Is ONGC under Pressure to Bail Out Debt-ridden Gujarat State Petroleum Corporation?
While the Bharatiya Janata Party claims the Congress has been trying to deflect allegations of corruption against it by highlighting controversies relating to Gujarat State Petroleum Corporation, the many allegations levelled against the management of this state government company are serious. The Oil and Natural Gas Corporation should think hard before deciding to partner GSPC.
The writer acknowledges research and writing assistance by Sourya Majumder, Abir Dasgupta, Natasha Bhide and Mugdha Kinjawadekar.
The Gujarat State Petroleum Corporation (GSPC), set up by the Gujarat government, has been in the news for all the wrong reasons for over a decade. In recent months, the Indian National Congress has been warding off allegations of corruption against it by the Bharatiya Janata Party (BJP) by highlighting a host of controversies connected with this company during the period Narendra Modi was Chief Minister of Gujarat between 2001 and 2014.
A series of reports prepared by the Comptroller and Auditor General (CAG) of India has claimed that GSPC consistently misused its funds and allegedly favoured private companies in the Adani, Reliance and Essar Groups, among others. Steeped in debt, the Gandhinagar-based GSPC is reportedly being sought to be bailed out through a “strategic partnership” with the Oil and Natural Gas Corporation (ONGC), one of the largest, if not the largest, public sector company in the country.
GSPC is in the high-risk business of oil and gas exploration, a business where large amounts of money can be spent over many years on drilling and exploring for hydrocarbons with little or no returns in the short term. Exploring and drilling for oil and gas is often compared to gambling in a casino. This argument has been used repeatedly to justify the allegedly reckless manner in which GSPC has been functioning. Government auditors have provided many instances of how the company’s money was apparently spent in an irregular manner. Besides the CAG, Congress politicians have for long been alleging that funds belonging to the GSPC have been misappropriated to favour a few influential industrialists with the help of a clutch of bureaucrats loyal to Prime Minister Modi who have been given cushy positions.
The budget session of Parliament saw frequent disruptions with allegations of corruption against leaders of the Congress party on the issue of procurement of helicopters from the Italian company AgustaWestland. In response, Congress Members of Parliament (MPs) raised questions about the financial dealings of GSPC alleging that the company was involved in a scam involving ₹20,000 crore. Congress MP Jairam Ramesh has written a series of newspaper articles describing the developments in GSPC as the “new KG scam”—KG being a reference to the Krishna–Godavari basin off the coast of Andhra Pradesh where GSPC has been operating (Hindu 2016). The Congress has demanded that a team appointed by the Supreme Court monitor investigations into the working of the company (Indian Express 2016a).
Congress leaders have based many of their allegations on a series of reports by the CAG which have brought to light large cost overruns, mismanagement of funds and instances of undue benefits allegedly being passed on by GSPC and its subsidiaries and associates to various private companies. Party functionaries have further alleged that GSPC’s funds have been diverted to help the BJP.
Gujarat government spokespersons, including state Finance Minister Saurabh Patel, have argued that the allegations against the GSPC management made by the CAG are baseless and that these should first be examined by the Public Accounts Committee (PAC) comprising MPs from different political parties (as is the standard procedure for CAG reports). The committee will then seek the views of the state government which would be provided. Patel, who also holds the portfolios of energy and petrochemicals in the Gujarat government, has claimed that all approvals by union government agencies to GSPC for its activities were granted when the Congress-led United Progressive Alliance government was in power.
He has added that the state government company’s exploration track record is better than that of ONGC. In various media reports, Patel has claimed that GSPC faced difficulties due to “technical” reasons and that it was hopeful of recouping its investments which typically had a long gestation period. Patel and others in the BJP have termed the allegations against GSPC raised by the Congress as an attempt to “deflect attention” from the AgustaWestland scam (Rediff 2016). Political mud-slinging aside, a look at the CAG’s observations reveals that much needs to be explained about how the GSPC has functioned.
This writer sent detailed questionnaires to GSPC’s Chairman G R Aloria, who also happens to be the chief secretary of the Gujarat government, and the company’s managing director J N Singh (both belonging to the Indian Administrative Service—IAS). The responses of the company’s management have been included in this article. Certain questions were not answered and these too have been indicated.
GSPC was incorporated in 1979 as Gujarat State Petrochemicals Corporation Limited with the Gujarat government holding nearly 90% of the company’s equity capital. Following the liberalisation of policies relating to the hydrocarbons sector by the Government of India, the company was re-incorporated in 1994 as Gujarat State Petroleum Corporation Limited. Together with its subsidiaries and associates, GSPC currently has a presence across the entire energy value chain spanning oil and gas exploration; development and production; gas trading and transportation; and distribution and generation of electricity.
On 31 March 2015, it held rights in 27 oil and natural gas blocks in the country, 16 of which were commercially producing while 11 were in the exploration and development stage. The largest chunk of GSPC’s investments for which it has also borrowed the maximum amount has been for a block (area) it acquired for exploration and production of oil and gas in the KG basin in the Bay of Bengal. The GSPC management claims it has been instrumental in making Gujarat a “natural gas based economy” which is the “only one of its kind in India” and which sets an example for other states to follow in the use of a relatively clean fuel.
On the “upstream” side, the company holds participating interests in at least 17 producing fields in Gujarat from which GSPC (along with its partners) has been constantly producing oil and gas since 1994. GSPC and its joint venture partners have produced over 9 million barrels of oil and over 350 billion cubic feet (cuft) of gas. Other than these producing assets, the KG-OSN-2001/3 block is its major asset.
In the “mid-stream” sector, GSPC is one of the largest natural gas marketing companies in the country. In 2015–16, it traded 11.64 million metric standard cubic metres per day (mmscmd) of gas worth over ₹10,000 crore. Its subsidiary, Gujarat State Petronet Limited, has developed 2,540 kilometres of gas pipelines in 19 out of the 33 districts in Gujarat, the largest intra-state gas distribution network in India. On the “downstream” side, another subsidiary, Gujarat Gas Limited, is the largest city gas distribution company of its kind—it has established almost a quarter of all compressed natural gas (CNG) stations in the country and provides piped natural gas to more than a million households (or around a third of all domestic gas customers in India).
The KG-OSN-2001/3 block of 1,850 sq km on the ocean bed of the KG basin was awarded to a consortium led by GSPC in February 2003. Exploratory drilling in the block started on 31 July 2004. In June 2005, in the third exploratory well, hydrocarbons were discovered. After exploring the block, most of the area was relinquished and an area of less than 500 sq km was retained. Since the development of a high pressure-high temperature (HPHT) gas field is capital intensive, the GSPC management says it decided to develop the block in phases. The company claims that the technical challenges in developing the block were “unprecedented”. It says it deployed the best technology available in the world. For instance, GSPC contends that it was successful in conducting “hydro-fracking” at a depth of 4,000 metres below the ocean bed—“a feat rarely achieved anywhere in the world”. (Hydro-fracking or hydraulic fracking is a technique in which large amounts of water combined with smaller amounts of chemicals and sand are pumped under high pressure into a drilled gas well.) In addition, GSPC’s block in the KG basin is located in a difficult geological zone (from the “mesozoic” period) which is rarely explored in India.
On 26 June 2005, Modi as Chief Minister of Gujarat announced that GSPC had discovered India’s “largest” gas reserves in the KG basin (Ramesh 2016c). The gas reserves discovered were apparently 20 trillion cuft, then worth ₹2,20,000 crore—more than all the natural gas India was producing at that time. Modi announced that he expected production to start by 2007 after an investment of ₹1,500 crore. He claimed that this find would enable India to become energy self-sufficient.
