The country’s upstream regulator — the Directorate General of Hydrocarbons or DGH — manages over 160 production-sharing contracts signed under the decade-old New Exploration Licensing policy (Nelp) and also keeps track of investments in the pre-Nelp blocks. In an interview with Vandana Gombar and Rakteem Katakey, DGH Director-General V K Sibal defends the system of checks and balances on the operators and also makes a strong case for disinvesting government stakes in oil companies so that they can perform better. Excerpts:
Your comments on the increasing costs being claimed by some operators?
Our production-sharing contract (PSC) is one of the best in the world. If there is a price increase, the government tranche goes up and the government’s share also increases and if the cost increases, the cost increase goes mostly to the operators, not to the government. Suppose in earlier tranches, when production just starts — mostly in Reliance case itself — 90 per cent profit petroleum belongs to them and 10 per cent to us, so, if the cost (and cost recovery) goes up — say doubles — 90 per cent of the cost goes to the operators and only 10 per cent comes to the government. If you go to higher tranches, cost recovery has been done and only operating expenditure remains. Now government share is 85 per cent and theirs is 15 per cent. So the arrangement that we have today in the production-sharing contract — it is so beautiful that it balances out — the more the cost increase, the more the operator suffers. His profit suffers more than anybody else’s….
You have earlier said that costs have increased — for example for rigs. There is however a perception that the capability of DGH to audit the costs is limited?
There are three audits — DGH audit, government audit and an independent audit — on any cost before it is allowed for cost recovery. There is the production-sharing contract which details how you hire or buy equipment. There are guidelines for up to $5,000 contracts, for anything above $50,000 they can have limited tender and for anything above $500,000, they have to opt for global tenders. If they do not award the contract according to guidelines, they have to come to the management committee, where, in most cases, I am the chairman.
Within the management committee, the expertise is there to approve or disapprove?
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The management committee only approves the activities, not the budgets. Suppose, if this year they want to drill 2 wells and 3 seismics, they give the budgets and the costs are benchmarked, so, we approve the budgets. We do not say that your capex is $1 billion, please go ahead. No. Only the initial capex is taken into consideration to find out if this project is commercially viable and their cost per barrel is comparable to world standards. You see Goldman Sachs report in terms of Reliance — it is the fastest-development and the lowest-cost project in the world compared with 32 similar projects around the world. So we don’t approve capex. We approve only activities, and year-wise we only approve budgets.
So are you saying that the current system is fine as it is and there is no room for improvement?
No, I am not saying that. What I am saying is that here is a production-sharing contract where reducing costs is a win-win situation for everybody.
The question is that if some entity chooses to inflate costs — do we have the system of checks and balances?
They cannot. I told you, if they increase the costs, they are in a problem bigger than anybody else. We also do surveillance of production and we also do the surveillance of all purchases. Special audits are also done if there is an anomaly. Like in one of the cases, we saw that production was suddenly going down. We had a surveillance team — and now we are also doing surprise surveillance —and then we see that operators are not playing with the production to control the Investment Multiples (to ensure they have to share less with the government). The checks and balances in production-sharing contracts are more than income tax checks, if someone reads through them.
Even with all the income tax checks in place, tax evasion does take place...
With all the police, murders are still happening... so that’s a general statement. What we are saying is that for an average operator — an international company — it is a beautiful environment to work within the rules of the game. Look at America. When Chinese were buying Unocal, they said no, this is our company. But in our country, our own company is doing well but if it is private, everybody speaks against it. We are very biased. We want systems where you can create chaos and get away with it. Nobody wants discipline in this country.
Suppose Bombay High (a nomination block) was a block auctioned under Nelp and given to company ‘X’, would the government have been a net gainer or loser if the production-sharing terms were the same as, say, they are with Reliance Industries?
Take Panna, Mukta, Tapti, Ravva. You know the reserves which were calculated and the production was 3,000 barrels. Today, they are producing 80,000 barrels and so much profit petroleum they have generated. Recently, one of the fields in Assam was terminated by the national oil company and now Canoro has found reserves, and it will be producing 30,000-40,000 barrels a day. I personally feel the times have changed. The concept of public sector is outdated. It should be a free market.
In most of the public sector companies, people are appointed by the government and we know there are political pressures, and these people are not accountable. We have to change our governance. For so many years, everybody said east coast, west coast — nothing is there, and suddenly there are finds. You see these private players, they want value for their money, and they will get the knowledge from everywhere. Suppose the public sector company also wants to get it, it is impossible. So many systems are there. Our cost recovery is such an important point that people keep on exploring until they find oil — like Cairn.
They were only supposed to drill 6 wells but the sixteenth well is where they got the oil. Then they have drilled more than 100 wells. The thing is for entrepreneur, it is a different ball game. It is a business. PSUs were good enough earlier. Now I think structure has to change. Under Nelp, PSUs don’t have any major discovery and they have the maximum blocks. Between Oil India and ONGC, they have so many blocks they have not been able to complete programmes. We have to treat PSUs like a private company. The best thing is to disinvest. If you want more oil and gas from PSUs, you have to disinvest.
So what is the mantra for optimal hydrocarbon resource management, which is your brief?
If we want to go to the next level — we have 205 billion barrels of oil and oil equivalent gas prognosticated, but we have found only 66 billion barrels — resources gap management is required. There is a knowledge gap, a technology gap and even an infrastructure gap. Today, nobody manufactures rigs in this country. Service is zero here. There is not a single software in the country developed for E&P industry, and then we say we are IT hub of the world. The basic fact is that even our academia is perhaps 20 years behind the industry. It is only in this country where the academia is behind industry. The courses taught in geoscience schools are outdated by 20 years.