I have been part of the international oil and gas industry for over five decades. I have been on countless oil fields both on-land and offshore, been involved with the planning and production of oilfields as diverse as Mumbai High, Sakhalin (Russia) and Sudan.
And yet what continues to amaze me the most are not the challenges of deep water drilling, or the sub salt basins of the world, but the sundry, free-wheeling comments on the business of oil and gas exploration and production that find their way into even well-established media.
A case in point is the recent spate of allegations about India’s largest private company stashing away huge gas reservoirs in its lockers, not allowing it to be produced for want of a good price.
Now, no one needs a PhD in geology to know that hoarding oil and gas is a rather difficult thing to do. This is so because any attempt to hold back production in an existing field immediately shows up in pressure anomalies in the affected wells.
Each well is like the release valve of a huge pressure cooker where the oil and gas has literally been cooking for millions of years. Hold back one and the pressure difference is immediately apparent in the next.
Actually, the question of hoarding is solved simply. If gas is being hoarded, pressure in all producing wells cannot decline. Ergo: how does one hoard something that does not exist? The same people go on to argue that since RIL had in its development plan estimated a production of 80 million standard cubic metres a day (mmscmd) of gas, that figure is a hallowed commitment that must be honoured.
I know of no arrangement anywhere in the history of the oil and gas industry where production-plan estimates are treated as commitments and producers forced to honour them. Had that been the case, the first companies to run into serious trouble would have been our state-owned ONGC and OIL.
Fortunately, examples such as Neelam, Mumbai High redevelopment plans, and Imperial (in Russia) abound across the world where reserves and production fell far short of expectation.
Estimates as commitments So is this sudden insistence on “commitments” made in development plan something to do with the provisions of the production sharing contract (PSC)?
Well, I have not found in the PSC a single clause that makes a case for plan estimates to be treated as commitments, let alone provide for imposition for cash penalties for not attaining estimated production figures. With the penalty having been imposed, the matter has gone into arbitration.
We must await the outcome of that arbitration, before we jump to conclusions about RIL having violated the provisions of the PSC.
But what about the poor fertiliser companies and all the power companies stranded for want of gas promised from KG-D6?
Please check the facts before levying that charge. Not a single power or fertiliser plant has come up in the country on the basis of KG-D6 gas. All of them came up on the basis of commitments made by other suppliers — not RIL— and from other sources, not KG-D6. What on earth happened to all those good old Gas Supply Agreements?
D1-D3 gas, mind you, was not even a thought in anyone’s mind then. Actually, far from RIL being the culprit, production from the D1-D3 field gave a fresh lease of life to many power plants which would otherwise have become NPAs.
Double standards Before we march RIL to the gallows, has anyone asked that those Gas Supply Agreements with PSUs be honoured? And that these plants be made to run on whatever domestic gas or LNG supplies they were actually established upon?
For that matter, why should this criteria of honouring fuel supply commitments be applied only to oil and gas suppliers? Why should hapless poor power producers be left cradling all the dummy fuel supply agreements with Coal India? Does anyone brandish “commitment to produce” here? After all there is a far greater element of certainty about coal reserves and production than there will ever be in the case of oil and gas!
Or are we to apply separate standards — one for holy cows and another for hang dogs?
Oil and gas fields buried miles below a sea bed — which is itself submerged under a mile of sea water — are necessarily complex. Geologists can only create approximate models and try and guess their shape and size. Mistakes do occur. These have happened in Neelam; they have happened in Siberia; and they have happened all over the world in the hands of the best established companies.
Let the market decide So, let us not fall into the trap of insisting on price controls merely to limit subsidies on fertiliser. A subsidy is given to make good the market price for those who cannot afford it. Subsidies do not come down by controlling the market price. They actually increase because price controls place an artificial cap on the marginal cost at which domestic gas production will happen.
This means that all the remaining balance beyond this will have to be imported. And you can be sure that imports will always be at nothing less than the international price. Therefore, the New Exploration Licensing Policy (NELP) used the simple logic of allowing market prices to determine how much domestic gas can be produced.
As for the bank guarantee offered by RIL — let us not forget that it is only an interim assurance offered by the producer until the case under arbitration is decided. Ultimately, those proceedings will decide if any liability resides upon the producer.
So my advice to all over-zealous columnists — please hold your horses.
The author is former president, International Business, Reliance Industries