Indian refiners cut imports from Iran by 38 per cent in May from a year ago, tanker discharge data showed, in a second month of steep reductions as they switch suppliers to cushion the impact of new U.S. sanctions on Tehran.The cutbacks raise New Delhi's chances of winning a waiver similar to that granted by the United States to Japan and some European countries after "substantial" reductions in their imports.India is discussing with Washington an exemption from the sanctions, which focus on banking and are being imposed over Iran's disputed nuclear programme, a source said last month.China and India are Iran's biggest crude clients and reductions in their purchases are crucial to Western attempts to crank up the pressure on Tehran. Neither has officially sought a waiver, although both have cut volumes.India imported about 243,000 barrels per day (bpd) of oil from Iran in May, down about 10 per cent from April and about 38 per cent from 394,000 bpd a year ago, the data made available to Reuters showed. In April - the first month of new contracts - imports from Iran slid nearly 40 per cent from a year ago.Falling imports from the OPEC member have pushed Iran to fifth position in the list of India's crude suppliers in April-May, compared with the third position it enjoyed a year ago and second in the first quarter of 2012.Refiners are expected to cut volumes they ink under term deals that started April 1 by more than 20 per cent, according to Reuters calculations, while the government says it aims for imports to be down 11 per cent from 2011/12 liftings to about 310,000 bpd.Indian refiners may lift significantly lower volumes out of Iran from July, when European sanctions will severely reduce the availability of insurance cover for cargoes and vessels.Among Iran's other Asian buyers, South Korea plans to halt all imports by the time the European measures hit, industry sources have said, and Japan could follow suit unless Tokyo provides a sovereign insurance guarantee for oil tankers.Indian refiners have been asked privately by the government to cut Iranian oil imports by at least 15 per cent, even though publicly New Delhi does not support unilateral sanctions, according to government officials.The refiners are making up for the shortfall in Iranian cargoes by raising imports from the world's biggest exporter, Saudi Arabia, as well as fellow OPEC member Iraq.The 12-member Organization of the Petroleum Exporting Countries (OPEC) pumped 31.80 million bpd in May, up from 31.75 million bpd in April, a Reuters survey of sources at oil companies, OPEC officials and analysts found.India's overall oil imports in January-May rose about 11 per cent from a year ago to 3.6 million bpd as the country expanded its refining capacity.With some of that capacity in maintenance in May, however, total oil imports in the month declined 3.6 per cent from April. They were up 14.5 per cent from a year ago, the data showed.Essar Replacing MRPLEssar Oil, which raised Iranian imports in January-March to stock up and meet last fiscal year's commitments, bought about 33,000 bpd in May, down more than 70 per cent both from April and a year ago, as it turned to Latin America.But overall during January-May, Essar was the top Indian client of Tehran, ousting state-run Mangalore Refinery and Petrochemicals Ltd.MRPL nearly halved annual imports from Iran in January-May to about 80,800 bpd. It bought about 52 per cent less oil in May from Iran compared with April at 43,000 bpd, the data showed, due to a full shutdown of its refinery during the month.State-run Hindustan Petroleum Corp emerged as the biggest buyer of Iranian oil in May, importing 99,000 bpd, up 66 per cent from April and about 1.4 per cent more than a year ago."May volumes are higher as HPCL took delayed delivery of an April cargo," said a source privy to HPCL's imports.Essar has renewed its annual deal of 100,000 bpd with Iran for this fiscal year starting April 1 but aims to lift 15 per cent less oil from there, while MRPL has reduced the size of its deal to 100,000 bpd compared with 142,000 bpd in 2011/12.HPCL aims to buy 60,000 bpd oil from Iran compared with 70,000 bpd in 2011/12.Indian Oil Corp, the country's biggest refiner, bought 67,600 bpd oil from Iran while Bharat Petroleum Corp. Ltd. did not buy any Iranian oil since February.(Reuters)
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Power Construction Corporation of China has signed a $2.4-billion contract to build the second phase of a massive coal-fired power complex in southern India to help meet soaring local demand for electricity, the firm said on Friday.China has been playing an active role in power project construction overseas, particularly in developing countries, taking advantage of state financing as well as experience and technology acquired through three decades of economic boom.Many Indian power companies have been ordering equipment from overseas, especially from China, as India's power gear makers have struggled to compete on price. After losing out to Chinese rivals, Indian manufacturers have been lobbying the government to impose duty on equipment imports.The