Companies & Sectors
Need BHP Billiton, Reliance and others to continue the work in oil industry

The government needs to re-establish that it truly wants international organisations to come into the country and work, hassle-free, in the oil and gas sector

In the last few weeks, there have been important developments relating to the oil industry. The tug-of-war between Reliance Industries Ltd (RIL) and the Petroleum Ministry has been going on for sometime now and the government imposed a penalty of $1.7 billion. But the debate on the application of revised (higher) rate for gas from April 2014 continued along with the uncertainty on the unsupplied portion of the gas and whether the contractees will get any compensation for non-delivery.

 

Reliance has taken a stand on the non-availability due to "geographical surprises", or putting it mildly: "force maejure conditions" and have demanded that some internationally reputed reservoir consultants be called for to investigate the veracity of their claim. For whatever reasons, Reliance did not take the commercial responsibility to drill other wells in the areas, where they have had even the tiniest inkling of gas presence! But the net result has been that country has suffered and has been forced to import the requirements at tremendous cost!

 

Quietly, Reliance turned around and offered to relinquish some of the areas in KG-6 block. The Ministry of Petroleum, however, did not fully accept what Reliance offered; instead, they have asked Reliance to relinquish 5,367 sq kms more i.e. a total of 6,198.88 sq kms! This means the Ministry wants to take back five discoveries viz. D-4, D-7, D-8, D-16 and D-23, totalling 814 sq kms, which are estimated to hold 0.805 tcf (trillion cubic feet) of gas, which, at the current international price would be about $10 billion!

 

The Ministry's claim is supported by the issues raised by the director general of hydro-carbons (DGH), which has stated that Reliance, "missed deadlines for submission of investment plans".

 

This may be legally right, but it is a very flimsy ground to pitch in a claim by the ministry! Such moves are not conducive to investors' confidence and trust. Apparently, there are some divergent views between DGH and Reliance. What were the authorities concerned doing when the contractor, Reliance, did not take adequate steps to drill the new areas to prospect? Are they not supposed to submit advance plans of action for extended periods of time? Were they not submitting periodic reports on the geological scene? What was the follow up action that the DGH or the Ministry took when it did not receive any intimation on this inactivity? Does the DGH take the initiative to do its own home work?

 

Both the Ministry and the DGH are equally responsible for the lack of diligent follow-up. There has been mutual lack of coordination.

 

Such accusations are being hurled at each other and it will not ensure that gas or oil will start gushing from somewhere? All the involved parties need to discuss the issues and plan their actions to focus and achieve the desired production!

 

It may look to be a mere coincidence, but the fact remains that BHP Billiton relinquished six blocks, which it had won in the 7th round of the NELP (New Exploration Licensing Policy). It owned a 26% stake and 3 fully owned blocks awarded to it under the 8th round of auction. It was unable to explore these blocks "due to regulatory issues". BHP Billiton has interest in the 9th block auction too.

 

It appears that there was an objection initially from the Ministry of Defence.  After some exchange of letters and clarifications, the ministry did provide approvals with certain conditions. The authorities are also concerned with hassle-free requirements and are now keen to discuss the issues with BHP. This is to ensure that the work becomes trouble-free, as far as possible. It now remains to be seen how the Ministry of Petroleum, DGH and the Ministry of Defence will be able resolve the issues faced by a large investor like BHP Billiton. The government needs to re-establish that they truly want international organisations to come into the country and work, hassle-free.

 

Meantime, it not only needs to settle issues relating to Reliance, but must also clarify as to what it intends to do, once it reacquires the "relinquished" blocks from Reliance (including the wells discovered in them)? It is unlikely that after having done so much spade work, Reliance will walk away without its pound of flesh!

 

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)

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REIT: New Way To Invest in Real Estate

On 10 October 2013, the Securities and Exchange Board of India (SEBI) issued draft Real Estate Investment Trusts (REITs) Regulations, 2013. REITs pool investment, like a mutual fund, but invest primarily in real estate of completed and revenue-generating properties. The rentals received from these properties are distributed among investors as dividend. Each investment in real estate is large. REITs are a means for people to invest smaller amounts in real estate and also achieve portfolio diversification.

SEBI has mandated that at least 90% of the value of an  REIT’s assets shall be in completed revenue-generating properties. No REIT will be allowed to invest in vacant or agricultural land or mortgages other than mortgage-backed securities. To provide flexibility, REITs can invest 10% in other assets as specified in the proposed regulations—under-development properties, listed or unlisted debt of companies, mortgage-backed securities, equity shares of companies deriving not less than 75% of their revenue from real estate activities, government securities, money market instruments or cash. It has been specified that the size of assets under management of the REIT should not be less than Rs1,000 crore. An REIT can invest its entire corpus in one project only if the size of the project is at least Rs1,000 crore. For investors, minimum subscription shall be Rs2 lakh while the unit size shall be Rs1 lakh.

Not less than 75% of the revenues of the REIT, other than gains arising from disposal of properties, shall be from rentals, leasing and letting out real estate assets, at all times. To ensure regular income to investors, at least 90% of the net income after tax has to be distributed to the investors.

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