No cost recovery of underutilised facilities for RIL: Solicitor General

Sources said no field development plan by any company anywhere in the world, including 40-50 put by state-owned ONGC, have gone exactly as per the plans put on paper because of uncertainty involved in behaviour of what lies several thousand feet below the earth

New Delhi: The Solicitor General of India (SGI) has held that Reliance Industries (RIL) should not be allowed to recover the cost of facilities that remain underutilised due to lower than anticipated output at its KG-D6 gas field, reports PTI.

RIL has built facilities to handle up to 80 million metric standard cubic metres per day (mmscmd) of gas but current production is less than 45 mmscmd, a phenomenon that oil regulator Directorate General of Hydrocarbons (DGH) blames on drilling of lesser number of wells than what the company had committed in 2006 when it won approval for investing $8.8 billion.

Sources privy to the development said the DGH had been pressurising RIL to drill the committed 22 wells by March 2011, so that Dhirubhai-1 and 3 fields can produce projected 61.88 mmscmd and MA field (also in the same block) another 8.1 mmscmd.

But when RIL, which was not confident of the geology after pressure at current 18 wells fell and some showed water ingress, refused, DGH proposed to allow only proportionate recovery of cost. On DGH insistence, oil ministry sought a view from the second highest law officer of the country.

SGI Rohinton F Nariman on 17th August opined that “the cost/expenditure incurred in constructing production/ processing facilities and pipelines that are currently underutilised/have excess capacity cannot be recovered”.

The Production Sharing Contract (PSC), however, does not envisage such a move and if oil ministry is to order such a thing, RIL is likely to challenge it and may initiate arbitration proceedings.

Sources said no field development plan by any company anywhere in the world, including 40-50 put by state-owned Oil and Natural Gas Corporation (ONGC), have gone exactly as per the plans put on paper because of uncertainty involved in behaviour of what lies several thousand feet below the earth.

ONGC had on about a dozen occasions changed field development plan for its prime Mumbai High oil and gas fields.

RIL is waiting for BP Plc, who has global expertise in deep-sea exploration, to come on board before recommencing drilling at KG-D6.

Mr Nariman in his opinion states that the government has ‘an arguable case’ to stop RIL from recovering expenditure which had “resulted in excess capacity/under-utilisation of the asset created” on account of its failure to adhere to the 2006 approved field development plan.

According to the 2006 plan, RIL was to drill a further 11 wells by March 2012 to raise output to 80 mmscmd and sustain it at those levels for nine years.

RIL has so far spent $5.693 billion and has already recovered $5.258 billion from sale of gas.

Mr Nariman advised that to the extent RIL has already recovered capital expenditure from sale of gas, “the cost entitlement of the contractor can be reversed”.

The Comptroller and Auditor General (CAG) in its report on KG-D6 field audit, which was tabled in Parliament earlier this month, had not commented on reasonability of RIL hiking the capital expenditure at the nation's biggest gas field from $2.4 billion proposed in 2004 to $8.8 billion estimate in 2006.

It, however, stated that with the gas output from KG-D6 falling to about 43 mmscmd, which is close to 40 mmscmd output level envisaged in the 2004 investment plan, raised “doubts if upgradation to 80 mmscmd with substantial increase in development cost (to $8.8 billion) was justified”.

RIL submitted an initial development plan (IDP) for Dhirubhai-1 and 3 gas finds in May 2004 with capital expenditure of $2.4 billion. This was followed up with an Addendum to the IDP (AIDP) in October 2006 proposing $5.2 billion capex in Phase-1 and $3.6 billion in Phase-II.

“Most procurement activities were undertaken late in the line with the schedules of the IDP of May 2004. By contrast, activities in respect of items in the AIDP were initiated even before the submission/approval of the AIDP. Clearly, the development activities of the operator were guided by AIDP, rather than IDP,” CAG had said in the report.


No black and white answers in economics on inflation: Kaushik Basu

“I do expect December inflation to be a fairly reasonable decline. But till then it will remain choppy,” chief economic adviser Kaushik Basu commented

New Delhi: Terming near double-digit inflation as ‘uncomfortable’, chief economic adviser Kaushik Basu on Wednesday said there is no black and white answer in economics and the Reserve Bank of India (RBI) will have to balance containing price rise and promoting growth at its review of credit policy on Friday, reports PTI.

“There is no black and white answer... RBI will have to balance out these two—controlling inflation and not dampening growth too much,” Mr Basu who is chief economic adviser to the finance ministry said.

He said inflation is likely to remain elevated till end of the calendar year and only start moderating after December.

“I do expect December inflation to be a fairly reasonable decline. But till then it will remain choppy,” he said.

His comments came after inflation climbed to 13-month high of 9.78% in August, from 9.22% in July, on the back of expensive food and manufactured items.

The RBI) has already hiked its key-policy rates 11 times since March, 2010 to curb demand side inflation. It is scheduled to announce its mid-quarterly review of credit policy on 16th September.

Department of Economic Affairs secretary R Gopalan said the RBI’s monetary tightening had had only a limited success.

The central bank has to ‘change from being accommodative to one of aggressively combating inflation,” he added.

“The benchmark short-term policy rate was raised in quick succession from March 2010. While this tightening has been able to anchor inflationary expectation up to a point it has had limited success in lowering inflation rates to acceptable levels,” Mr Gopalan said.

This is also the ninth consecutive month when inflation has remained above the 9% mark.

While the sustained inflation is likely to put pressure on the central bank to continue with its tight monetary policy, there is concern on the growth front.

