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Open up the oil market Does India need a giant integrated PSU oil company? Should petrol and diesel be brought under GST? OVL records highest ever profit Little effort to exploit rich reserves The dooms day of crude oil ‘Kaliyuga’ of climate change preventable Will OPEC succeed in increasing price? Old wine in old bottle Why have we failed? Unjust enrichment or scam? Moily and his magic wand... The great oil subsidy riddle India’s Gas Scenario
 
Unjust enrichment or scam?
The Krishna Godavari basin gas theft, revealed merely as unjust enrichment in the Justice Shah Committee Report, has all the features of 2G and Coal scams. However, this issue has still not yet become part of the national agenda as a full blown scandal.

The report concluded that Reliance Industries Ltd (RIL) has drawn nine billion cubic metres of gas from adjacent blocks belonging to ONGC. The value of that gas is Rs 9000 crore. In addition, ONGC lost the opportunity to develop reserves in its blocks due to the loss of pressure. The Shah report, however, did not try to quantify the losses to ONGC. It concluded that Reliance should not compensate ONGC, but should compensate the Government of India because gas reserves belong to the nation. 

Though the report is critical of ONGC for its failure to complain earlier about the theft, it spared the upstream regulator, the Directorate General of Hydrocarbons (DGH), which should have prevented the theft. The report merely suggested that DGH and Petroleum Ministry should do a better job in the future. 

The Shah Committee and the media (with rare exceptions) have failed to investigate how we ended up this way. The report reads like a detective story about whether there has been a migration of gas reserves from ONGC blocks, whether RIL had benefited and whether RIL is responsible to pay for it. This shameful story of theft is reminiscent of the early era of oil in Texas. In the early 1900s, when oil was discovered in Texas, prospectors drilled thousands of wells to draw oil as fast as they could without worrying about whether it gushed out from their land or  those of their neighbours. 

 

Rule of capture

Even courts approved such operations under the so called “rule of capture.” But the practice resulted in inefficient oil production. The Texas Railroad Commission was established to regulate the oil industry. Today, world over, in every oil-producing country, there are similar oil regulatory commissions charged with the responsibility of monitoring oil and gas production. In India, such a commission is the DGH. 

Whenever oil and gas fields extend over two or three adjacent blocks, there are requirements to enforce joint development, called unitisation. In this way, each company is able to receive its fair share. 

Production sharing contracts (PSC), signed by RIL and ONGC to explore and develop blocks in KG basin, did provide for such unitisation. PSCs have the requirement that all field data collected by oil companies should be given to DGH. 

 

RIL did know about the connectivity...

The Shah Commission report says that in 2003 RIL came to know about the connectivity of the blocks from a report by consultants DeGolyer and MacNaugton. The study had been commissioned by RIL’s partner, Niko. However, RIL failed to share that report with DGH. Shah was also critical of ONGC for failing to inform DGH about the connectivity as early as 2007 when they first had definitive proof. ONGC formally complained only in 2013. 

In 1999, KG basin blocks, KG-D5 and KG-D6, were awarded on open bidding to Cairn and RIL respectively. ONGC losing the bids raised some suspicion about a possible leakage of inside information. Oil companies must have had some indication about the underlying geology and boundaries of the potential fields prior to bidding. 

RIL started to produce gas from its KG-D6 in 2009. While ONGC failed to get approval from DGH to farm out to technically competent Petrobras, RIL succeeded in selling 30 per cent interest to BP. With considerable experience in unitisation, BP should have known about the connectivity. BP must have realised the potential loss if ONGC demanded compensation because of the failure to unitise the blocks. 

Though the terms of reference of the Shah Commission were limited, it should have been apparent that there was more to this issue than the loss to ONGC. Unitisation is routinely adapted by oil companies all over the world when the field extends into neighbouring blocks. Why did this not take place in India? The report shies away from this critical issue. It is unfortunate that the petroleum minister after waiting for precious one month after the publication of Shah Report, only decided to find out how much has to be paid by RIL for its unjust enrichment.  n

The author has worked in international oil industry for 50 years, and served on the board of Georgian National Oil Company.

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