Three years later his claim had become bigger. On 17 July 2008, Modi declared that the gas reserves discovered by GSPC in the KG basin exceeded 20 trillion cuft and was worth $100 billion or over ₹4,00,000 crore. However, commercial production had not started and the Directorate General of Hydrocarbons (DGH), the regulatory authority and the technical arm of the Ministry of Petroleum and Natural Gas (MoP&NG), had only certified the estimated gas reserves for one well in the block at 1.8 trillion cuft. More than 11 years after the first announcement was made by Modi and after investments worth more than ₹19,000 crore have been sunk, GSPC has still not been able to commence commercial production from its block in the KG basin. According to the company, from August 2014 till June 2016, a total of over 8 billion cuft has been extracted. The fact is that the rate of gas production by GSPC from the KG basin has been unstable and way below what had been estimated.
GSPC Bids with GeoGlobal and Jubilant
The consortium led by GSPC to explore and develop the KG-OSN-2001/3 block comprised two private companies, GeoGlobal Resources (GGR) and Jubilant Enpro. GSPC barely managed to qualify for the auction. It was reported that a team led by Modi increased the net worth of GSPC by ₹300 crore, enabling it to meet the minimum requirements stipulated for bidding (Rediff 2005). Jubilant Enpro is controlled and headed by Shyam Sunder Bhartia, husband of the head of the Hindustan Times newspaper group (owned by HT Media Limited) Shobhana Bhartia, who was also a member of the Rajya Sabha. Shobhana Bhartia is the daughter of the late K K Birla who was also a MP belonging to the Congress party. The Jubilant Group of companies has interests in chemicals, besides oil and gas.
During a media conference in 2012, Arvind Kejriwal (who went on to become Chief Minister of Delhi) had alleged that an example of cronyism of the Modi government in Gujarat was the “rather strange” way in which a valuable stake in GSPC had been “gifted” to a company run by someone perceived to be close to the Congress party, namely, Shyam Sunder Bhartia. This was an instance of how there was little to distinguish between the BJP and the Congress, Kejriwal claimed.
A CAG report tabled in the Gujarat assembly in 2012 evaluated the bid process of the consortium led by GSPC in detail. Notably, the tabling of this report did not take place according to convention, that is, at the beginning of that year’s budget session (DNA 2012a) but was presented after the entire contingent of Congress members of the legislative assembly (MLAs) was suspended from the assembly on 29 March 2012 for protesting vociferously against the delay in tabling the CAG report (DNA 2012b). According to this report, the joint bidding agreement between GSPC, GGR and Jubilant specified that GSPC would be the operator of the block with a participating interest (PI) of 80% with GGR and Jubilant holding a PI of 10% each.
According to the terms of the production sharing contract (PSC) signed between the consortium and the union government, the exploration phase was to last six and a half years and would consist of three phases during which 20 exploratory wells were to be dug. The wells were to be of a cumulative depth of 45,348 metres. The minimum work programme (MWP) comprised acquisition, processing and interpreting of three-dimensional seismic data, reprocessing of the data and drilling of exploratory wells.
By August 2008, 12 wells had been drilled and the required depth target had been crossed. As per policy revisions made by the MoP&NG in 2007, GSPC was deemed to have completed the MWP. The company, however, continued drilling till August 2009 by which time it had completed drilling 16 wells incurring an aggregate drilling cost of $1,302.88 million (₹5,920.27 crore). There were a total of nine discoveries in the block—three in the south western part and six in other areas. The first three were named Deen Dayal West (DDW) after the ideologue of the Rashtriya Swayamsevak Sangh and leader of the Jana Sangh, the political party that became the BJP, Deen Dayal Upadhyay.
The CAG noted discrepancies between the outcomes and the estimates that the GSPC-led consortium had made in its bid. As per the bid evaluation criteria, the net worth of the participating companies needed to be at least equal to the estimated cost of the MWP in the first phase of development. The net worth of the GSPC- led consortium at the time of bidding was $60.05 million (₹291.18 crore). The cost of implementing the MWP of the first phase was estimated at $59.23 million (₹287.21 crore).
The CAG noted that this estimate was far too conservative and made fresh calculations. It said that if the cost of hiring rigs and associated services were considered at the prevailing market value as it stood at the time of submission of bids, the estimated cost of implementing the first phase of the MWP would have been $169.27 million (₹820.79 crore) or almost three times higher than the projected cost. It noted that the consortium should have considered the possible rise in costs over the first phase of two and half years. If this had been correctly factored in, the CAG calculated that the bid submitted by the GSPC-led consortium would not have been eligible because of its low net worth.
Further, the CAG found that the actual cost incurred by the consortium was significantly higher than what it had estimated. Drilling was conducted at an average cost of $16,384 (₹7.65 lakh) per metre, or nearly seven times the estimated cost of $2,254 (₹1.02 lakh) per metre. Over the three phases of seismic study and drilling, a total of $1,404.86 million (₹6,265.68 crore) had been spent which was nearly 13 times the estimate of $109.7 million (₹531.94 crore). Sixteen wells of depths ranging between 2,535 metres and 6,007 metres were eventually drilled against the commitment made by the consortium to drill to depths between 900 metres and 4,118 metres.
On the basis of this evidence, the CAG noted that there was a “lack of due diligence” and an “inadequate assessment of the financial and technical requirements” of the project which resulted in the consortium being forced to borrow heavily. The CAG also noted the lack of experience on the part of the GSPC in operating offshore blocks. The under-stating of the bid evaluation criteria cannot be explained away by lack of experience or incompetence on the part of either the government or the GSPC–GGR–Jubilant consortium, the auditors claimed.
The GSPC management refutes these contentions claiming that the CAG’s observations are “retrospective” in nature. The company says the specific block in the KG basin given to GSPC to explore was a “wild cat” one in the sense that no geophysical information was available about it. The MWP discoveries were made in nine out of a total of 13 exploratory wells dug and that this ratio of discovery is “unmatched” in India. It is further contended by GSPC that it had presumed that the wells that would have to be drilled would be at lower depths than anticipated and the HPHT environment in the block “had not been envisaged at the time of bidding.” Hence, the company had not intentionally underestimated the cost of the MWP at the bidding stage. The difficult working conditions resulted in costs going up, the company claims, as did the rise in international prices of crude oil and fluctuations in the rupee–dollar exchange rate.
The CAG closely examined the role of GGR which had been included in the consortium ostensibly on the ground that it would be able to provide technical expertise. Its 10% interest in the consortium had been allowed on the condition that payments would only be made out of the revenue generated from the block. If no gas or oil was produced, GGR would owe nothing to GSPC. In fact, GSPC incurred a loss of interest income to the tune of ₹11.43 crore by remitting GGR’s share of costs between August 2003 and March 2007. The dice seemed loaded heavily in favour of GGR and against GSPC.
The CAG found that GGR failed to provide adequately competent technical advice to GSPC. The geological model prepared of the 20 wells envisaged that under the MWP, four HPHT wells (or wells that are drilled to a depth of more than 4,000 metres) were to be drilled. In reality though, GSPC ended up having to drill 12 HPHT wells. This indicated to the CAG the “deficiency of the geological model” prepared by GGR which led to escalation of costs. Additionally, GSPC was forced to conduct a review of GGR’s geological model for which it hired an American firm Petrotel as a technical expert at an extra cost of $600,000 (₹2.64 crore)—this amount could have been saved had GGR done its job better in providing technical expertise to GSPC, the CAG claimed.
Since the terms agreed with GGR did not permit GSPC to recover GGR’s share of exploration costs, GSPC had to bear the entire burden of the escalation in exploration cost and the time overrun. In addition, it had to incur interest costs of ₹104.14 crore by having to pay for GGR’s share of exploration costs from April 2007 to March 2011. It was evidently a “sweetheart deal” as far as GGR was concerned.
