 Hello and welcome to NewsClick. Today we have with us Dr. Surya Sethi, Principal and former Principal Advisor, Energy to the Planning Commission and a well-known energy expert. Surya, good to have you. Thank you Praveer. The CAG report has raised serious questions regarding the production sharing contract with Reliance as well as other companies. Do you think that the production sharing contract now will be reviewed by the government in light of the CAG comment or is it that they will go with the same policies as they have been doing in the past? See there are many flaws in the production sharing contract and it is not for the first time that these flaws have been pointed out. The big flaw that CAG has pointed out is he calls it a perverse kind of incentive where the government share actually reduces if the capital cost goes up. I personally don't think that is that as bad as it is being made out to be that issue. The problem is not what happens to the government share because remember we are an energy-starved country and we need more energy. So if we can recover an additional amounts of energy with putting in extra capital it may be well worth it given the fact that we are energy-starved. The problem with that is that we have no clue what the right capital cost should be for extracting a certain amount of energy. So as I say corruption and stealing and corruption they are all perverse if you have no fear of getting caught. So the problem is now that the costs go up and we recover some extra energy. The problem is we have no clue what the right cost to recover that energy was and that is the essence of the problem of D6 and the CAG report. From 2.5 billion to 8.8 billion and according to CAG even this is likely to go up even further. It will go up further because if you are to produce ATMMCMD of gas from that field it will not produce with this amount of what investment has taken place. In fact if it will ever produce that I'm not sure but the point I'm trying to make is that neither are we sure whether 2.2 was correct nor are we sure whether 8.8 is correct. So we simply there's a tremendous amount of asymmetry of information between the people who are putting up these costs and the people who are approving these costs as legitimate. There are two other issues that are involved. One is of course the fact that there's an exploration area or to which you are supposed to hold only the discovery, discovered area as well as the production area. But in the case of reliance it's been allowed to hold 100% of the area's exploration area. So the development area and the production area would be only 5% of this area. Do you think that this is something which immediately needs action? I think CAG has done great service in pointing out that this contract has been violated in this respect. We haven't yet heard the explanation at least the general public hasn't heard the explanation from the other side as to how come that this happened because this is very well laid out in the production sharing contract whereby you have to relinquish areas that you've not actually started production from within a given period of time. Now how that was not implemented in this I think the biggest single contribution that I found out of the CAG report because even I was not aware that this is actually happening. Now as I said I haven't heard the other side of the story but I don't know what explanation they'll come up with as to what prompted the CAG to permit this but as far as the PSCs are concerned there's the clear violation of the PSC. All the production sharing contracts seem to take international parity prices the basis for oil at least. For gas it was fixed by the EGOM headed by Pranab Mukherjee at 4.2 dollars per million BTU when the cost of gas as per the case that they fought with reliance fought with Anil Ambani's reliance was that the cost they would have made profit even if it was sold at 2.34 per million BTU. Now what justification is it is there for setting such high prices and plus the fact that it is set in international terms oil price and index to oil price and formula exchange the dollar. Prabhir I have a very personal grudge here because I showed to that EGOM samples from 53 or 63 countries I forget of how gas is priced and I showed them that not one of the countries prices gas the way we were pricing gas. The problem is that what we are talking of here is natural gas the way natural gas is priced is very different from where LNG is priced and what we agreed to do was to price natural gas as LNG not only we agreed to price natural gas on a formula based LNG level we also agreed to a formula which had no some resemblance with the formulas used for LNG pricing also in the world and this was categorically in writing told to the EGOM and they still did not listen. Now the fact of the matter is that 4.2 dollars well-aid price for natural gas and I again emphasize natural gas is the highest price anybody has ever received for natural gas anywhere and while you say cost of production you know the various figures came out somebody said one dollar but nobody has claimed that the cost of production is more than 143 or some such number for $1.43 but there are numbers to show that is probably 99 cents also but wherever they are the maximum number is 143. Now why under that situation were we paying 4.2 dollars is completely beyond me at least. I as I said this was discussed this was demonstrated that this is not the way to price natural gas but yet the EGOM and its wisdom decided to go with that price. One part of the cost that you are talking about of course is the cost of 8.8 billion dollar investment capital investment and though the CAG hasn't really gone into the details of this there are some reports to indicate that this was approved 2.5 billion to 8.8 billion was approved in the matter of something like 53 days. You also said that the government really does not have the expertise on this. Have any indicate have the have the done any studies to indicate what this cost should be or any normative costing to understand how this prices have been arrived at. Time and again this issue has come up. This is not the first time this cost increase came up. I mean today we have a CAG report but internally this issue was debated time and time again as to how this cost increase has been approved and at least I in the eight or nine years that I was in the government I did not see any legitimate justification for this cost increase. Production sharing contracts. Has the government ever received what it was committed by the oil companies or the companies like Lyons? You see that's a very good point that you have asked. The problem of all this is one point which I think even the CAG has missed is that when we say that the government share rises as you achieve a certain investment multiple. The underlying assumption is that by the time you achieve the investment multiple there would be some resource left to share. But if you actually look at the numbers and the capacity of these wells there will be no resource left to share by the time that investment multiple is achieved. So that's the beauty of this rising capital cost because with rising capital cost investment multiple is assured and by the time you recover or reach that investment multiple there will be no gas left to share. So no matter you may give the government 85% share beyond a certain investment multiple but 85% share of a zero is still zero. That's the hard reality which hasn't yet come out of the CAG report and I have been asking as to show me among the private fields. I don't want ONGC is a separate kettle of fish but among the private fields I would love to know how much has profit petroleum or how much profit gas has the government benefit till date on private fields. Effectively what it would seem to imply therefore is by cooking the capital cost figures by the way this is also the Enron case that you cook the capital figures of course you get a higher price. By cooking the capital cost figures you make profit really in two ways. One is of course you recycle the funds back to the company and second of course is that you also get as you said the share of the profit petroleum which doesn't therefore go to the government. But there is a third issue by inflating all this. Reliance can also boost its stock price and this is one of the things which it reliance seem to have been doing continuously. Well again if you look at the earlier balance sheets of reliance to the best of my knowledge the DGH by then had only certified 7 trillion cubic feet of gas but the reports were claiming much differently from there. This would not happen elsewhere in the world. This only was possible here and yes that that does impact stock prices. The deficiency is independent regulation and regulation of by people who know this sector who people who are experts in the sector who are equal in their there's no asymmetry between their knowledge base and the private sector whoever is proposing these things to them. And unless we get that kind of regulation in place with that kind of expertise and that level of independence we will always face these problems where we don't know whether 2.2 is right or 8.8 is right or neither is right. So a lot of this could have been just this increase of gas reserves as reliance claim without a verification could very easily have been just to boost the stock price and recover some money. Well we see the results today you know they said that they can produce 80 MMCMD. Today from whatever I'm reading in the you know from my friends I'm gathering this may turn out to be one of the biggest disaster fields of the country because they're not even able to produce today at I think 43-44 MMCMD which was the original level. Everybody felt that at 40 MMCMD the field will last 14 or 15 years but I have never seen data to confirm that 80 MMCMD the field life would still be real. You know you can extract 80 MMCMD from the same field but you will kill the field in three years or four years time. As we see from what the data is of production. The government can wait for 85% share of something that will never never show up. Thanks Surya. I think this has been a very interesting discussion and let's see what the government reply is going to be the draft CJA report. I think that will at least bring out one of the issues. I look forward to reading that myself. Thank you. Thank you.