Caspian, Kashagan and China, clearly show how risky oil exploration is. Even a technologically mature company, BP paid $7.2 billion to Reliance Industries to buy 30 per cent of their interest in the KG basin. Only time can tell if BP was wise or had blundered.

Oil exploration is like playing the roulette. It is because of the risky nature of the business, any country inviting investment needs to be mindful of the factors which attract foreign companies. It should try to develop a win-win working relationship with them.

 

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