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7 - 20, 1998 PETROLEUM POLICY
A deal questioned
A writ petition in the Delhi High Court challenges the deal that the Central Government signed with a private consortium in 1994 for the exploitation of the Panna-Mukta oil and gas fields. R. PADMANABHAN in Mumbai THE Delhi High Court is hearing a writ petition against a deal that the Government of India struck in 1994 with a consortium comprising Enron Oil and Gas India Limited (EOGIL) and Reliance India Ltd (RIL) for the exploitation of the Panna-Mukta (Gujarat offshore) oil and gas fields. The petition challenges the deal on the grounds, among others, that the entire process leading to the award of the contract was "thoroughly irregular, illegal and highly suspicious". A report submitted by the Comptroller and Auditor General of India (CAG) in December 1996 has been cited by the petitioners in support of their case. It was in response to the wishes of the World Bank -- which the Government and the ONGC, or the Oil and Natural Gas Commission (now Corporation), approached for loans in 1991 -- that India decided to open up oilfields for development through indigenous and foreign private sector participation. In August 1992, the Ministry of Petroleum and Natural Gas invited bids for the further development of the Panna-Mukta oil fields -discovered and partially developed by the ONGC. On December 22, 1994, a 25-year production-sharing contract (PSC) was signed with the Enron-RIL consortium (Frontline, July 11, 1997). The writ petition names the CBI as one of the respondents, the others being the Union of India, the ONGC, RIL and EOGIL. According to an affidavit filed by the CBI, the agency registered a preliminary enquiry on June 2, 1996 against "some unknown officials" of the Ministry of Petroleum and Natural Gas, RIL, Enron and others. The registration report says that the Ministry officials allegedly colluded with the Enron-RIL consortium and "placed Panna-
CBI. and not sent to the agency's headquarters in Delhi. BY SPECIAL ARRANGEMENT An offshore rig of Reliance Industries Ltd. The NPV was arrived at by discounting future net cash inflows to the present value at 10 per cent per annum. New Delhi and the National Alliance of People's Movements. The petitioners allege that the file containing the recommendation was withheld by the then Joint Director. The CBI conducted only a preliminary inquiry although. to the effect that a first information report (FIR) be registered and a regular case launched. a counter-affidavit filed on the Government's behalf questions the petitioners' understanding of the issues involved and says that their sole intention is to malign the Government. and referred to the report of an expert committee in this connection. The CBI submitted to the court on February 2 a status report of the inquiry stating that there was nothing irregular about the award of the Panna-Mukta contract.K. a recommendation was made in March 1996 by Y.P. The signing of the PSC brought into being an unincorporated joint venture. according to the petition. of all the eight bidders. departmental action against officials and the cancellation of the PSC. it directed the CBI to furnish the expert committee's report by that date and the Government to make the original records pertaining to the award of the contract accessible to the court on that date. consisting of Justices Y. Mukta and Panna areas of the Mumbai offshore region. in the course of a hearing on February 2. the CBI told the court that no such file existed. At present the petitioners are giving top priority to getting a criminal investigation supervised by a retired judge instituted. it offered the highest project net present value (NPV) to accrue to the Government (including the ONGC. Mumbai. The Government's case is that the contract was awarded to the Enron-RIL consortium because. filed on behalf of the Centre for Public Interest Litigation. Initially. Singh himself was responsible for the disappearance of the file. said that it would proceed with the hearings only after it had ascertained whether or not extraneous considerations had influenced the award of the contract. Finally.K. with the ONGC having a participation interest of 40 per cent and EOGIL and RIL having an interest of 30 per cent each. and Enron in mid and south Tapti. After perusing the status report. Adjourning the hearing to March 3. . Sharma. which has surrendered the 19902010 mining lease held by it in favour of the joint venture.Mukta discovered oilfields under the production sharing contract". says: "It seems likely from the facts and circumstances that the contract has been procured by giving bribes to top officials of the Government. Sabharwal and M. The petition prays for a criminal investigation.P. The writ petition. They envisage that the judge will select the members of the proposed CBI team. Singh." Without explicitly dismissing this allegation. the bench. It then took the position that the file was untraceable. it apparently tried to impress on the court that Y. then Superintendent of Police in the Anti-Corruption Branch of the agency in Mumbai.
