Capping speculation

The government's move to clamp down on oil and gas companies making premature announcements about the results of their exploratory efforts is long overdue.

Under pressure to prove the efficacy of their exploration efforts, and increasingly with an eye to the stockmarkets, companies tend to provide upbeat estimates of potential hydrocarbon reserves that may later prove to be off the mark.

Reliance, for example, had initially estimated its gas reserves to be in the region of 12-14 trillion cubic feet (tcf), much to the surprise of industry experts, who felt that India didn't have a rock structure that could yield such rich reserves.

Over a period of time, the size of the find was scaled down to seven tcf and is now estimated at around five. ONGC estimates that it has around four tcf of gas, but it still needs to drill a few more wells to come up with an improved estimate.

In the US, Shell fell foul of the law when it downgraded its reserves after giving out some other figure in its annual report. It had apparently flouted the reporting standards prescribed by the Securities and Exchange Commission in this regard.

The resultant scandal led to the departure of Shell's chairman, CEO-designate, and CFO in rapid succession. India needs such tough laws, too, if it is to prevent similar misreporting.

The short-term effect of the proposed curbs on announcements will affect ONGC, which has just reported a large find, but in the long run it should work fine for everybody.

Caution is warranted not only in the reporting of large finds, but also in estimating the level of extractable reserves. So far, Indian companies have been able to extract a lot less oil from their fields in comparison with global best practices.

ONGC's average is around 24-25 per cent of proven reserves as against the global average of 30-32 per cent. This is something that needs to be kept in mind when the guidelines are notified by Sebi (based on inputs from the petroleum ministry).

In the case of gasfields like the ones owned by Reliance and ONGC, the problem is a lot less acute as anywhere up to 80 per cent of reserves are said to be extractable.

Another issue that comes up in the light of the Shell episode is the need to have standard classifications and definitions of what are reserves. All companies need to go by the same definitions.

Ideally, no announcements should be allowed unless they have been certified by the Directorate General of Hydrocarbons. But it is equally important to ensure that confirmatory announcements are not delayed inordinately.

This will create a situation in which only company insiders know the real story, increasing the chances of insider-driven speculation in the company's shares.

While protecting investors is one part of the story, the proposed guidelines are also important for making a more realistic estimate of the country's energy resources.

Many experts earlier believed that, but for the problem of environmental pollution, India's coal reserves would be sufficient to meet its energy needs for another 50-75 years.

Yet, fresh estimates show that our coal reserves are nowhere near as high as initially assumed. Indeed, large chunks of reserves are located so deep underground that their recovery is economically unviable.

This means that production levels could decline after another 20-25 years. Standardisation will help clear some of the confusion on how good, or how bad, the country's energy reserves really are.