The drilling of the 16 wells took place at a pace that was slower than envisaged. As per the drilling plan, a rate of 27.76 metres per day needed to be drilled against the actual rate of 22.49 metres per day. This resulted in the rigs being deployed for 653 days longer than what had been estimated, resulting in an extra expenditure of ₹180.91 crore. Responding to the CAG’s charge that GSPC had not properly monitored the drilling operation, the GSPC management stated that the HPHT conditions in the KG block had slowed down the rate of drilling. This contention was, however, rejected by the CAG saying that this should have been factored in at the time of preparing the drilling plan and appeared to be a direct consequence of the “incorrect” geological model provided by GGR to GSPC.
The GSPC management points out that a decade before 2004 when the company commenced exploratory drilling in the block, ONGC had drilled two offset wells —an offset well is an existing well-bore that may be used as a planning guide—which was the only data provided in the bid document. As GSPC commenced exploratory drilling, the first two wells that were drilled in accordance with the conventional drilling plan went dry. The company decided to “not abandon wells one after the other in accordance with its preliminary drilling plans … change its drilling prognosis and look for hydrocarbons in deeper zones.” Besides encountering geological and geophysical challenges in HPHT areas, instead of vertical drilling, many wells had to be drilled directionally and “side-tracked,” all of which took more time and money, the company claims.
GSPC says it had to deploy multiple drilling rigs at the same time since it had only seven years under the PSC to fully explore the area. The company adds there was a time when two jack-up rigs and one semi-submersible rig were simultaneously deployed. This led to a lot of “non-performance time” on the part of rig contractors and other service providers which was not caused by “negligence”. The GSPC management argues that by pointing out the fact that the company had drilled for 653 additional days and incurred a higher expenditure of ₹180 crore, the CAG had put out a “red herring,” meaning a ruse or a misleading piece of information.
GeoGlobal’s Colourful Past
GGR and its founder Jean Paul Roy have quite a chequered past. Roy is a Canadian-origin geologist who became a citizen of Guatemala. He began his career with Petro Canada, where he taught himself to interpret data to produce geological models for oil and natural gas blocks. During the time he worked with Petro Canada and subsequently with Canadian geophysical software solutions provider GEDCO, he took part in exploration activities in almost 30 countries. His association with India started as a technical advisor to Niko Resources, a Canadian company, which was jointly exploring the Hazira offshore field with GSPC. He also advised Niko during the discovery phase of the KG-D6 block, operated by Reliance Industries Limited and Niko (Thakkar 2012).
Roy incorporated GGR in Barbados six days before it entered into a contract with GSPC. At that time, it was a two-person company with paid-up capital equivalent to ₹3,200. Soon after the consortium was formed with GSPC and Jubilant, Roy transferred half of his 10% stake to Roy Group (Mauritius) Inc, a company he had incorporated (and fully controlled) in Mauritius. By this transfer, half of the benefits and obligations of the contract pertaining to the 5% stake of GGR in the consortium was transferred to the Roy Group.
Meanwhile, GGR took over an American company called suite101.com, wherein all of GGR’s outstanding capital stock was exchanged for 34 million shares of suite101.com. Roy was paid $2 million and granted 14.5 million shares of suite101.com, while the remaining 19.5 million shares were held in escrow to be released on the occurrence of certain specific events related to offshore exploration of gas in the KG basin. On 2 February 2004, suite101.com changed its name to GeoGlobal Resources Inc. Two years later in January 2006, the share price of GGR rose to $14.92 against its nominal value of $0.001. In disclosures made to US authorities, GGR informed its shareholders that the company had no exploration experience before venturing into India and that the GSPC-led joint venture was its first foray into the oil and gas business.
Roy, who speaks French, English and Spanish, has been described as a man who has an “an eagle’s eye for discovering oil” as well as discovering “people who matter.” GGR’s board at one time included former ONGC chief Subir Raha. It had also earlier appointed as director Avinash Chandra, former director-general of hydrocarbons. The partnership with GSPC, however, turned sour. Once listed on the New York Stock Exchange (NYSE), GGR was issued a delisting notice on 4 December 2012. Its shares were trading then at an average price of $0.11.
The exchange said the firm’s listing would be predicated on either better performance or a “reverse stock split.” By then huge amounts had been invested in the KG block with nothing to show. GSPC had started demanding payments from GGR after having originally agreed to pay its share till production started. Investor confidence in GGR was on the wane. Meanwhile, Roy contradicted Modi’s 2005 announcement about the GSPC’s gas discovery and filed a clarification with the NYSE calling the Gujarat government’s claim premature. In August 2010, he lost control over the management of GGR and left its board of directors (Thakkar 2012). The same month, GSPC forfeited its PI and the costs it incurred on behalf of GGR have not been recovered.
The GSPC management points out that its association with “geophysical expert” Roy started in 1995–96 when he was closely involved in evaluation of data on the gas field the company was operating in Hazira which grew from a small one to a medium-sized field. When GSPC decided to participate in bidding for the third round of the New Exploration Licensing Policy (NELP) in March 2002, it wanted to join hands with different partners but did not get an “encouraging” response from anyone. Roy was at that point of time working not only with Niko Resources which had partnered GSPC in five small discovered fields in Gujarat, but with other Indian companies, including Reliance Industries Limited (RIL). The kind of technical expertise offered by Roy and GGR, the firm he set up, was not easily “available,” GSPC claims, adding that Roy insisted on a participating interest or PI in the venture.
A similar PI was granted to Jubilant when no other offers were forthcoming. The GSPC management points out that such “carried interest” partnerships were not uncommon and had previously been used by ONGC in Kazakhstan. After GGR started failing to “make cash-calls,” it was declared a “defaulter” under the August 2010 joint operating agreement between the firm and GSPC. The GSPC management says the company is yet to receive the MoP&NG’s approval to forfeit GGR’s PI. It pointed out that not a single rupee had been paid to GGR till date and its share of operating costs would be recovered by GSPC before doing so. As far as the Bhartia Group company Jubilant Enpro is concerned, GSPC says the company invested more than ₹1,400 crore before it too started defaulting on cash-calls. GSPC claims it is currently “in active discussions” with Jubilant to “remedy” the situation and recover its dues.
A Tiff with Reliance
A muddle was then created when GSPC permitted RIL to “encroach” into the block in the KG basin in which it was operating. In December 2003, RIL sought GSPC’s permission to lay subsea pipelines from its deep-water KG-D6 block through the shallow water block controlled by GSPC. RIL was granted permission to do so in January 2004. Four years later, in January 2007, RIL started the construction of a control and riser platform (CRP) complex in addition to the pipeline. A CRP is a much larger structure which would facilitate the transport of gas by RIL from various different wells in its block. If RIL had to build this in its own block in the deep-water region, it would have had to build a floating structure which would be a much more expensive proposition than the fixed structure it was able to build in GSPC’s block. Thus, by “encroaching” on GSPC’s block, it gained an undue benefit at the expense of GSPC, or so the CAG argued.
When GSPC approached RIL claiming the latter had violated the terms of its agreement, RIL responded that it had a no-objection certificate from GSPC as well as an approval from the DGH. However, neither GSPC nor RIL could produce proof of this purported approval from the DGH to the CAG. Further, the construction of the CRP by RIL in GSPC’s block appeared to violate Rule 7 of the Petroleum and Natural Gas Rules, 1959, under which GSPC did not have the right to grant permission to RIL without the written consent of the union government. It never sought such consent. Further, under the conditions of the mining lease, GSPC was responsible for the safety and security of all structures within its own block and therefore, ended up being responsible for securing RIL’s CRP as well.
The presence of RIL’s CRP complicated GSPC’s own exploration activity. Now it had to take RIL’s consent to take up any activity around the CRP. In order to acquire three-dimensional (3D) seismic data with more accuracy and reliability, in August 2008, GSPC needed to conduct a survey the contract for which was awarded to WesternGeco International Limited, UK. When this work was in progress, RIL’s CRP presented a physical obstacle to standard survey methods. A specially equipped vessel had to be deployed to acquire the seismic data beneath the CRP through a process called “undershooting.” RIL delayed granting permission to GSPC to do this, which resulted in the special vessel having to be kept on standby which resulted in unnecessary expenditure to the tune of ₹5.76 crore.
