The Gujarat State Petroleum Corp. model of befriending ‘rivals’ & ‘friends’

In this extract from <i>Grand Illusion: The GSPC Disaster and the Gujarat Model </i>by Subir Ghosh, the author details how the GSPC passed on undue financial benefits to private companies

Photo Courtesy: Authors Upfront
Photo Courtesy: Authors Upfront

Subir Ghosh

It was not just a question of friends and partners; the GSPC (Gujarat State Petroleum Corporation) was inadvertently helping others—rivals, if you please—too. A piquant situation was created when the GSPC permitted Reliance Industries Limited (RIL) to virtually ‘encroach’ into the block in the KG Basin in which it was operating.

When the GSPC was planning out its ambitious KG Basin activities, RIL was already its more ambitious and powerful neighbour. Around May 2004, it was developing the deepwater KG-DWN-98/3 block that was adjacent to the GSPC block. In December 2003, RIL sought the GSPC’s consent to acquire soil data, etc, to lay a subsea pipeline through its shallow-water block. A month later, the GSPC agreed in principle saying that it had no objection to RIL’s pipeline route or shallow-water pipeline end manifold (swplem). But, it did request for a discussion so as to mitigate any mutual issues that may come up based on the GSPC’s own exploration and development plans.

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, and this platform would facilitate the transport of gas by RIL from various different wells of its block. If RIL had to build this in its own block in the deepwater 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 the GSPC’s block. Thus, by ‘encroaching’ on GSPC’s block, it gained an undue benefit at the expense of the GSPC. By this time, the GSPC had already made discoveries in two wells (in June 2005 and July 2006) in the DDW field.

When the GSPC approached RIL claiming the latter had violated the terms of its agreement, the company responded saying that it had a no-objection certificate from the GSPC as well as an approval from the directorate-general of hydrocarbons (dgh) in the ministry of petroleum and natural gas (mopng).

However, neither the GSPC nor RIL could produce proof of this purported approval to the CAG. Moreover, the construction of the crp by RIL in the GSPC’s block appeared have been a violation of Rule 7 of the Petroleum and Natural Gas Rules, 1959, under which the GSPC did not even have the right to grant permission to RIL without the written consent of the Union government. Worse, it never even sought such consent. Further, under the conditions of the mining lease, the GSPC would be responsible for the safety and security of all structures within its own block and therefore, ended up being needlessly responsible for securing RIL’s structures throughout its life period.

Naturally, RIL’s structures complicated the GSPC’s own exploration activities. Now instead, it would have to take RIL’s consent to take up any activity around the crp in its own area of operation. In order to acquire three-dimensional (3D) seismic data with more accuracy and reliability, in August 2008, the GSPC needed to conduct a survey the contract for which was awarded to Western Gebo International Limited, UK. When this work was in progress, RIL’s crp presented a physical obstacle to the standard survey methods. A specially-equipped vessel had to be therefore deployed to acquire the seismic data beneath the crp through a process called undershooting [a process of making a 3D seismic image of the subsurface of an area without the seismic equipment ever being on that land]. RIL delayed granting permission to the GSPC to do this, which resulted in the special vessel having to be kept on standby which in turn resulted in unnecessary and avoidable expenditure of $1.24 million (₹5.76 crore).

The GSPC, however, did not think that any of this was a problem. In its response to the CAG, the management argued that the issue of RIL putting up their surface facilities in the KG block did come up when the block was under exploration lease with it. Since the GSPC did not have any mining lease for the block at that time, it did not have any right on any matter concerning the block except exploration of sub-surface reservoirs in the block. The block continued to be the property of the Indian government and RIL was using the above-ground part of the block. It had been granted the mining lease only in August 2010. By that time, the surface facilities of RIL had already been established. The management contended that RIL’s structures had neither affected the developmental activities nor the production plan. The GSPC management said that the GSPC and RIL were both ‘contractors’ and the Indian government owned the land on which they operated. The government could allow or disallow the putting up of facilities in specified places by contractors who only had ‘sub-surface’ rights for exploration or exploitation of natural resources while surface rights vested with local owners of land or the state / Union government in the case of offshore blocks. The GSPC claimed all ‘necessary permissions’ were obtained from the government by RIL and that the GSPC ‘suffered no damage’.

The auditor did not buy this half-hearted argument. It commented in the report: ‘Even in the exploration licence issued to the company for the block in March 2003, it was stipulated that the licence issued was subjected to the provisions of PNG Rules. As per the Rules, necessary approvals should have been specifically obtained from government of India by the company, before giving in-principle approval to RIL. Thus, the in-principle no objection granted by the company for putting up the RIL structure in January 2004 was in violation of PNG Rules. Further, as RIL had established [a] fixed crp in company’s KG block, the company cannot avoid obtaining RIL’s prior consent/noc [no objection certificate] before taking up any development activity in the KG block surrounding crp.’

Elsewhere, the GSPC had entered into a production sharing contract (psc) with Oilex Limited, an Australia-based firm, to carry out extraction operations in the onshore Cambay oilfield in Gujarat. The GSPC held a 55 per cent of stake in the project. The partners together invested $100 million in Cambay over the previous decade. The returns were as low as $3 million. In October 2015, the 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 it already owed Oilex. The 2011 CAG report had pointed out 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 the GSPC continued ‘to be in arrears in paying cash calls and in delaying approvals for budget and work programmes,’ after it was sued in November 2015 by one of its own investors for failing to disclose that the GSPC was defaulting on the share of payments. The future of the project is uncertain.

The GSPC got embroiled in other controversies too, far away from its e&p field areas. For instance, in the case of its spv with the Gujarat Power Corporation Limited (GPCL) called GSPC Pipavav Power Company (GPPC). The objective was to establish a 700 megawatt gas-based power plant in the port city of Pipavav. On 24 March 2009, it was announced that the GSPC would sell a 49 per cent minority stake in the GPPC to Mumbai-based Swan Energy Limited (SEL). In effect, this would have made Swan the largest stakeholder, with the GSPC and GPCL holding 34 per cent and 17 per cent stakes respectively.

SEL was listed with the Bombay Stock Exchange (BSE) and had interests in textiles, real estate and energy. Its deal with the GSPC attracted controversy with Shaktisinh Gohil alleging that Swan had been given the stake without following a proper bidding process. He 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 attempted. The GPPC’s shares were sold at ₹37 each though these were possibly worth at least ₹260. The total potential loss was ₹2,296.29 crore, Gohil alleged. The deal also attracted controversy because 70 per cent 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 the GPPC. While Gohil’s petition was still pending in court, Swan in February 2012 decided to withdraw from the project. The pil was dismissed since it had become infructuous following SEL’s withdrawal from the project.

In its replies to the detailed questionnaire sent by (Paranjoy) Guha Thakurta (the then editor of the ‘Economic and Political Weekly’), what was significant was that the GSPC management chose not to respond to questions about the company’s deals with the Adani Group companies, SEL, Oilex of Australia, its operations in Egypt, and the skewed overall profile of its borrowings—all of which had been adversely commented upon by the CAG.

Extract taken with permission from Paranjoy/Authors UpFront ; ₹395

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Published: 10 Dec 2017, 4:20 PM