second phase of the project for India's Infrastructure Leasing & Financial Services Limited (IL&FS) will include the addition of four generators each of capacity 660 megawatts (MW), the Chinese group said on its website.The deal is an EPC contract, meaning Power Construction Corp will be responsible for engineering, procurement and construction. It said the project will create more than 10,000 jobs in India and use power equipment made in China.Power Construction Corp, a sprawling enterprise under the direct supervision of China's central government, was created last year through a state-dictated merger of dozens of domestic survey and design institutions, power construction companies and equipment manufacturers.The group, parent of Chinese dam builder Sinohydro Group that was listed in Shanghai in October following a $2.1 billion initial public offering, aims to list itself as well, Chinese media have said.Power Construction Corp, with total assets of 196 billion yuan and 200,000 employees at the end of 2010, said it generated total profits of 6.47 billion yuan on revenue of 160 billion in 2010.Its strategy is to "become a world famous corporation with strong international competitiveness," it says.India Coal ShortageIL&FS said it would import coal from Indonesia, Australia and South Africa to fuel the plant, the first phase of which included two generators each with capacity of 600 MW, and is scheduled to commence commercial operations by June next year. It has acquired a mine in Indonesia to supply the generators.IL&FS plans to sell the power from the project to state-run distribution companies on a long-term basis as well as in the open market.Indian newspaper The Financial Express, citing an unnamed source, reported in March that Singapore-based Ascol, a consortium of four private equity investors, planned to buy control of the project's operator -- IL&FS Tamil Nadu Power Company that is a unit of IL&FS.Officials at IL&FS Tamil Nadu Power and Ascol were not immediately available for comment.Coal fuels more than half of India's power capacity of 191,000 MW and will be required for 85 per cent of the 76,000 MW additional capacity targeted to be added in the next five years.About 9,000 megawatts, nearly 10 percent of India's total coal-fired generating capacity, became unviable last year after Indonesia changed rules on coal prices. These plants have long-term agreements to sell power to states and no flexibility to pass on increased costs.Slow environmental clearances and land acquisition have led to stagnating coal output in the country and have increased dependence on imports. State-run Coal India, which accounts for 80 percent of India's coal output, produced about 436 million tonnes in 2011-12, missing a scaled-down target.(Reuters)
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Reliance Industries expects to double its operating profit over the next four to five years, Chairman Mukesh Ambani told shareholders at the company's annual general meeting on Thursday.The company also plans to invest 1 trillion rupees across its businesses in India over the next 4-5 years, he said.The company hopes to produce an additional 30 million cubic metres per day of gas at its KG D6 field off India's east coast, Ambani added.The additional production will be realised through further exploration and development at the field, Ambani told shareholders at the company's annual general meeting on Thursday.So far Reliance Industries has bought back 27 million shares to date, 22.5 per cent of its share buyback target, Ambani said.Reliance announced in January it would buy back up to 120 million shares at a maximum value of Rs 10440 crore, its first share buyback since 2005 and the biggest ever in India.The energy-focused conglomerate reported its second consecutive quarterly drop in profit during the three months to March, its shares are near a three-year low, and its rising cash pile has fuelled investor disquiet.(Reuters)
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Life Insurance Corp (LIC) and Infrastructure Leasing and Financial Services (IL&FS) on Friday signed a pact to set up a debt fund with a corpus of $2 billion to finance infrastructure projects in Asia's third-largest economy.IL&FS Financial Services Ltd, the investment banking arm of IL&FS, plans to initially raise $1 billion from international as well as domestic investors for the fund, the company said in a statement.State-run LIC will contribute up to 10 per cent of the total corpus and the rest would be raised by IL&FS Financial Services in a phased manner, said an IL&FS official, declining to be named as he was not authorised to speak to the media.Finance Minister Pranab Mukherjee announced in February 2011 the setting up of infrastructure debt funds to source long-term debt from both foreign and domestic investors in his budget speech for the last fiscal year.India has pledged to spend $1 trillion on upgrading its creaking power plants, railways and ports in the five years to 2017 to deal with a key bottleneck to continued growth. Private cash has been pencilled in for half of that.India Infrastructure Finance Company said in December it planned to launch a $1 billion infrastructure debt fund.(Reuters)
