Smelling a scam — supposedly

Potential: “If GSPC successfully pumps out even the 1.05 trillion cubic feet of natural gas, it will generate a revenue of $6.6 billion.” The KG basin.

Potential: “If GSPC successfully pumps out even the 1.05 trillion cubic feet of natural gas, it will generate a revenue of $6.6 billion.” The KG basin.  


It is important to keep a hawk eye on government operations to prevent corruption and scams. However, it is destructive to try and generate a scam where there is none

I have been flummoxed by Jairam Ramesh’s astounding assertions in two articles in The Hindu (“ >The new KG scam” published on April 18 and “ >The KG basin scam — Part II” published on April 29). Mr. Ramesh has said that the Gujarat State Petroleum Corporation (GSPC) has invested nearly Rs. 20,000 crore in the off-shore KG basin, “ostensibly looking for missing gas”. He has also said: “GSPC went on a massive borrowing spree, despite its admission that there was no gas to be found in the KG basin [emphasis mine].”

The report of the Comptroller and Auditor General (CAG) of March 2016 says on page 33 that as per the government-approved field development plans of November 2009, Deen Dayal West (DDW) area — one of GSPC’s operational blocks of 17.3 sq km — had an estimated recoverable gas reserve of 1.0596 trillion cubic feet. Field development plans for DDW put the total gas in place at 2 trillion cubic feet over 20 years. The CAG marginally lowered the estimates by the globally recognised energy auditing firm of Gaffney, Cline and Associates (GCA), which had certified that the total gas in place in DDW alone was 2.98 trillion cubic feet over the next 30 years. GCA further certified in 2012 that eight different fields of the KG basin, including DDW, had proven probable reserves of 14.4 trillion cubic feet, of which 7.6 trillion cubic feet were recoverable reserves. Do these official estimates and those certified by global auditors point towards GSPC not finding any gas in the KG basin?

Explaining the inconsistency

A simple mistake could explain this huge inconsistency. GSPC’s annual reports stated that the company’s proven reserves from operational blocks (it is important to remember that DDW and other blocks in the KG basin are not operational) had by 2014-15 dwindled to 257mm3 or a mere 0.0009 trillion cubic feet. In his hurry to malign the Prime Minister, Mr. Ramesh has either confusedly or consciously used these numbers as estimates for DDW or KG basin reserves — a blunder. The CAG report clarifies: “The estimated reserve (in DDW) is approximately 116 times of the existing gas reserves of the Company.”

Is it not scurrilous to compare a company with 14 trillion cubic feet of natural gas in its proven and probable reserves to a bankrupt airline company as Mr. Ramesh does? In fact, if GSPC successfully pumps out even the 1.05 trillion cubic feet of natural gas, which is proven recoverable gas in DDW, it will generate $6.6 billion, or nearly Rs. 43,000 crore at the current officially stipulated gas price of $6.61 per million British thermal units (mmbtu).

These will continue to increase over the next three decades. Once commercial production commences, as is likely by the end of the year, future revenue streams will suffice to service the debt and generate returns on investment.

Yes, it is true that the project is nearly four years behind schedule. This is not without reason. KG basin has tight gas which can be released only by hydrofracking techniques. In a high temperature, high pressure field at more than 5km below seafloor, this represents frontline technology. This is being used for the first time in India, with all its attendant risks and implementation hazards. Yet, some initial production has just begun from well number D-4, which cumulatively produced a relatively small amount of 244 billion cubic feet by March 31, 2016.

It should be noted that all participating banks, which incidentally lent money to GSPC during P. Chidambaram and Pranab Mukherjee’s tenures as Finance Ministers, have not declared any of their advances to GSPC to be even stressed let alone non-performing. At the end of March 2016, the company had borrowed and invested more than Rs. 20,000 crore. It has regularly serviced its debt, largely from its internally generated incomes (Rs. 6000 crore) and some from additional borrowings (Rs. 2000 crore). Would commercial banks not hasten to recover their advances if, as Mr. Ramesh asserts, there is no gas in the KG basin?

Mr. Ramesh also speaks of GSPC’s “other expenses”and non-viable choice of a drilling consortium. He tries to imply that the latter was led by a crony businessman. He insinuates that Rs. 500 crore, cited as “other expenses”, could have been misspent. Had he cared to check, he would have discovered that nearly Rs. 400 crore of this amount was foreign exchange-related charges, incurred in gas imports and sales.

Debarring Tuff

The drilling consortium, led by Tuff Drilling, with BHEL and Spartan as partners, submitted the lowest bid. While Tuff was admittedly a new entrant to the petroleum and gas sector, its two partners had significant relevant experience. The Tuff consortium, after it was termed unresponsive, was debarred from continuing operations. Furthermore, Nabors, the next highest bidding consortium, was awarded the contract at the L-1 price. Not a single rupee was paid to Tuff. Instead, its bank guarantee of about Rs.15 crore was encashed. The total contract was valued at $150 million of a total exploration and development expenditure of $3.4 billion incurred by GSPC and its two partners GeoGlobal and Jubilant Energy. Can a mere four per cent of the total expenditure, of which not a rupee was paid to Tuff, translate into a scam?

Mr. Ramesh charges GSPC of having spent nearly Rs.19,700 crore over more than a decade without extracting any gas and surrendering some of the blocks it had acquired. He should have told the readers that ONGC wrote off Rs.48,000 crore and Oil India Limited wrote off Rs.1,800 crore over the years. Even British Petroleum had to write off nearly $8 billion of exploration expenses. Exploration of fossil fuels is necessarily a risky business.

Such write-offs or surrendering of exploration blocks do not represent a scam. It is therefore not merely mischievous, but also highly damaging to the much-needed efforts of creating a trust-based public-private partnership model in technology-intensive sectors when people like Mr. Ramesh make baseless charges. It is important to keep a hawk eye on government operations to prevent corruption and scams. However, it is hugely destructive to try and generate a scam when there is none.

Rajiv Kumar is senior fellow Centre for Policy Research and Founder-Director of Pahle India Foundation.

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Printable version | May 22, 2019 3:04:00 PM |

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