The GSPC management says that GSPC and RIL are both “contractors” and the Government of India owns the land on which they operate. The government can allow or disallow the putting-up of facilities in specified places by contractors who only have “subsurface” rights for exploration or exploitation of natural resources while surface rights vest with local owners of land or the state government or the union government in the case of offshore blocks. GSPC claims all “necessary permissions” were obtained from the government by RIL and that GSPC “suffered no damage.”
In April 2007, a few months before Modi announced the expected commencement of production, GSPC awarded a contract for a “jack-up” rig required for drilling to Premium Drilling Inc of the US. However, GSPC permitted Premium Drilling to provide it drill pipes of a lower technical grade than was specified in the contract. When these pipes were unable to meet the drilling requirements, GSPC was forced to bear the cost of their replacement. The transportation cost itself of the replacement pipes was ₹38.14 lakh. The CAG stated that the failure to insist on drill pipes that met the technical specifications of the tender could not be justified.
Responding to this writer’s questions, the GSPC management contended that the company incurred no losses in this transaction. It provided technical details of the specifications of the pipes used and the clauses in the contract to deploy rigs to support its contentions. It pointed out that it had to incur extra expenditure on transporting particular kinds of pipes from Singapore. However, a close reading of its response indicates that GSPC effectively agrees with the CAG’s claim that the pipes originally supplied by Premium Drilling were not of the required specification but were nevertheless accepted.
Lapses on GSPC’s part also resulted in losses on the design of facilities for transport of gas from its wells to the shore. In January 2006, it issued a work order to Mustang Engineering of Australia to take up a front-end engineering design (FEED) study at a cost of ₹5.85 crore which was scheduled to be completed by June 2006. This work involved devising a plan for creation of facilities such as well-head platforms and pipelines as well as calculation of estimates and preparation of tender documents for the award of contracts to construct these facilities. For the FEED study, certain specific geophysical data sets had to be given to Mustang by GSPC. The CAG observed that GSPC failed to supply the relevant data, as a result of which the design which Mustang prepared was unsuitable. Its design was thus rejected and the work re-awarded in February 2007 to WorleyParsons of Thailand. It took GSPC a year and a half to provide the required data this time, and WorleyParsons’ design, which was stipulated to be completed by June 2007 was eventually completed in March 2009. The delay caused an expenditure of ₹2.07 crore. The CAG termed these expenses frivolous and wasteful.
In response, the GSPC management claimed that the fluid produced from a particular well, after the FEED study was commissioned, had a “very distinct property” as a result of which the assumptions for the study had to be altered. The extra amount that was paid to Mustang was “not even a small fraction” of the total costs of the project.
Four Years and ₹4,700 Crore Later
In the period between 2006–07 and 2010–11, GSPC had borrowed close to ₹4,450 crore in the form of long-term loans, all of which went towards financing its exploration activities in the KG block. This was in addition to more than ₹2,700 crore borrowed as short-term loans. The CAG’s report, which was prepared for the commercial year ending in March 2011, commented on the GSPC’s finances at the time. By then its borrowings stood at ₹7,149.08 crore of which ₹2,710.32 crore were in the form of short-term loans from public sector banks. The CAG held that this was an inappropriate way of financing high-risk, capital-intensive activities such as exploration, development and production of oil and natural gas. The CAG found GSPC’s response that most of its short-term loans were in the form of lines of credit extended by banks at lower interest rates than long-term loans untenable, arguing that supply of such credit was not guaranteed in the long run and that this money was being used to fund capital expenditure contrary to established business practices.
The GSPC management did not respond to this writer’s questions in this regard.
Field Development Plan: Unviable and Not Feasible?
In 2009, two years behind the schedule specified by Modi, GSPC released a field development plan (FDP) report for the DDW block. A CAG report tabled in the Gujarat assembly on 14 March 2016, noted that a “declaration of commerciality” or DOC for the discoveries in the DDW block had been submitted in June 2008 and approved in December 2008 by the management committee constituted under the PSC. Subsequently, a FDP was submitted in June 2009. The DOC for the other six discoveries was approved in February 2014 but the FDP had not been submitted till November 2015. On the FDP, the CAG report alleged that it was financially “unviable” and technologically not feasible leading to cost overruns, avoidable expenditure and partnerships with unqualified firms.
The FDP had estimated a capital cost of ₹13,122.46 crore. In comparison, by March 2015, ₹17,025.45 crore had already been spent. The CAG has pointed out that the FDP estimate, when separated into different subcategories, indicated that under several headings GSPC had underestimated costs. For offshore facilities, as per the original design parameters, the FDP had underestimated the cost by 48%. It revised the parameters in trying to reduce the burden of high costs but the final contracts were still awarded at a level 33% higher than the FDP estimate. This initial underestimation “affected the overall economics of the project” the CAG noted, pointing out that it led to a shift in the proposed date of commercial gas production by over a year.
As per the FDP, the total estimated cost for 15 wells was $860 million. It envisaged meeting the requirement by completing the four existing wells and drilling 11 new wells. Under the FDP, six wells were to be completed before production commenced. The CAG observed that GSPC did not complete any of the existing wells. Two of the wells in development were completed in June 2014 and another in September 2014. These were completed at a cost of $294.59 million, 9% higher than what the FDP had estimated. With the rest of the wells yet to be completed, the CAG anticipated a significant cost overrun.
The FDP estimated gas output of 400 million metric standard cubic feet per day (mmscfd) with a capital cost of ₹13,122.46 crore. As per the approved FDP, the estimated amount of gas production was 1.0596 trillion cubic feet (tcf), considerably less than the 20 tcf figure touted by Modi, but nevertheless 116 times the gas reserves held by the GSPC on March 2015. It stipulated December 2011 as the date of commencement of commercial production. The GSPC management pointed out that the “plateau” production rate of 200 mmscfd would be achieved two years after the commencement of commercial production. Since August 2014 till now, GSPC has been undertaking only “test production” in the DDW block.
The CAG first examined the financial viability of the FDP. In it, GSPC assumed a gas price of $5.7 per million British thermal units (mBtu) for the viability of the project. However, the government approved price for natural gas at the time was $4.2 per mBtu. At that price, the project would not have been viable. GSPC stated that when the FDP was prepared the industry expected gas price deregulation in India and an increase in global crude and gas prices. In fact, in October 2014 the government notified the New Domestic Natural Gas Pricing Guidelines applicable to all domestically produced natural gas. This was based on a weighted average of the prices in the US, Mexico, Canada, the European Union and Russia, and was to be revised every six months. The October 2015 revision took the figure to $3.81 per mBtu and the CAG concluded that the project would not be viable.
Of all the observations made by the CAG, the GSPC management described the ones on the FDP as among the “most bizarre.” The union government’s gas pricing guidelines notified in 2009 had fixed a price of $4.2 per mBtu. The company argues that this price was “meant primarily” for RIL’s KG-D6 field. All the NELP PSCs, including the one signed by GSPC, contained provisions for marketing and pricing freedom to all contractors subject to the prices being discovered through an arm’s length bidding process. GSPC’s FDP was approved by the MoP&NG in October 2009 when the legal dispute between RIL headed by Mukesh Ambani and Reliance Natural Resources Limited led by his younger brother Anil Ambani on the government’s powers to price gas was pending in the Supreme Court. In May 2010, the apex court declared that the Government of India alone had the power to fix the prices of gas irrespective of the provisions of various PSCs.