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Heard of the Wind Awards that recognise the performance of infrastructure loan portfolios? Sanjay Palve, head of infrastructure finance at Yes Bank, has one displayed in his office. Infrastructure is an impressive 13 per cent of the bank's total loan exposure. But infrastructure loans, in the past three quarters, have been a major contributor to the increase in the banking system's non-performing assets (NPA). With tight credit, high interest rates and low liquidity, making a profit on these loans means taking calculated risks that may (and have) gone wrong.Over the past three years, much has gone wrong with the sector. The World Economic Forum's Global Competitiveness Index ranks India at 89 out of 142 countries on the quality of its infrastructure in 2011-12; slipping from 86 (out of 139) in 2010, and 76 in 2009.The Eleventh Five-Year Plan (2007-12) ends on 31 March 2012; the Planning Commission's estimate of investment in infrastructure was Rs 20.55 lakh crore (about $430 billion at Rs 47.79 per $). We will probably be well short of this target: the Planning Commission's latest estimate is a shortfall of 10-12 per cent, or $45-50 billion (about Rs 2.25 lakh crore). Some analysts say 25-30 per cent. The Twelfth Plan (2012-17) target for infrastructure investment is hardly modest, and is like a ‘double or quits' approach— at $1 trillion. "It could be $1.7 trillion over the next 5-7 years," says Palve, citing a Goldman Sachs estimate. "About 30 per cent will come from the government, and another 30 per cent through equity financing. But 40 per cent will have to be raised as debt." Which begs two questions: one, where is all this money going to come from? Two, why is it so hard to finance infrastructure?Funding GapThe problem of infrastructure financing is not limited to India. The OECD (Organisation for Economic Cooperation and Development) 2006-07 report on infrastructure estimated the global infrastructure investment need until 2030 to be about $50 trillion, and said there was a greater need for private sector finance, especially after the financial crisis. 1. (from left) SANJAY PALVE senior MD, corporate finance, Yes Bank "THE BASIC QUESTION OF BANKABILITY REMAINS"2. JAI MAVANI leader, infrastructure & real estate, PwC India "DELAYS IN PROJECT EXECUTION ARE USUALLY AT THE BEGINNING"3. DHRUBA PURKAYASTHA president and CEO, financial advisory, Feedback Infrastructure Services "LONG-TERM DEBT FINANCE IS NOT EASILY AVAILABLE" A look at infrastructure financing in the Eleventh Five-Year Plan is instructive. The breakup is about $30 billion in equity and $74 billion in debt by the private sector, another $56 billion and $88 billion by public sector undertakings and about $142 billion and $39 billion in equity and debt financing, respectively. The reality, though, was different. The State Bank of India's (SBI) estimate — it is the largest lender to infrastructure, with a portfolio of over Rs 1,20,000 crore — of the private sector equity was $22 billion. Debt from both PSUs and the private sector was about $70 billion. About $180 billion came in from both central and state government budgetary resources. FDI brought in $40 billion or so. The financing has not been across the various segments either: telecom and power got the biggest chunk, while road and rail transport suffered. The government's target of building 20 km of road per day was pared down to 12 km a day. The Planning Commission's review of the first three years of the Eleventh Plan was similar. Funds from the central government budget financed 45 per cent of the total investment. The remaining came from debt (41 per cent) and equity (14 per cent). On top of that, the total funding gap during the last two years of the Eleventh Plan was about Rs 1.28 lakh crore (Rs 1,885 crore in equity and Rs 1.26 lakh crore in debt finance, usually available from commercial banks, NBFCs, insurance firms, ECBs and infrastructure debt funds). Scouting For MoreUnder these circumstances, how will the government invest $1 trillion? Let's not forget the $125 billion shortfall from the Eleventh Plan. The government puts its faith in a few new initiatives, and on the private sector, which actually accounted for over 35 per cent of infrastructure investment in FY11 and FY12. In the FY13 Union Budget, finance minister Pranab Mukherjee made a couple of key announcements. The limit for issuance of tax-free bonds to finance infrastructure projects was raised to Rs 60,000 crore. For power projects, the conditions for accessing ECBs would be relaxed, as would the eligibility conditions for viability gap funding and PPP projects. Earlier in March, an infrastructure debt fund with an initial size of Rs 8,000 crore was launched. But all these steps, while helpful, will not be enough. A big part of the financing problem is the very nature of infrastructure finance. "It requires long-term debt finance, which in countries like ours, is not easily available," says Dhruba Purkayastha, president and CEO of the