income tax and levies such as cess on oil and royalty. all the elements comprising the. "signature bonus".The Government's share of this includes its quota of profit petroleum. As for the Government's argument that the managing committee would also exercise control over OPEX. In the absence of such an exercise... it is not feasible to incorporate commitments with regard to production and OPEX in a 25-year contract.6 million by way of 'signature bonus'. are we to reject the bid that offers highest NPV of Government take just because it may not meet the benchmark on one of the elements of the. . The Government is probably right in stating that in view of the uncertainties the oil industry is subject to.is at the mercy of more or less arbitrary figures for OPEX and production presented in the consortium's bid. production bonus and its quota of profit petroleum (net of income tax). Nor does the contract provide for guaranteed production in line with the profile presented in the bid. "are based on the parameters available/assumed at the time of bid evaluation. But the managing committee is not insulated from the effects of the uncertainties of the oil industry. Analysis of documents indicates that the Government did not bargain with the consortium to maximise individual elements of its take. "For example. is "unduly flexible and uncertain". Government take should have been carefully benchmarked and expected returns from these elements diligently evaluated before initiating the bidding process. PSCs would appear to have been drawn up purely on the basis of bids received from the investors. were among the main criteria on the basis of which the Government worked out NPVs for comparison of bids." The CAG report notes that the ONGC received from the consortium only $3. the PSC entitles the ONGC only to a bonus of $6 million when the joint venture achieves a cumulative production level of 50 million barrels and a further $9 million when the 100-million-barrel level is reached. As a result." says the Government affidavit. the CAG report says: "As a matter of prudence.. who would." The NPVs are a "useful construct". But OPEX has not been incorporated in the PSC as a firm commitment. and there are no disincentives for exceeding the OPEX indicated in the consortium's bid. the higher the NPV. But this leads to the logical conclusion that the project NPV . These parameters. Part of the Government's answer to this is that no deviation from the production profile presented in the bid can be made without the approval of the managing committee in which the Government and the ONGC are represented. The Government affidavit virtually admits as much...and its 'take' of it . The lower the operating expenditure (OPEX) and the higher the oil and gas production levels. the CAG report asserts that such control cannot be effective in the absence of clear "principles of computing cost escalation and control". "To assign benchmarks on individual elements of cash flow would have only served to vitiate the NPV criterion (of bid evaluation). In sum. and the ONGC's share.an amount payable to the existing holder of a mining lease for the right to carry out exploration and drilling activities in a given contract area. it says.. and the capital expenditure (CAPEX). to indicate that the bonus quantum was negotiated in the light of estimates of what would have accrued to the ONGC had it not surrendered the lease. The NPVs worked out for the bids received. it says.. the 'take' the consortium offered the Government. which purportedly clinched the contract for it.. have framed them at terms most favourable to themselves. and should not be seen as a cast-iron guarantee of Government NPV from the project over the contract life. take?" In contrast to this. as the CAG report puts it. Nor was the consortium's bid for the production bonus payable to the ONGC considered with reference to any benchmarks that might have been worked out in the light of Panna-Mukta's oil production potential. other things being equal. There is no evidence on record.