GSPC presented six different scenarios in its FDP and these are outlined in the company’s response to this writer. GSPC raised a few questions. How could GSPC or DGH or MoP&NG not allow the extraction of gas from reserves estimated at close to two trillion cuft to be produced over a period of two decades “simply because” the notified gas price was “momentarily” low and below the level at which the block would be considered “viable”? Was it to be presumed that gas prices would always remain below the $4.2 per mBtu mark? Was this not a “short-term approach”?
GSPC nevertheless carried on with its process of discovering the price of gas from the DDW block which was completed in April 2013? The result was a minimum or “floor” price of $8.5 per mBtu which priority sector users (mainly in the power and fertilisers industries) “were ready to pay,” the company claims, adding that this confirmed its expectations that at the time the FDP was submitted gas prices were expected to rise given the gap between demand and supply in the country. After the new pricing guidelines announced in 2014, the officially administered price of gas came down to $3.81 per mBtu. However, this price is not applicable to contractors operating in HPHT fields. The company says the price applicable to GSPC’s DDW field is currently $6.61 per mBtu—well above the level the block needs to be commercially viable.
The DDW field has HPHT conditions and low permeability. Pressures can exceed 10,000 pounds per square inch and temperatures can exceed 150 degrees centigrade. Permeability determines the ease with which the reservoir contents, whether gas or oil, can flow through the rock into the well. The FDP had recognised the HPHT and low permeability conditions of the DDW field, and noted that production rate would be impacted by these factors. It proposed to address the issue by employing well-bore designs and completion techniques to maximise bore contact with the reservoir. The CAG however, noticed a number of technological uncertainties that went unaddressed.
The FDP had proposed drilling of slanted wells or “multilateral” wells (wells which commence as a single well but bifurcate into two or more segments after a certain depth) to achieve the targeted production rate. It recognised that fracking was a technically feasible option, but did not include it in the FDP as no evaluation of fracking techniques had been conducted in the area. However, there remained uncertainty with respect to the success of the multilateral wells. Subsequently, based on further studies to solve the low permeability problems, GSPC awarded a contract for carrying out fracking in six development wells in October 2012. The first well this was tried on produced no results. It turned out that this was a result of the use of an inappropriate fracturing fluid. Following this, two wells were completed without using fracking techniques.
The CAG noted that the successive changes in approach for resolving the issue of low permeability and outcome indicated that GSPC was still not clear on how to achieve the proposed production rate from the wells. It observed that the company’s board of directors was apprised in May 2015 that GSPC had not developed suitable drilling technology during the exploration phase and data gathered during the exploration stage was inadequate, creating problems in development operations. With trial production having started in August 2014 and having achieved an average production of 19.45 mmscfd by March 2015, against a target of 200 mmscfd, the CAG was forced to conclude that the technological issues remain unresolved.
The GSPC management’s response was that the company first drilled three wells using conventional perforation techniques. Realising that the unprecedented low permeability of the reservoir was not allowing a “desirable level of production using conventional methods,” GSPC decided to go for more sophisticated hydro-fracturing technique and changed the entire design of the fourth well. As mentioned, GSPC claims the hydro-fracking it performed at a depth 4,000 metres below the seabed is a “rare” achievement anywhere in the world and has helped increase production.
Curious Case of Tuff Drilling
In March 2010, GSPC had awarded a contract for “platform rigs” that would operate from well-head platforms to a contractor named Tuff Drilling, a consortium led by Tuff Drilling Private Limited which included Spartan Offshore Drilling and BHL International as its partners. Tuff Drilling had not designed, engineered or constructed a modular platform rig on its own before. According to the CAG, this was a violation of the tender conditions. It was only the experience of the individual consortium members that was to be considered and Tuff Drilling did not meet the criteria.
The well-head platform from which the platform rig was to operate was expected to be ready for drilling by March 2011 and the rig was to be mobilised by then. Tuff, however, failed to meet this requirement and the rig did not arrive on time. The contract was then re-awarded to Nabors Drilling International whose rig arrived in February 2012. As the well-head platform was ready for drilling from May 2011 onwards, GSPC had to deploy a more expensive jack-up rig for drilling development wells during the period September 2011 to January 2012. This resulted in additional expenditure of ₹34.20 crore.
Tuff Drilling was incorporated only in 2006 after Modi’s initial announcement about GSPC’s gas discovery in the KG basin. Its promoters, who have been in the apparel business, included Om Prakash Yadav, Vivek Yadav, Vinay Yadav, M G Mohan Kumar, Prakas Ladhani and S N Ladhani. Between 2007 and 2009, several companies with similar names like Tuff Energy, Tuff Infrastructure, Tuff Mining and so on, were set up with the same set of directors. These companies were registered in Bangalore and Delhi. In a press note issued in 2011, the then leader of the opposition in the Gujarat assembly, Congress MLA Shaktisinh Gohil, alleged that the ₹3,930-crore memorandum of understanding (mou) signed between Tuff Energy and the Gujarat government during the Vibrant Gujarat summit of 2009 “did not translate into anything for the state and the people of Gujarat.” He further alleged that the Tuff group had used the platform of Vibrant Gujarat to raise finances. A few months after the summit, Tuff Drilling won the contract for supplying rigs to GSPC (Subramanian 2016).
On 4 May 2016, it was reported that Tuff Drilling had defaulted on loans of over ₹120 crore to public sector banks, including Punjab National Bank, Corporation Bank and United Bank of India. The last-named bank had named Tuff Drilling and two of its directors, Om Prakash Yadav and Vivek Yadav, as “wilful defaulters.” Data from the Ministry of Corporate Affairs indicated that the company had not held an annual general meeting since 2010. It had a paid-up capital of ₹30 crore and was under liquidation. The other companies in Tuff group were listed as “active” but each had a paid-up capital of ₹1 lakh. When Tuff Drilling’s bankruptcy became known, it kicked up a political storm. Congress leaders claimed that there had been corruption and nepotism in the transactions between Tuff Drilling and GSPC (Ahmedabad Mirror 2016).
The GSPC management responded to this writer’s questions by claiming that the technical qualification criteria required in the tender document provided that in the case of a bid by a consortium, the experience of individual members of the consortium would be added up to decide whether the consortium qualifies technically or not. This claim is in contradiction to what the CAG has contended. GSPC disclosed that “due to non-performance,” its contract with Tuff Drilling was terminated in March 2011, that it has not made any payment to Tuff Drilling and that it has encashed its bank guarantee worth ₹15.54 crore. (The CAG has pointed out that the additional expenditure incurred on this deal was twice the amount.)
The CAG has alleged that GSPC failed to seek forest and wildlife clearances from the relevant departments of the Government of India and the Government of Andhra Pradesh to construct a subsea pipeline in the KG basin. This resulted in costs going up from ₹763.20 crore to ₹1,887.66 crore, mainly on account of “stand-by charges” paid to the contractor. The delay in laying these pipelines held up the rest of the project, resulting in further stand-by charges to the tune of ₹68.32 crore (CAG 2012).
The GSPC management responded in great detail to what the CAG alleged by stating that what happened is a “classic case” of the letter of the law being enforced but not its spirit. It acknowledged that its work in laying pipelines was stopped by Andhra Pradesh forest department officials for a “considerable period of time” due to certain doubts and misunderstandings which were eventually cleared. GSPC states that at present it has adhered to all relevant rules and regulations.
GSPC pointed out that an expert appraisal committee of the Ministry of Environment, Forest and Climate Change had specifically stated in July 2008 that GSPC’s exploration activities would not interfere with the forest or mangrove area while approving its plan with two changes. These included (i) the adoption of a non-straight line path for the pipeline as the initial plan had traversed through a reserved forest area and (ii) the laying of pipelines through the riverbed instead of through areas where there were mangroves. The company claimed that there had been “further due diligence” on its part by having a second topographic map to ascertain the areas traversed by the pipeline after an initial environmental impact assessment report prepared by the National Environmental Engineering Research Institute (NEERI). Hence, it took a “conscious call” based on a “bona fide belief” that no further approval would be required under wildlife or forest conservation laws.