financial advisory division at Feedback Infrastructure Services. "Commercial banks are not willing to lend to projects that have extended gestation periods, given the asset-liability mismatch." The biggest worry for investors is the project's bankability. Says Purkayastha: "First, the issue is of risk allocation between the government and private sector, and I think each project needs a good initial risk allocation assessment with given contractual structure even before bidding it out. Some attempts are being made by the Department of Economic Affairs and the Planning Commission. Second, is the issue of project risks being assessed and measured so that lenders can take appropriate decisions on price of money and capital allocation. What happens today is mis-priced loans (often syndicated). Credit ratings for infrastructure projects are faulty and do not serve the purpose of enabling project finance." LOW TIDE: Investment in ports was revised from Rs 87,995 crore to Rs 40,647 crore in the Eleventh Plan (BW pic by Subhabrata Das) break-page-breakIn recent months, however, a number of foreign funds and private equity (PE) firms have shown significant interest in financing infrastructure. Saudi Arabia is in discussions to set up a joint venture to bring in $750 billion; Blackstone, among the best-known PE firms, said that it had earmarked about $1.5 billion for the next two-three years. However, not everyone is convinced. "Raising funds via ECBs is an easy, but high-risk option," says Amrit Pandurangi, senior director at Deloitte India. "And a long-term bank loan comes with the uncertainty of rising interest rates." Developments in recent months, a depreciating rupee and global turmoil, might make raising overseas debt more difficult.Weak StructureTo be fair, the government has taken steps to encourage investment in infrastructure. In July 2009, the Cabinet Committee on Infrastructure was constituted. Then, there is the PPP Appraisal Committee, for streamlining procedures related to public-private partnerships and simplifying the approval process. Since its constitution in January 2006, the committee has sanctioned 255 proposals at a total estimated expenditure of Rs 2.42 lakh crore. In his budget speech, the finance minister also referred to the government's intention to streamline the viability gap funding (VGF) programme, which appears to have worked reasonably well. Under the VGF programme, the government — state or central — will provide a grant of up to 20 per cent of capital costs incurred by a PPP project approved by a central government agency. An additional 20 per cent may be given as a grant by a state government. Other forms of assistance have, however, not met with enthusiasm by the private sector. Take-out financing, advanced as a good way to provide infrastructure financing, has not quite worked. Take-out financing is a method of providing finance for projects (say, of 15 years) by banks that sanction medium-term loans (say, 5-7 years). The loan will be taken out of the books of the financing bank within the pre-fixed period, by another institution, say the IDFC, after the project reaches certain milestones."Low credit ratings act as a deterrent to insurance funds and pension funds, best suited to invest in long-term debt," adds Abhinav Sharma, assistant general manager at CARE Ratings. "The risks are highest in the initial phase of the project, and banks are reluctant to part with a project after they have successfully taken the initial risk."The Sceptics Could insurance companies and pension funds (at present they account for about 7 per cent of infrastructure finance) play a larger role? Not likely, say market observers, citing onerous regulatory restrictions. It is the same problem with long-term financing. For instance, the IIFCL can provide funds to infrastructure projects up to only 20 per cent of the total project cost as long-term debt. Even a relaxation in their take-out financing schemes has not helped that option push the envelope. What of infrastructure debt funds? In November 2011, the Reserve Bank of India (RBI), along with the Securities and Exchange Board of India (Sebi), announced guidelines for Infrastructure Debt Funds (IDFs), which can either be a mutual fund or an NBFC. Commercial banks can act as their sponsors. IDF-NBFCs can raise funds through issue of either rupee- or dollar-denominated bonds of minimum five-year maturity. ANIL AHUJA, managing director, 3i Asia "NOT ENOUGH PROJECTS HAVE CRITICAL BUILDING BLOCKS IN PLACE" These debt funds are expected to direct funds from insurance companies and pension funds into infrastructure. But again, given the high risks and the long gestation and repayment periods, IDFs are allowed to invest only in PPP and post-commencement operations date projects that have completed at least one year of satisfactory commercial operations.Retail investors are not enamoured by infrastructure investments either. Swetha P., a retail investor, recently came across advertisements for investment in IDFC's and L&T Finance's tax-free bonds. While looking for information on them, she came across a fixed deposit of a