It may be true.67 million barrels. the maximum production envisaged from the field is only 145. The subtraction of this from the estimated net revenue of Rs. 1996 by Y. for the entire contract period. Besides notional figures for CAPEX. An elaborate set of assumptions underlies the estimates. 1993. 8. a barrel) and a past investment made by the ONGC having a net present worth of Rs. 900 a tonne for cess. there is oil worth Rs. 15 crores -. 6.in the form of 'token' signature and production bonuses.222 crores yields a figure of only Rs. for on that very day the Government notified an increase in the general rate of royalty to Rs. The Government affidavit says that the net present worth of the ONGC investment would work out to only Rs. 17. the assumptions include the following: An oil price of $18 a barrel for the period of the contract. A Government take of profit petroleum ranging from 5 per cent to 50 per cent (whereas Y. 8. also for the duration of the contract. 481 a tonne for royalty and Rs. It estimates the gross project revenue at Rs. the Government has sold itself short on two other elements of its take . It asserts that the worth of the oil reserves to Enron and RIL should be estimated not on the basis of gross oil reserves but net of CAPEX. According to the CAG report. Singh's note says the formula for the take has been so devised that it can never rise above 5 per cent). 864. 36 to a dollar.had work in the oilfield not been suspended that month on account of a planned shutdown . 13. Even so. The calculations based on these assumptions have led to an absurd outcome. OPEX and production. and that. when even the Government-computed average price for June 1997 is about $19 per barrel. at the March 1992 rates of Rs. Singh and cited in the writ petition.442 crores for the Enron-RIL share .338 crores and the revenue net of CAPEX and OPEX at Rs. Terming this a gross overestimate. the Government affidavit says that the average price that would have been paid to the joint venture in June 1997 . the joint venture receives international-market prices for its output. The report also says in effect that the field was handed over to Enron and RIL at a throwaway price. or Rs. According to a report on the Panna-Mukta deal submitted on January 16. On the one hand. including a premium of $4 over the international price.While the contract does provide for an even further bonus of $15 million at a cumulative production level of 200 million barrels.000 crores.280 crores (200 million barrels at $24.P.224 crores. The total take of the Government (including the ONGC) is estimated at Rs. The PSC freezes these payments. that the freezing of levies is in line with the practice of many countries to provide private enterprise in oil and gas production with fiscal stability. OPEX and the Government take. too. it is surprising that the royalty payable in respect of Panna-Mukta was frozen on February 23. the day the Government approved the PSC. 600 crores.the cess and the royalty payable to it by the partners in the joint venture. 1. 1994. it says. the Government had been buying crude from the joint venture at $24 a barrel. this asset was given to the consortium for Rs. 3. An exchange rate of Rs.780 crores. as the Government says. Whereas the national oil companies are paid for the crude oil they produce at an administered price. on a nondepreciated basis. 528 a tonne with retrospective effect from April 1.P. On the other.was about $19 a barrel.
the rate of return for the companies would be substantially negative. and nearly $10 a barrel (or 76.99 a barrel mentioned in the data submitted to the SEC is 27. Reuters. realised from its Trinidad operation. The CAG report observes that the reserve estimates on the basis of which the Government proceeded kept varying at different stages leading to the finalisation of the PSC. the Petroleum Ministry explained to the CAG in July 1996 that carrying out three-dimensional seismic survey and obtaining ." The Government affidavit claims that it pays the joint venture not $24 a barrel but at the rate of 10 cents per barrel less than the international-market price of Brent crude prevailing at any given time.57 a barrel. doubling in seven years. the figure is 14 million tonnes. 1. 1. 25 million tonnes is the figure mentioned in the ONGC's economic recovery plan. was $18.S. be left intact.S.000 crores. and the average price realised by Enron from its Trinidad operation. and according to the ONGC's revised recovery estimates. 36 to a dollar.35 million tonnes. derived from wire services figures." The petitioners' rejoinder says: "If this were indeed the case. that the average price that Enron realised for Panna-Mukta crude during the first half of 1997 was $22..247 crores invested even in a post office account for 21 years.5 a barrel (or nearly 18 per cent) more than what the "Brent minus 10 cents" formula would have entitled it to. it would be much closer to Y. By way of justification.86.a copy of which has become available -.8 per cent) more than the administered price that the ONGC got. The affidavit adds: "To generate this revenue over the 25 years the companies have to incur a capital expenditure of Rs. according to the petitioners' rejoinder. according to the Government affidavit. according to an ONGC spokesman.of the projected net revenue of the project. was $17. If the gross project revenue be worked out on the assumption of an oil price per barrel of $22. then. is well above the average international price of crude. the average crude oil price for the first half of 1997 under the head "India" was $22.72 per cent higher than the