However, the Andhra Pradesh forest department objected to the lack of clearances once work had begun, leading to payment of “stand-by charges.” The GSPC management said notices were issued under both the Forest (Conservation) Act (for the pipeline traversing through the Rathikhalva reserved forest area) as well as under the Wildlife (Protection) Act (for the pipeline being routed through the Coringa Wildlife Sanctuary) to claim that this “proved” that the forest authorities were not certain about what the exact path of the pipeline should be. A certified map of the area was apparently not provided and a site inspection by forest department officials on 13 April 2003 “concluded” that there were no mangroves or vegetative growth at the points where GSPC’s pipeline had passed through.
The story of how this happened would merit a separate article.
Eleven Years, Little Gas, ₹19,716 Crore in Debt; Now What?
Test production did start in 2014 from three wells in the DDW block. The GSPC management states that more than 8 billion cuft of gas has been produced since then but the CAG notes that the rate of production is yet to stabilise and falls far below the targeted rate. Meanwhile, the financial burden on GSPC continues to grow year after year.
In 2013–14, GSPC’s net profit fell to ₹35.90 crore from ₹846.57 crore in the previous year. The figure shrunk further in the following year to ₹23.70 crore. The drastic fall in the company’s net profit in 2013–14 can be attributed to exploration expenditure worth ₹2,123.72 crore being written off by GSPC in blocks where it had started exploration and production activities but ended up surrendering the acreages. Meanwhile, the company’s total borrowings rose from ₹7,126.67 crore in 2010–11 to ₹19,716.27 crore by 2014–15, a rise of 177%. This raised its interest costs from ₹631.53 crore to ₹1,804.06 crore in the same period, over 75 times its net profit.
The lion’s share of this debt burden was due to its activities in the KG block, as much as ₹1,616.42 crore of the total interest cost, according to the CAG. It stated further that even if commercial production were to start in 2015–16, the revenue generated from it would be insufficient to service the interest costs. GSPC’s consortium partners also continue to owe it significant amounts. GGR owed ₹1,734.60 crore, a claim that is in dispute. Jubilant owed ₹313.60 crore, having stopped making payments since October 2013 citing various procedural lapses. Even though GSPC disputed Jubilant’s claims, it did not ask for interest on the amount due, the CAG noted. GSPC needed an infusion of equity capital by finding a suitable financial partner for the DDW project. In other words, GSPC was looking for a “strategic” ally. And who is better to fit this role of a white knight for GSPC than the country’s biggest player in the sector, ONGC?
In January 2016, it was reported that GSPC was looking to restructure its business to improve its credit profile (Kalpana Pathak 2016b). This seems to have fallen through as by April 2016 it was being reported that GSPC was in talks with ONGC to sell a controlling stake in its block in the KG basin (Maulik Pathak 2016). Union Minister of State for Petroleum and Natural Gas, Dharmendra Pradhan, confirmed this on 3 June 2016, stating that “ONGC and GSPC [are] in ‘commercial discussions’ on (the) KG (basin) block” (Economic Times 2016). Pradhan had earlier commented on the rising debt saying that it was a feature of the exploration and production business and was unavoidable. “These are very difficult fields. The nature of exploration (of oil and gas) is such that it has a 20%–25% chance of success and till that time you will need to keep on spending. It is only when the production reaches the commercial phase that you start reaping the profits,” he had stated (Indian Express 2016b).
On GSPC’s negotiations with ONGC, he argued that with the new regulations on natural gas pricing, the deal would be mutually beneficial. This was contested by the Congress however, with its MP Jairam Ramesh accusing Pradhan of “playing the role of an investment banker” and questioning whether the deal would genuinely benefit ONGC or if it was rather an attempt to “whitewash a murky record” and “protect” Prime Minister Modi (Ramesh 2016a). Ramesh had earlier charged that “senior ONGC officials” were being pressurised by Modi, the BJP’s national president Amit Shah and Pradhan himself to purchase 50% of GSPC shares and that “ONGC officers were concerned about investing in a dying unit.”
The GSPC management confirmed to this writer that commercial discussions with ONGC over a “strategic partnership” had commenced but added that it was premature to comment on the progress of these negotiations.
Undue Benefits to Adani Energy?
As mentioned at the beginning of this article, large “write-offs” of large investments are not uncommon in oil and gas exploration activities. Over the years, however, the CAG has persistently noted discrepancies in several transactions between GSPC and other companies leading to losses to the public exchequer or the passing off of undue financial benefits to private companies. While these discrepancies involved relatively small amounts compared to those detailed earlier, seen in their totality they constitute a litany of problematic deals and transactions that fall into a pattern.
One of GSPC’s earliest oil and gas exploration and production ventures was in Hazira, 25 km from Surat. Here, in 1994, it partnered with Niko Resources to drill for gas, entering into a contract through which it would share revenues from the sale of gas in a 2:1 ratio. GSPC would keep two-thirds of the revenue; Niko the other third. In 2003, Niko and GSPC jointly signed a gas sales agreement (GSA) with Adani Energy Limited (AEL), a flagship company of the Adani Group headed by Gautam Adani who is close to Prime Minister Modi.
Under this agreement, AEL was to be supplied one lakh standard cubic metres per day (scmd) of natural gas from the Hazira facility at a price of $3.45 per thousand cubic feet (one cubic foot is equivalent to 0.0283 cubic metres). The agreement was valid initially for 10 years. AEL was buying the gas for further sale to commercial, industrial and domestic consumers. Under the GSA, the supply was to start at 20,000 scmd for the first month and then scale up by 20,000 scmd each month to reach the agreed figure of one lakh scmd by the fifth month. If AEL was unable to accept delivery of the amount it was contracted to receive, it would have to pay minimum charges equivalent to 80% of the daily contracted quantity.
GSPC was ready to supply the full contracted quantity of one lakh scmd from 1 September 2004. AEL, however, wished to buy only 5,000 scmd on a temporary basis because it had not yet given gas connections to a large number of its potential customers. GSPC accepted this request and supplied the reduced quantity for two months. In December 2004, it declared 2 December as the “commencement date” for the GSA and started regular supply under the agreement. AEL pleaded once again that most of its potential customers were carrying out major modifications in their plants. It requested that the “temporary” arrangement be extended till March 2005. GSPC agreed once again, and postponed the commencement date to 1 April 2005.
A 2007 CAG report noted that the GSA contained no provision permitting a “temporary” arrangement. It noted that once the commencement date had been declared, under the GSA, AEL was obliged to take 1.21 crore scmd from December 2004 till June 2005. However, AEL actually took only 71.61 lakh scmd. The penalty that should have been paid by AEL worked out to ₹2.70 crore, of which GSPC’s share would have been ₹1.80 crore. This amount, the CAG concluded, was an “undue benefit” passed on to AEL.
The GSPC management did not comment on this issue.
Another CAG report presented in 2012 noted one more such instance of undue benefits being passed on to AEL. Between 2006 and 2009, GSPC bought gas from Hazira LNG Private Limited (HLPL) and sold 23,20,196 mBtu of this gas to AEL. The price of the gas for GSPC ranged between ₹340.95 per mBtu and ₹1,075.44 per mBtu. However, the gas was sold to AEL at a lower price, the reductions ranging between ₹5.23 and ₹430.79 per mBtu. The CAG could find no recorded reason for the discount being offered to AEL. The CAG calculated that this resulted in a loss of ₹70.54 crore to GSPC, an amount that was passed on to Adani Energy. This revelation caused Congress MLA Gohil to claim in a March 2012 press note that the “Gujarat government gives expensive gas to common rickshaw-wallahs but gives gas to Adani at a rate lower than (the) purchase price.”
When questioned, the GSPC management chose not to respond on this topic.