well-known transport firm that gave annual returns of over 10 per cent. It is not difficult to guess which one she chose.Depending On DebtReport after report of committee after committee has attested to the importance of a deep and active bond market as a source of long-term debt capital. But the government has not been able to create one. Many blame the banks. "They are the biggest impediment in developing a long-term bond market," says the head of a leading financial services company who requested anonymity. "They are unwilling to part with their relationships and compete with other instruments. They could buy the very same bonds, but marking them to market is hard on their balance sheets and risk management." True, they have been stepping in for the past few years to finance infrastructure projects. As Purkayastha points out, most commercial banks have been actively financing infrastructure even within the constraints of asset-liability mismatches, but are reaching their exposure limits. "The question of bankability remains," says Palve. "Commercial viability makes a project bankable. In its absence, blaming the lack of funds doesn't seem correct."As an illustration, Pandurangi points to electricity boards whose input costs have risen, but revenues and tariffs have not kept pace. "If a project is reasonably good, if the group raising money is well known in terms of execution, equity financing is not an issue," he says. "But if it is a new group or if the group bid aggressively, it will be difficult." Anil Ahuja, managing director, 3i Asia, an investor in infrastructure projects, laments, "There are not enough projects that have critical building blocks in place." Does this mean that the roots of the financing problem lie elsewhere? The biggest hole is at the construction phase, says Jai Mavani, leader, infrastructure & real estate, PriceWaterhouse-Coopers. "With issues like land and environmental clearances, you can expect delays in project execution right at the beginning." Globally, governments take care of the approvals, while investors only have to worry about efficiency in construction and the economics of operations. But in India the combination of regulatory uncertainty and the operating ecosystem make it difficult for the sector to raise funds. tanushree(dot)pillai(at)abp(dot)in(This story was published in Businessworld Issue Dated 23-04-2012)
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J.P.Morgan's re-initiated coverage of Reliance Industries, India's biggest energy conglomerate, with an "underweight" rating and a price target of Rs 650 citing a lack of earnings growth and high valuations.The investment bank added it had a "negative" outlook on Reliance's refining and petchem businesses, while "sustained" weakness in its downstream business would cause earnings downgrades.J.P.Morgan added Reliance's upstream outlook was "cloudy," saying it expected natural gas production to decline in the near-term.Reliance shares have risen 7.3 per cent year to date, heavily under-performing the 13.7 per cent gain in India's 50-share Nifty index.Shares rose 1.8 per cent to end at Rs 743.3 on Thursday.Reliance has been facing analyst ire for quite some time. Last week, Kotak cut its price target for the stock, citing "conflicting" company signals on the use of cash, "confusing" news from exploration and production, and "continuing weakness" in chemicals and refining margins.The brokerage cut its sum-of-the-parts target price to Rs 800 from Rs 830, while maintaining its "neutral" stance on Reliance Industries, becoming the latest investment house to deliver warnings about the company's earnings outlook. Kotak analyst Sanjeev Prasad further warned of risks from lower recoverable reserves from Reliance's KG D6 block, as well as declines in chemical margins for naphtha-based crackers.Reliance Industries shares have been hit hard in March, with the stock down 8.6 pwer cent, far above the 1.7 per cent fall in the Nifty index last month, due to worries about its earnings.With KG-D6 output hitting an all- time low, last week, Reliance Industries and its British partner BP plc submitted to the government a revised field development plan for enhancing gas production from MA field in the block.RIL-BP proposed to drill one gas production well on the MA oilfield in the eastern offshore KG-DWN-98/3 or KG-D6 block besides intervention jobs in at least two of the existing six wells on the fields, sources privy to the development said.MA is the only oil find made by RIL in the 7,645 square kilometre KG-D6 block. The field produces about 11,200 barrels a day of along and associated gas of 6.45 million cubic meters per day. MA field makes up for about one-fifth of the 34.09 mmcmd of current gas output from KG-D6 block.Sources said six wells had been drilled on MA field, of which one had to be closed because of water loading and sand ingress. RIL-BP plan to do workover (intervention activity involving invasive techniques to raise output) on the closed well and at least one more well facing similar problems.This together with a seventh well, which would only produce gas unlike the current five