Why lesser focus on Reliance

This is a quick response to various News Items / Tweets referring to much lesser focus on the CAG report on Reliance as compared to the outrage over the report on Civil Aviation.

There are a few reasons for the same. The most important one in my opinion is that the report on Civil Aviation is a good, well presented report. On the other hand the report on Reliance is not that conclusive. This is not to say that the report is not believable. Knowing Reliance and with my short experience in auditing oil exploration JVs, I can only feel that the report is too shallow. It has not even scratched the surface. But I would not blame the CAG on this because it is too big an issue to be dealt with by a small team of officials ill equipped both in terms of knowledge (my opinion, certainly questionable) and support. They have even mentioned in the executive summary that there was reluctance in providing data/ access to records. What they lack in capability has been made up by enthusiasm.

The Report can be summed up in 3 issues.

1.    Profit Petroleum and its definition.

2.    Area of Operation.

3.   Investment.

Items 1 and 3 are integrally connected and the report dwells exhaustively on this. Too exhaustive to bore any lay reader. The report just scratches he surface on item2. To me that has to be also looked into by SEBI. To quote from the report “In violation of PSC provisions, in the case of 13 out of 19 discoveries between October 2002 and July 2008, the operator had without first furnishing the initial particulars of discovery in writing to MC and Government, directly given written notifications regarding potential commerciality of the discoveries.  ……” (Para 4.2.4)

“Given written notifications” to whom?  Sentence looks incomplete. But one has to assume notifications to public, which we knew happened over this period. Share prices went up substantially.

But the report also says most of these claims were based on 3D Seismic Data rather than by digging of wells. CAG only looks at insufficiency of data or non conclusive nature of available data. But I would worry equally about the share prices during the same period and the manipulation that could have happened at the same time. Only SEBI has the powers, data and expertise to do the same.

Now to come back to items 1 and 3 which needs to be seen together. The order I have chosen is contrary to the report which lists findings in order of 2,1 and 3. But the reason why I listed as i have is this. The PSC which is the bible to the whole operation is explained as below by the CAG report itself. “The basis for the contractual relationship between the GoI and the private contractors is the Production Sharing  Contract (PSC). The PSC lays out the roles and responsibilities of all the parties, stipulates the detailed procedures to be followed at different stages of exploration, development and production, and also indicates the fiscal regime (Cost recovery, profit sharing etc.) This is the starting point of the relationship.

The next important point is “Profit petroleum”. ” The PSC as it currently stands, is based on a scaled formula for profit sharing between the GoI and the Private Contractors. This is based a critical parameter – Investment multiple ……The slabs for profit sharing are so designed that more capital intensive the project (i.e. lower IM), lower the GoI share of “profit petroleum” (which could be as low as 5 to 10 percent). Contrarily Higher the IM, … higher the GoI share of “profit petroleum”. (which could be as high as 85 percent.”

In simple terms – when a block goes up for bidding, few parties bid for it. One of them is successful. A JV is formed with few other unsuccessful bidders pitching in. ONGC is automatically included. A management committee (MC) is formed. The successful bidder becomes the operator. Rest are involved only MC level and are essentially financial partners. Exploratory wells are dug and once discovery is made, a part of the other area is given up as the JV would become financially committed to discovered reserves and the rest could be given to new explorers. The investment into the production rigs start at this point. As crude flows out, the same is sold and the revenue shared in various ratios as per the IM slab. IM is arrived at by dividing the Crude sales divided by the investment. At lower levels of IM Government gets say 5 %. The rest is shared between JV partners as per investment pattern. At higher levels this can go upto 85% share to Government.

So the sequence is this. PSC is signed. Exploration and discovery follows. Once discovery is made, rest of field is given up. Production rigs are built. As crude flows, the revenue is split. GoI gets its due first and rest is split between the investors. The operator gets a management fee for his efforts apart from his absolute control over day to day running of the process. CAG lists the following issues in this process.

1. PSC is on a sliding scale. It allows the operator (and others) more share in initial period which helps them recover their money. But the flip side is after recovery of their money, GoI’s share goes up to very high levels. This CAG feels is not the best solution. To get a better share there would be a inclination to inflate investments.  The second part deals with this theoretically (my first point) and the third part gives various instances of such “potential” inflation. (my third point)
2. Reliance was not keen on giving up parts of the field. They tried their best to say the whole field is one big reserve and GoI did not do much to dispute this.(First part by CAG and my second).

The report can be seen here.

I have tried to be as brief as  possible without adding any spice (as far as I could.)

 

 

 

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