Mundra LNG Terminal—Another Favour to Adani Group?
A ₹4,500 crore project to construct an LNG terminal in Pipavav had initially been envisioned as a joint venture between GSPC, Adani Enterprises and a company in the Essar Group. GSPC held a 50% stake, with Adani Enterprises and the Essar Group company each holding a 25% stake. The project was subsequently relocated to Mundra in a special economic zone (SEZ) being developed by Adani Ports. This was ostensibly going to save the project between ₹700 crore and ₹800 crore. Essar left the project after it was shifted to Mundra. GSPC and Adani now had to find a fresh partner to pick up Essar’s 25% stake in the venture (Pandit 2011). In 2011, the two companies were granted permission by the Gujarat government to convert the Mundra LNG terminal into a 50:50 joint venture with Adani grabbing up Essar’s stake (Pandit 2013). In 2014, GSPC was declared a “co-developer” and the project is due to be completed by December 2016 (Mint 2014).
The MoU for this terminal had been signed by Adani during the Vibrant Gujarat summit in 2007. Gohil raised a number of questions about the project. Since GSPC’s power plant is situated at Pipavav, why should the LNG terminal be located at Mundra? Further, Mundra is an earthquake-prone area and public money has been spent on levelling the land. Gohil has claimed that the “real” reason for the shift in location was to benefit the Adani Group port at Mundra through which duty-free imports take place. It has also been alleged that land for the Mundra SEZ was sold to Adani Group companies at very low prices varying between ₹1 and ₹32 per sq km against its actual worth of ₹1,500 per sq km (Pushparaj 2016).
The GSPC management again chose not to comment on this subject.
Attempt to Favour Swan Energy?
GSPC, in collaboration with Gujarat Power Corporation Limited (GPCL), through a special purpose vehicle called GSPC Pipavav Power Company (GPPC), took up a project to establish a 700 megawatt gas-based power plant in Pipavav. On 24 March 2009, it was announced that GSPC was going to sell a 49% minority stake in GPPC to Mumbai-based Swan Energy (Business Standard 2009). This would have made Swan the single largest stakeholder in GPPC, with GSPC and GPCL holding 34% and 17% respectively.
The shares of Swan Energy are listed on the Bombay Stock Exchange. The company has interests in textiles, real estate and energy. Its deal with GSPC attracted controversy with Gohil alleging that Swan Energy had been given the stake without following a proper bidding process. The Congress politician filed a petition in the Gujarat High Court challenging the sale, alleging that financial assets had been undervalued and that no competitive price determination process had been attempted. GPPL’s shares were sold at ₹37 each though these were allegedly worth at least ₹260. The total potential loss was ₹2,296.29 crore, Gohil alleged. The deal also attracted controversy because 70% of the carbon credits that would have been earned by converting three coal-based power plants in Gujarat to ones that would use gas as feedstock would have accrued to Swan in spite of it holding only a minority stake in GPPC (Rediff 2010). While Gohil’s petition was still pending in court, Swan announced that it had decided to withdraw from the project (Pathak 2012).
Yet again, the GSPC management did not comment on this issue.
Undue Favours Shown in Gas Trading
Reports by the CAG over the years have highlighted various ways in which GSPC has allegedly bestowed undue financial favours on private companies. GSPC’s management did not comment on any of these irregularities.
A 2012 CAG report found that GSPL had passed on undue benefits of ₹52.27 crore to RIL in an agreement that allowed RIL to use GSPL’s pipeline network. In 2007, the two companies had signed a gas transportation agreement to transport gas from RIL’s KG-D6 block through GSPL’s pipelines from Bhadbhut in Bharuch district to RIL’s refinery in Jamnagar. GSPL was to lay new pipelines for the purpose. The agreement was to be valid for 15 years starting 1 July 2008. Transportation charges were of two kinds: capacity charges at ₹6.75 per mBtu paid on the maximum capacity of 3,71,000 mBtu per day and commodity charges at the same cost per mBtu on the actual quantity of gas transported. Due to delays in the development of RIL’s KG-D6 field, the flow of gas started only from April 2009. By this time, the new pipeline network had been built at a total cost of ₹807.30 crore.
However, the government allocated gas from the KG-D6 supply to priority sector users which prevented RIL from directing any gas to its refinery. To cater to the refinery’s demand, RIL arranged to purchase gas from two firms at Mora and Dahej. It entered into a fresh short-term gas transport agreement with GSPL for transporting 25,52,200 mBtu of gas per day from Mora and Dahej to its refinery for a period of three months between May and July 2009. This agreement did not split the transport charges into capacity and commodity charges. The transport charge was fixed at ₹12.45 per mBtu (the same as the capacity and commodity charges combined in the earlier agreement) with an additional charge of ₹9.18 per mBtu.
From October 2009, RIL was allowed to direct its KG-D6 gas to the Jamnagar refinery. Yet, GSPL incorrectly charged it under the terms of the new agreement instead of the one that should have applied and as a result ended up earning ₹52.27 crore less than what it should have. This was termed by the CAG as an “undue benefit” passed on to Reliance.
In a 2015 report, the CAG found that GSPL issued bills in March 2013 to RIL and Torrent Power Limited for using the “high pressure Gujarat grid natural gas pipeline network” from July 2012 to February 2013 as per the tariff regulations that GSPL itself had requested from the Government of Gujarat in 2012. These amounts, ₹83.59 crore for RIL and ₹31.88 crore for Torrent Power, were permitted to be paid in four and two instalments respectively. However, GSPL did not raise invoices for the interest lost on the amount locked in, which caused a loss of ₹1.71 crore and provided an equivalent undue benefit to the two companies.
A 2014 CAG report highlighted one particular loss-making transaction by GSPL with Essar Steel based on a 2004 agreement. GSPL had agreed to transmit gas from its LNG terminal at Dahej to Essar Steel’s plant in Hazira. Essar Steel was to bear the cost of transportation at ₹6.28 crore per month. The agreement was amended in 2009 and 2010 to extend its validity as well as to extend the transport capacity that was reserved for Essar Steel. However, Essar subsequently requested that gas supply be stopped from May 2012 till March 2013 and transport charges be waived for this period. GSPL granted this request for the whole of 2012–13 and did not raise invoices for transmission charges. These were both in violation of the gas transmission agreement and caused a loss of ₹73.70 crore to GSPL due to non-utilisation of its reserved capacity, a move that the CAG said “may have benefited ESL (Essar Steel Limited) unduly at the cost of the public exchequer.”
In a 2011 report, the CAG noted that GSPC had failed to recover upwards of ₹50 crore from Essar Power and Gujarat Paguthan Energy Corporation Limited (GPECL). It had gas sale agreements in place with both these companies guaranteeing supply of gas from 2008 to 2013 at a daily average volume of 13,00,000 scm and 4,00,000 scm, respectively. The two companies were power producers and supplied their power to Gujarat Urja Vikas Nigam Limited. Under the agreements, if the companies were unable to accept delivery of a “minimum take off quantity” equivalent to 80% of the daily contracted quantity, they were to pay “take or pay” (ToP) charges on the difference between the amount they actually bought and the minimum amount. In the July–September 2009 period, both the companies failed to accept the minimum take off quantity. GSPC demanded that ToP charges of ₹46.71 crore be paid by the Essar Group company and ₹1.26 crore by GPECL. Neither paid up. GPECL had given a security deposit to GSPC which could have been encashed but GSPC chose not to exercise this option. Essar Power had furnished no such security deposit, in violation of the terms of the gas sale agreement. Further, GSPC failed to levy penalties of ₹3.50 crore (on the Essar Group company) and ₹0.09 crore (on GPECL) on the outstanding ToP charges as well.
