It is a matter of legitimate concern that the Krishna-Godavari natural gas fields in the Bay of Bengal do not appear to be yielding the gas output that, at one point, they were expected to. Whatever the cause for this phenomenon — a matter not entirely irrelevant, as that cause is what's, in effect, being disputed — its consequences are worrying. First, the precipitous drop in production -- from 61 million standard cubic metres a day (mscmd) in March 2010 to 30 mscmd at present, which is projected to decline further to 20 mscmd next year — has had a cascading effect across gas-intensive sectors including power and fertilisers. The government revenue, too, has been less than expected as a consequence. And, finally, it has added to the perception that something is very wrong in how India is managing its natural resources, an important component of the increasing lack of faith in its growth story. Thus, apparent movement in the dispute between the government and the largest operator in the KG basin, Reliance Industries Limited, is welcome. It appears that the government has told Reliance that pending capital expenditure outlays for exploration of additional sections of the KG-D6 block could be approved. However, this will require that RIL open its books to the Comptroller and Auditor General, the ministry has warned, something the company is loath to do.
The issues here are not simple — but some would think that the long stand-off between the government and RIL has made them appear unnecessarily and excessively complex. RIL is unhappy that the pre-agreed price of gas from KG-D6 appears now to be substantially lower than what the market could support. It would like this revised; the government, correctly, is disinclined to agree to this request. Simultaneous with RIL’s dissatisfaction, production from KG-D6 has fallen off sharply. RIL maintains it is due to technical factors and the nature of the gas field, but these reasons do not appear to be convincing, according to many observers, including some in the government. Meanwhile, there are concerns that the nature of the contract between the government and RIL allows the concessionaire to over-spend on investment, which has the effect of reducing government revenue when combined with the drop in production. The staring match between the government and the operator has resulted, among other things, in demands from the government that the operator dig more wells, which Reliance claims would be useless. The price Reliance can charge comes up for renegotiation in 2014, when it will presumably be increased — and the government recognises it would look terrible if, suddenly, the same areas currently underproducing went back to high production for “technical reasons”.
While further exploration must eventually be sanctioned, the government must stand firm in its expectation that Reliance meet its agreements. An independent technical evaluator should judge the claims that Reliance is making about the gas field’s problems; and the CAG must be allowed unimpeded access to the operator’s records relating to investment decisions that eventually impact the government’s revenue share. This should also be a lesson as to the structural problems with India’s exploitation of natural resources. In a pure market with strong regulation, rather than this interlinked mesh of concessions, subsidies and faulty contracts, such problems would not arise. The government must move towards such models in future.