wells that produce both oil and gas, would help the field raise output to 8 mmcmd. MA field had begun oil production in September 2008 and gas in April 2009 and in 2010 had averaged 8 mmcmd of gas output.Sources said the revised FDP for MA field was submitted to the Directorate General of Hydrocarbons (DGH) in February and RIL-BP have made technical presentation.Also, RIL-BP are working on an integrated and capital efficient plan for block development, involving production from all the 18 gas discoveries in KG-D6.They projected first gas from R-Series, the third largest gas find in KG-D6 block, by 2015 and production from satellite fields by 2016 subject to timely regulatory approvals.RIL began production from Dhirubhai-1 and 3 (D1&D3) fields, the largest among the 18 gas and one oil find, in April 2009 but output has fallen from a peak of 54 million cubic meters per day in March 2010 to 27.64 mmcmd this month.Together with 6.45 mmcmd of gas production from D-26 or MA oil field in the same area, block output is 34.09 mmcmd.The plan would help in cost savings of over $1 billion due to integration and optimisation. In addition, un-incurred phase-II cost of D1&D3 field development plan ($3.1 billion out of total cost of $8.8 billion) would not be required to be spent, they said.Sources said RIL-BP plan to connect R-Series and four satellite fields, for which a $1.529 billion field development plan was approved by the government in January, to the existing infrastructure used to produce gas from D1&D3 and MA. Also, other satellite fields would be hooked up to these.R-series and four satellite fields alone have potential to add 30 mmscmd of output.
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India will raise retail prices of subsidised fuels, including diesel, once parliament approves the finance bill for the current fiscal year early next month, a senior government source with knowledge of the matter said on Thursday.Parliament is expected to consider the finance bill on May 7 and approve it a couple of days after that."The government's credibility on fiscal consolidation is at stake. After crude prices remaining over $120 a barrel, hike in oil (fuel) prices is certain," the source, who did not wish to be named because of the sensitivity of the issue, told Reuters."We cannot do without it. Once the finance bill is approved, oil prices including diesel would be raised," he said.Finance Minister Pranab Mukherjee has vowed to raise fuel prices as soon as possible to tackle a rising subsidy burden and large deficits, but the move is politically fraught for the weak coalition government, already under fire over high inflation.Diesel prices were last raised in July and the government has still not fulfilled a promise to fully liberalize the market. It was expected to raise prices earlier this year.India imports about 80 percent of its crude oil needs. Rising global prices increases its import bill and widens the trade and current account deficits.In theory, India allows state fuel retailers to fix petrol prices to market rates but continues to cap prices of other fuels at a lower rate to rein in inflation and protect the poor.However, the state fuel retailers - Indian Oil Corp <IOC.NS>, Bharat Petroleum Corp <BPCL.NS> and Hindustan Petroleum Corp <HPCL.NS> - have not raised prices of petrol since December in line with global trends due to an unofficial dictat from the government.Any price rise will help curb rampant diesel use, which has increased as the market-driven price of alternatives like fuel oil have jumped. Diesel now accounts for a third of local fuel use.The source indicated gasoline prices could be raised around the same time as diesel.Softening inflation, currently at about 7 percent, also strengthens a case for a hike in fuel prices.The government will not reverse a hike in gold import duty to 4 percent from earlier 2 percent, introduced in March, the source said, adding it may abolish an excise duty levied on non-branded jewellery.Jewellery traders across the country went on strike last month protesting against the duties. The industry called off the strike after it said the finance minister promised to reconsider.(Reuters)
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The war of words between Reliance Industries (RIL) and the government is escalating. The oil ministry, on 3 May, slapped a penalty of $1 billion for not meeting the natural gas production targets. Of the $5.76 billion that Reliance invested in developing the deep-sea KG-D6 fields, the ministry has disallowed $1 billion from the ultimate cost recovery (which is 2.5 times the total investment) till the company scales up production to the promised level.RIL has hit back, saying there was no provision in the production-sharing contract (PSC) to disallow any part of its investment. "The production fall and delay in drilling the promised number of wells are because of geological complexities," say RIL officials.A bit of history places the battle in context. On 23 November 2011, RIL issued an arbitration notice under the provisions of the PSC on "wrongful denial of cost recovery on the ground of