In a 2010 report, the CAG found that GSPL had favoured a company named Atul Limited from Valsad in a project to develop spur lines from its main Mora–Vapi pipeline to benefit potential customers in three clusters in Vapi, Morai and a Gujarat Industrial Development Corporation estate in Saraigram. Atul did not come under any of these clusters. Moreover, no gas transmission agreement was signed. However, GSPL still made an investment of ₹2.25 crore in a spur line from the main pipeline right up to the premises of Atul. The CAG termed this an “irregular investment without due justification.” A further ₹40.89 lakh was lost as interest over 23 months due to this investment being locked up.
Drilling in the Wrong Block
GSPC struck oil in Tarapur near Ahmedabad in 2005. It was the operator in the onshore block CB-ON/2 in a joint venture with GGR. From 2005 till 2009, it went on to drill 36 exploratory wells in the Tarapur block. Of these, one well, TS-8, drilled between June and August 2007 proved to be oil-bearing. It was drilled at a total cost of ₹10.54 crore. However, it was subsequently noticed that TS-8 in fact, was not in the block at all! It turned out to be located within the boundary of a neighbouring block—the North Kathana Field (NKF). The operator of the NKF block was Hyderabad-based firm Heramec (which is incorporated in the Bahamas). GSPC was a non-operator partner to Heramec in that block, with a participating interest of 30%.
With the discovery that the well was not in its own block, GSPC proceeded to hand it over to Heramec. It should have recovered the cost of drilling the well but the management committee of the NKF block, on the suggestion of representatives of the MoP&NG, decided that the cost should not be passed on until GSPC completed an internal investigation and fixed responsibility for the error. The investigation did not take place, at least until March 2011, a CAG report of 2012 noted. The GSPC thus blocked funds amounting to ₹10.54 crore leading to a loss of accumulated interest worth ₹3.94 crore. There were no comments on this matter from the GSPC management.
GSPC Kept Drilling Without Permission, Twice
GSPC and Heramec were the joint holders of a block in Unawa, north-west of Mehsana. In May 2008, a development well was drilled which was water-bearing. GSPC went ahead and drilled another well without the approval of the management committee of the block. The work stopped midway and a sum of ₹2.75 crore was wasted, the CAG noted. As the operator of the block, GSPC continued exploration activities beyond the stipulated period without approval from the DGH. In another block, Tarapur, during the exploration phase between November 2000 and November 2008, GSPC drilled 35 wells and found oil in 12 of them. The document of commerciality was submitted in April 2008 and the MWP requirements under the exploration phase were also declared as completed in November 2008. However, instead of preparing an FDP, the CAG noted that GSPC continued to drill one exploratory well, seven appraisal wells and three development wells at a cost of ₹9.87 crore, ₹71.25 crore and ₹23.17 crore respectively, without the approval of either the management committee or the DGH. The non-operator partner, GGR did not agree to share the cost. The entire expenditure of ₹104.29 crore had to be absorbed by the GSPC. These unapproved wells did not yield sufficient hydrocarbons to even recover costs. Nothing was gained by anyone. The GSPC management did not comment.
Closing Cambay Oil Field
GSPC had entered into a PSC with Oilex Limited, an Australia-based firm, to carry out extraction operations in the onshore Cambay oil field in Gujarat. GSPC held 55% of stake in the project while Oilex held the remaining 45%. The partners have together invested $100 million in Cambay over the last decade. The returns have been as low as $3 million (Pathak 2016a). In October 2015, GSPC refused to pay its share of the work programme it had sanctioned at the beginning of the fiscal year. This was in addition to the $7.7 million that GSPC already owed Oilex (Economic Times 2015).
A CAG report had pointed out as early as 2012, that income from the Cambay block was insufficient to meet expenses, resulting in an average annual loss of ₹4.37 crore for four out of five years in the period between 2006–07 and 2010–11. In April 2016, Oilex mentioned in its quarterly report that GSPC continued “to be in arrears in paying cash calls and in delaying approvals for budget and work programs,” after it was sued in November 2015 by one of its investors for failing to disclose that GSPC was defaulting on its share of payments. The future of the joint venture is uncertain. GSPC preferred not to respond to this writer’s query on this subject.
Problems in Egypt
GSPC’s overseas operations have also been controversial with low success rates. It operated with its partners in five blocks in Egypt. In two—North Hap’y and South Diyur—GSPC bought the participating interests of its partner, GGR, to get complete ownership of the blocks. There were delays in executing the projects. In North Hap’y, drilling rig contracts were cancelled and new contracts had to be signed at a cost of $89.55 million against an original estimated cost of $68.04 million. The total cost overrun was $113.98 million. In the South Diyur block, Egyptian regulators forfeited a bank guarantee of $10.36 million (₹63.90 crore), of which $5.65 million was paid in penalties for not following procedural requirements and the regulator’s technical assessments. The difference between the expenditure claimed and the actual expenditure incurred was mainly on account of a loss of $3.29 million incurred on the disposal of excess materials that were acquired by GSPC due to poor planning, the CAG noted. The GSPC management had no response to questions about its overseas operations.
Why Did GSPC Pay for Food, Alcohol, Sarees, and Flowers?
A new twist was added to the GSPC story on 4 February 2015 when Gohil, no longer the leader of the opposition in the Gujarat assembly, issued a press note alleging that GSPC’s money was being diverted to benefit BJP functionaries. He presented a series of payment orders and vouchers that had been issued by GSPC from its office in Delhi. These were for flower bouquets, private transport facilities, sarees,food and alcohol. In response to these allegations, a criminal investigation was initiated. A first information report (FIR) was filed in Gandhinagar naming GSPL’s former special director A K Vijay Kumar and his junior Bhawna Kumar. The GSPC submitted an affidavit to the Gujarat High Court on 4 April 2016 saying the FIR had been lodged following an internal inquiry into Gohil’s allegations (Jha 2016). The company chose not to comment on this matter.
High-flying GSPC Officials
The careers of several prominent bureaucrats who had worked for GSPC have flourished. Here are three examples.
Atanu Chakraborty, a 1985-batch IAS officer, who was GSPC managing director from November 2014 to April 2016 was appointed as director general, Hydrocarbons, in February 2016 (Saikia 2016).
D J Pandian, a 1981-batch IAS officer had served as chief executive officer of GSPC for over eight years. He was first shifted to Gujarat’s energy and petrochemicals department as principal secretary and additional chief secretary, industries and mines. Thereafter, he became chief secretary to the state government in October 2014. In February 2016, Pandian was appointed vice president and chief investment officer of the newly created Asian Infrastructure Investment Bank (Business Standard 2016).
The 1982-batch IAS officer Tapan Ray, who was GSPC managing director before Chakraborty, became additional secretary in the Department of Electronics and Information Technology in New Delhi (Ujaley 2013). In June 2015, he was given charge of the post of director general of the National Informatics Centre (Alawadhi 2015). In August 2015, he moved to the Ministry of Corporate Affairs becoming its secretary (DNA 2015). In this capacity, in October 2015, he was appointed as a director of the Securities and Exchange Board of India (SEBI), the regulator of India’s capital markets (Business Standard2015).
The Congress party is certain to continue criticising the working of GSPC. Jairam Ramesh compared GSPC’s debts to those of Vijay Mallya’s corporate empire arguing that the hostility the latter’s unpaid loans worth ₹9,000 crore debt generated was not matched by the popular reaction to GSPC’s mounting debts (Ramesh 2016b). In a blog post responding to Ramesh’s claims, Rajiv Kumar of the Centre for Policy Research rubbished his arguments pointing to the inherent risks in the oil and gas exploration business (Kumar 2016). He accused Ramesh of trying to “generate a scam where there is none.”
To sum up, the recent working of GSPC reveals many interesting and unusual aspects of the relationship between politicians and bureaucrats who lead public sector companies. All eyes are now on ONGC. Will India’s biggest oil and gas exploration company bail out GSPC? The story goes on.
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