RIL-Ministry Spat Forces PMO to Look at Oil, Gas Pacts Rangarajan to head committee, to press for revision in terms of production sharing contracts for future deals

A committee headed by C Rangarajan will review terms of the contract that oil & gas companies sign with the government, after a controversy between Reliance Industries and the oil ministry over declining KG-D6 output highlighted the need for a change in the clauses. 

Top government officials told ET the Prime Minister's Office has taken the lead in the initiative, realising the need for a robust contract that will reduce messy disputes and attract more foreign investment in the critical sector. 

Headed by C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, the committee will seek to rewrite some of the terms in the production sharing contracts (PSCs) and will not affect agreements that have already been signed, two people with knowledge of the matter said. The decision, they added, was taken after meetings between Prime Minister Manmohan Singh and Oil Minister Jaipal Reddy last week. 

The PSCs were first drafted under the New Exploration Licensing Policy (NELP) in 1997. They provide a framework under which private companies can recover their development costs or capital expenditure from oil & gas revenues after which the profits are shared with the government as per a specific formula. 

The trigger for the current review appears to be the ongoing spat between Reliance Industries and the oil ministry over declining production and cost recovery for the private player from KG-D6, the country's biggest gas field. 

The ministry, which is trying to fight off accusations of favouritism towards Reliance Industries, issued a notice to the company earlier this month for not fulfilling obligations and failing repeatedly to meet targets, factors which it said caused considerable losses to the government. The notice imposed a penalty of . 6,600 crore on RIL. The ministry also struck down Reliance's proposal to recover $1.2 billion in costs incurred on the D6 field, saying the company had drilled fewer wells than originally committed. 

Reality Check 

What are Production Sharing Pacts? 

They provide a framework under which private oil firms can recover costs from the revenues after which profits are shared with government 

Why the Review 

PMO keen to avoid disputes & attract investment. But experts say fl aws are in implementation, not in PSC Need for Freedom on Gas Pricing 

Gas output from the premier field had dropped from close to 61.8 million standard cubic metres per day in March 2010 to 33.67 mmscmd in April this year. The Comptroller & Auditor General had charged the oil ministry with laxity in enforcing contracts with private companies, including RIL, and warned the ministry of the risks involved in approving capital expenditure without an internal audit of the gas field after 2009-10. 

Reliance had served an arbitration notice on the government in November 2011, anticipating penalties, and moved the Supreme Court this year after the Centre failed to appoint an arbitrator. RIL has consistently maintained that the fall in output is due to geological reasons and drilling more wells will not change the situation. It has also said the PSC allows it to recover costs irrespective of the level of production. A former senior official in the government, who headed the oil ministry, said the PSCs had broadly stood the test of time. The flaws were in implementation rather than the terms, he said, while making out a case for strengthening the Directorate General of Hydrocarbons — a quasi regulator for oil & gas exploration. "Unless some of these issues are sorted out and there is greater freedom on pricing of gas, many private sector companies may stay away from investing in the sector," he said. 

The latest development comes even as RIL has pitched for an increase in the current gas price of $4.2 per million metric British thermal units (mmBtu), saying rates should reflect global trends. An empowered group of ministers headed by Finance Minister Pranab Mukherjee is examining the issue, though the oil ministry has opposed a mid-course change. As per the original formula, prices were to be revised in 2014. The issue has now been referred to the law ministry. Earlier, the PM had said exploitation of natural resources should lead to a win-win solution for both investors and Indian citizens.