lower production or underutilisation of facilities". However, no arbitrator was appointed. So RIL filed a petition in the Supreme Court on 18 April 2012 under Section 11 of the Arbitration Act, pleading for the appointment of an arbitrator (by the government).Under the PSC, RIL is entitled to deduct the cost incurred in developing the gas block from the revenue while calculating the share of profit to be paid to the government. The firm has already recovered $5.28 billion towards cost, but the government's argument is that the cost recovery that RIL is entitled to should be proportionate to the actual level of production.The current output of 34 million metric standard cubic metres per day (mmscmd) from KG-D6 basin is way below the target of 80 mmscmd for this time of the year. Output from the fields is expected to fall further. On 6 May, petroleum minister Jaipal Reddy told Parliament that the gas output is projected to decline to 20 mmscmd by March 2015; that's below the 34 mmscmd of gas that RIL will produce in 2012-13, and well below the peak of 60 mmscmd achieved in 2010.After RIL found huge gas reserves on the east coast in 2002, it changed the initial plan for producing 40 mmscmd of gas at a cost of $2.5 billion to 80 mmscmd at a capex of $5.2 billion. RIL's executive director P.M.S. Prasad told Businessworld that it added $3.6 billion in Phase II, taking its investments to $8.8 billion over 9-10 years, which was disputed by the DGH.This might put RIL on a weak wicket while going for arbitration. When RIL's high investment was questioned by the Comptroller and Auditor General of India, the pacifying factor was the promised output (80 mmscmd). Now with production below the initial target of 40 mmscmd, RIL's interest in doubling the target might invite criticism, say analysts. 34 mmscmd is the current production at D6, way below thetarget of 80 mmscmd at this time of the year (BW Pic by Sanjay sakaria) At the same time, the government cannot ignore the risk factors involved in the exploration business. "Natural calamities can alter the geology of the entire reservoir. The contractor is taking a financial risk while going for such huge investments," says an RIL official.RIL chairman Mukesh Ambani, in a letter to shareholders that was published in the company's annual report, said that production from D6 was impacted due to "unforeseen reservoir complexities". RIL sources say the KG basin was a virgin area when production started in 2009. So the geological issues were unknown. "That is why we roped in British energy giant BP." BP paid $7.2 billion to acquire a 30 per cent stake in 21 of RIL's oil and gas fields.RIL said it has cut the estimates of its proven gas reserves by 0.43 trillion cubic ft at the beginning of FY2012. RIL's reduced estimates reflect the firm's reassessment of its portfolio and the relinquishment of five blocks during FY2012.The government has rubbished claims that RIL has not violated the PSC with regard to output; it has warned RIL of further action if it fails to submit detailed plans with timelines and steps being taken to remedy the default.Some of the language of the PSC seems ambivalent; Clause 151 says the contractor can recover costs out of a percentage of total value of petroleum produced and saved from the contract area in the year. Separately, Clause 15.11 says: "…Such provisional determination of cost petroleum shall be made every quarter on an accumulative basis. Within 60 days of the end of each year, a final calculation of the contractor's entitlement to cost petroleum, based on actual production quantities costs and prices for the entire year shall be undertaken and any necessary adjustments to the cost petroleum entitlement shall be agreed upon between the govern- ment and the contractor within 30 days and made within 30 days thereafter."Therein lies the core of the dispute: how clear the PSC is in regard to linking production targets to cost recovery. RIL wants to arbitrate the Minimum Work Programme stipulated in the PSC for four blocks relinquished by the firm. "The firm has been advised that the government cannot deny cost recovery for any element of contract costs on the ground that the levels of production mentioned in the develop- ment plan were not being achieved. The company is following the required procedure for progressing the arbitrations," RIL's annual report says. In a letter to Prasad, oil ministry joint secretary Giridhar Aramane stated: "In terms of the approved initial field development plan (IDP) as amended, you were required to drill, connect and put on stream 22 wells by 1 April 2011 with an envisaged production rate of 61.88 mmscmd and 31 wells by 1 April 2012, with an envisaged production rate of 80 mmscmd." But RIL has completed just 18 wells. Of which only 12 are in operation now, which the joint secretary cites as the reason for production fall.RIL shares fell to Rs 671 on 8 May, compared to its 52-week high of Rs 967.90. When elephants fight, the grass gets trampled.(With Anup Jayaram)(This story was published in Businessworld Issue Dated 21-05-2012)
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