Deora asks for second opinion on RIL's $8.8-bn investment

NEW DELHI: Petroleum Minister Murli Deora has asked for an independent review of Reliance Industries' proposed investment of 8.8 billion dollars in developing its KG-D6 fields to allay fears that the company was inflating expenditure to get a higher price of natural gas.

Eminent reservoir engineer P Gopalakrishnan has been engaged to look into the reasons for rise in Phase-I capital expenditure from USD 2.47 billion to USD 5.2 billion and an additional USD 3.6 billion proposed for Phase-II beginning 2010 for maintaining plateau production of 80 million standard cubic meters per day.

Besides, one of the six shortlisted global consultants will be appointed to carry out validation of the proposed field development plan, upstream oil regulator V K Sibal wrote to the ministry on August 24 on Deora's instructions for a second opinion.

The six consultants include Mustang Engineering of US, Pajak Engineering of Canada, Petrofac of UK and Beicip Franlab of France.

Sibal said the USD 8.8 billion investment approval was limited only to establish techno-economic feasibility of producing gas from Dhirubhai-1 and 3 fields in KG-D6. RIL will, however, be reimbursed cost from gas sales based on actual independently audited expenditure and not on approved Field Development Plan.

As per the Production Sharing Contract, all capital commitments are made on the basis of a tendering process through international competitive bidding (ICB) mechanism and detailed procurement procedures are laid out in the PSC based on the concept of optimal pricing. Sibal said initially USD 2.47 billion plan was approved in 2004 to produce 5.3 trillion cubic feet of gas at a peak production rate of 40 mmscmd. However, the block was later found to hold higher potential and development plan was revised to 10.02 tcf of gas at a peak rate of 80 mmscmd.

"The contractors' estimate of the revised investment is higher due to the increase in number of wells and production and pipeline facilities to produce a higher volume of gas and also due to the increase in price levels in global market for E&P operations," he said.

He said the cost per barrel of D6 block is estimated to be very competitive when compared to international companies and other discoveries in the country.

"The per barrel finding cost of KG-D6 is estimated at USD 5.69, compared to USD 10.61 for PY-1 (in Cauvery basin), USD 34.21 for CN-ON-3 (in Cambay basin) and USD 5.74 for Rajasthan block. The cost of British Petroleum in 2005 was USD 5.79."

The regulator said development cost globally are revised when there is escalation in price or change in production capacity. "For instance, Sakhalin project cost was revised by Shell from USD 11 billion to USD 20 billion. In India, during the current year, PY-1 investment was revised from USD 138 million (2004) to USD 371 million."

Sibal said the idea of 'gold plating' was misplaced and "was coined out of sheer ignorance of business economics."

"Inflating the expenditure does not benefit anybody, neither the companies nor the government... every additional rupee of wasteful investment eats into the profit of the companies. The amount of USD 8.8 billion is not the cost recoverable amount approved by government."

Deora asked for an independent opinion after charges of 'gold plating' of investment to get higher gas price surfaced. Gopalakrishnan will submit his report by September 15