Industrial production fell to a 21-month low of 3.3% in July. Besides, gross domestic product (GDP) growth also moderated to 7.7% in April-June period, the lowest in six quarters.

India Inc and experts have blamed the high interest rates for increasing the cost of borrowing and said this has put pressure on fresh investments and hindered growth.

Most economists, however, said that as inflation remain at an elevated level the central bank is likely to go for another rate hike at its mid-quarterly review of credit policy on 16th September.

“No doubt the RBI is in a dilemma but inflation control remains its prime agenda and so we expect it to go for another hike of 25 basis points on 16th September,” Crisil chief economist DK Joshi said.

While rate hikes have not shown the intended effect, inflation would have been much more if RBI had not resorted to a monetary tightening, Mr Joshi said.

Assocham said rate hikes by RBI had ‘limited success’ in curbing inflation as global commodity and oil prices have been remained elevated due to easy money policies of developed nations that boosted liquidity in global markets.

“Any rate high by RBI at this juncture will seriously impact the growth which is already showing signs of fatigue...

Assocham calls for a pause (in the hikes),” it said in a statement.

Standard Chartered senior economist Anubhuti Sahay said there are not enough policies to ease supply side pressure and inflation is expected to remain high in near future.

However, she said that the moderation in growth ‘is not yet broad-based’.

She felt RBI is likely to go in for another hike of 25 basis points in its key-policy rates. Before the interest rates peak, there could be yet another revision in October, Ms Sahay said.

Besides, the local factors, high international commodity prices are adding to the problem.

Weakening of rupee against the US dollar is also a bad news for the policy makers grappling with inflation.

“The recent depreciation of the rupee relative to the US dollar would exert pressure on the prices of imported items...

Accordingly, we expect the RBI to persist with monetary tightening and hike the repo rate by 25 basis points in the upcoming policy review, despite the sluggish industrial growth,” ICRA economist Aditi Nayar said.

India imports around three quarters of its oil and gas from abroad and international commodity prices continue to remain elevated, despite the crisis in US and Eurozone.

Deloitte, Haskins & Sells director Anis Chakravarty said that the tightening has not the desired impact the apex bank should halt rate hikes.

“We are at a stage where monetary policy is not having the desired impact. The dilemma with RBI is not only to adjust between growth and inflation but also whether its policy is having the desired impact and what is the alternative,” Mr Chakravarty said.

The monetary tightening is getting reflected in expensive purchases, interest rates and other aspects of daily life, he added.


ADB lowers India’s growth rate to 7.9% for current fiscal

“Despite robust overall growth for the year through March 2011, economic momentum slowed reflecting weakening industrial activity and investment,” the ADB’s ‘Asian Development Outlook 2011 Update’ said

New Delhi: Asian Development Bank (ADB) on Wednesday trimmed growth forecast for India to 7.9% for the current fiscal, from 8.2%, in the wake of subdued growth of major world economies and rising crude oil prices, reports PTI.

The ADB’s ‘Asian Development Outlook 2011 Update’, which was released on Wednesday, has also raised the March 2012 inflation forecast to 8.5%, from 7.8% earlier.

ADB’s growth projection is lower than that of the Indian government, which expects the gross domestic product (GDP) to expand at 8.5%.

The revision in the forecast comes within five months of the Asian Development Outlook (ADO) 2011 in April which projected India’s growth at 8.2% this fiscal.

“Despite robust overall growth for the year through March 2011, economic momentum slowed reflecting weakening industrial activity and investment,” the update said.

Growth in most advanced economies has declined in the second quarter of 2011 and emerging markets are witnessing a combination of moderation in growth and rising inflation.

The recent downgrade of US Sovereign ratings by S&P and lengthening shadow of the Eurozone crisis all over the market in the world has become a matter of concern.

The ADB report also revised downward India’s GDP growth for the next fiscal (2012-13) to 8.3% from 8.8% “due to longer monetary tightening cycle and higher policy rate hikes, than expected earlier.”

In its bid to tame inflation, the Reserve Bank of India (RBI) has been hiking interest rates since March 2010 and is again scheduled to review its monetary policy on Friday. The overall inflation in August stood at 9.78%, much higher than the comfort level of 5%-6%.

Talking about rate of price rise, the ADB’s update said inflation is expected to remain elevated in the first half of FY11-12 for a variety of reasons, like hikes in fuel prices and upward revision of minimum support prices.

“Given the RBI’s commitment to battle persistent high inflation there will likely be further monetary tightening in the coming months of FY11-12 until there is credible evidence of inflation trending to the RBI’s target range,” ADB said.

The RBI has projected March-end inflation at 7%.

The report, however, said that inflation should show a downward trend from the latter part of FY11-12 because of likely stabilisation of global commodity prices and other supply-side measures of the government.

It said that inflation would remain a concern for economies in Asia in the coming months and there will be pressure on policy makers to manage price rise given the slowdown in global economy.

As per the update report, Asia (excluding Japan) is projected to grow at 7.5%, lower than the earlier estimate of 7.7%.

It also raised the region’s Developing Asia—made up of 45 countries in Central Asia, East Asia, South Asia, Southeast Asia and the Pacific—inflation forecast to 5.8% this year, from its April estimate of 5.3%.

“Inflation should cool in 2012 to 4.6% as commodity prices recede but central banks will need to keep a close watch and may need to take remedial action,” it said.

On capital inflows, ADB said that it may cover current account deficit given the investor interest in India's strong growth prospects. It further said that FDI inflows would be come into the oil and gas, metal, and telecom sectors.


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