price of $18 a barrel assumed by the Government for the calculation of project revenue. The feasibility report of the ONGC mentions a figure of 31. But whereas the Government affidavit says a price of $18.9 per cent) more than what Enron Oil & Gas Co.99 instead of $18 as in the Government affidavit. would fetch about Rs 10.71 a barrel.247 crores in the initial two or three years of the project.99 a barrel. the average FOB cost of all U. Dow Jones and other agencies reported that the average daily closing price of Brent crude in the international market that month was only $17. Rs. was $13. to go by U. Whereas the information docket furnished to the bidders spoke of 31. according to the data submitted to the SEC..59. that during the first six months of 1997 the joint venture received on an average $3. Department of Energy figures. the average FOB price of Brent crude.35 million tonnes. was $19. To go by data contained in a document -. It is a fair inference. The figure of $22. Mid and South Tapti is producing only gas.969 a barrel would have been payable to the joint venture in June 1997. to which the price payable to the joint venture by the Government of India is linked. and that this received amount was $4. including a stagnant exchange rate of Rs. imports of crude oil. the administered price paid to the ONGC.that Enron Oil and Gas Company has filed with the Securities and Exchange Commission (SEC) of the United States.P.280 crores even if all the other assumptions of the Government. These figures indicate that in the international market the price of Brent. Singh's estimate of Rs. the bids were evaluated on the basis of the lowest of the three figures.13 a barrel (or 21.99 a barrel. 17. Panna-Mukta and Mid and South Tapti are the only Indian oilfields in which Enron has a stake and. During the same period.
The CAG report notes that past cost compensation was not included as a biddable item in the case of Panna-Mukta. "it would be difficult for the Government to anchor negotiations properly for obtaining higher Government take. 546. the Ministry had also told audit that the entire issue must be viewed in the perspective of the overall national interest rather than from "the limited angle of the ONGC's interest. the Petroleum Ministry had contended that the provision in the PSC for signature bonus and production bonus was intended to meet a part of ONGC's past costs. might well have made it easier for the bidders to arrive at a "collusive understanding" to the Government's detriment. Citing provisions of the PSC itself. The Government affidavit responds to only one of these observations. whereas the PSC signed with the Videocon-Command consortium for the development of the Ravva field provides for partial reimbursement of such costs. however.international agencies' opinion on it were time-consuming and "involved certain costs with uncertain benefits." The CAG report says this assertion "is an unacceptable generalisation. Nor did the Ministry adopt the procedure. It says that the generally accepted Government procedures require the maintenance of a record of the dates of receipt of bids." . The procedures also require these officials to authenticate the bids opened on the same day to rule out change of bids at a later date.44 per cent internal rate of return (IRR) to the companies on their investments on development of the Panna-Mukta field. it says. On the subject of past-cost compensation. The Government affidavit expresses the view that where there is open competitive bidding the intrinsic value of a field being offered is essentially market-determined and that there need be no correlation between a field's market value and the costs incurred in developing it. "In the absence of a reasonable assessment of reserves. It adds that the only reasonable basis for bid evaluation and selection is the total Government take (which includes the ONGC take) and not past cost reimbursement or any other individual element of the take. adding that there is nothing on record to substantiate the Government's claim that the bidders were pressed during bid negotiations to compensate the ONGC for past costs. according to the report. In reply to audit queries on this issue.39 crores incurred for the development of Panna-Mukta." it says. The PSC does not provide for the reimbursement to the ONGC of the cost of Rs. attributes the vast disparity in the figures to a lower reserve base for the Mukta field indicated by interpretation by the ONGC of the three-dimensional data acquired by it. The documentary record does not establish that any of these steps was taken." Nor had the Ministry ruled out the subsequent upgradation of the reserves -. of bids being read out in the open in the presence of bidders. especially in view of the manifest infirmities of the bidding and contract finalisation process brought out by audit.the report points out that exercises carried out by the Ministry "showed a 13. the CAG report asserts that the bonuses "are not in any way related to past costs.that Panna and Mukta were relatively uneconomic fields -. the details of bidders and the names of the officials present at the time of opening of the bids. A public opening of bids." The Government affidavit." Dealing with another assertion of the Ministry -.which would increase the IRR further. which would have made for transparency. The CAG report states implicitly that the absence of firm estimates of reserves weakened the Government's bargaining position." The report found inadequacies in the Petroleum Ministry's tender invitation procedures.
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