116 Case Studies in Business Ethics and Corporate Governance
the central government and the big private players of the country. The drafted report explains that the
Directorate General of Hydrocarbons (DGH) has favored Reliance Industries Limited (RIL) to leverage
on the capital cost of the plant permitting them to gain huge margins on their initial costs. The agree-
ment between the government and the private players is based on the production sharing contract (PSC)
known as the “Investment Multiplier,” stating that the higher the initial capital cost, the greater will be
the player’s profi t share.
During the bidding process of KG Basin (D6 Block), the capital cost estimated by RIL was $2.4 bil-
lion inflating to $8.5 billion during the operations without any objections from DGH and the ministry of
petroleum. For the inflation of capital costs in the operations, the obvious route is through the invoice
with deals from favored subcontractors. Since CAG did not compute the account well, the government
had to bear the huge losses throughout the process. Reliance, though, has denied all the allegations from
the CAG report about the inflated capital cost and reducing the government’s profit share of revenue
from the project. Reliance argued that the cost of project figured by the company is lower than the cost
involved in the shallow-water project.
As per the CAG contract, the company had to develop a certain contracted area within a limited time
span and the company violating the contract will be relinquished from it. In violation of the contract, the
DGH and the ministry of petroleum designated this area as the “Discovery Area.”
The CAG has looked upon only one of the two scams. The first is the violation of the production
sharing, while the other one is the high price of Reliance share ($4.2/m BTU) set in 2007, supported
by the ministry headed by Mr. Pranab Mukherjee. RIL had initially agreed upon $2.34/MBTU for the
supply of gas to both NTPC and RNRL, in which they noted the profit of 50% through their own calcu-
lations. In the court case between RIL and NTPC/RNRL, RIL admitted that their production cost was
$1.43/MBTU while they subsequently increased the supply price to $4.2/MBTU, which leads to the
issue between NTPC/RNRL.
Different Kind of Gold Plating
The area of the KG basin is 8,100 km offshore, which was set up for gas and oil exploration. The block
D-6 was given to RIL (90%) and Niko Resource Ltd. (10%) through a bidding of production-sharing
contract under the new exploration licensing policy. The initial research shows that D-6 was able to
produce 40MMSCD, which was further renewed to 80MMSCD. Due to this, the initial cost of devel-
opment, $2.4 billion, was raised to $5.2 billion through an “Addendum” in 2006 during its fi rst phase
while an additional $3.3 billion was incurred in the second phase.
According to the production-sharing contract which the government envisaged with Reliance in
2000 is called as the “Cost Petroleum.” This helped the government to cover operating cost, 5% of roy-
alty, and exploration costs for the development of production of gas. According to the contract, 90% of
the petroleum/gas sold comes under cost petroleum and the remaining 10% is considered as the profit
petroleum until the complete capital cost is recovered.
As per the “Investment Multiplier” mentioned in the contract, the change in the proportion of
profit sharing will depend on the amount of the cost recovered to the total cost. The pegging be-
tween the government and RIL is based on this Investment Multiplier for their proportion of share,
which signifies that the major portion of the profit until the cost is recovered will go to Reliance
Industries. After recovering the major part of the costs, the Investment Multiplier will continue
The artifi cial escalation of costs with extensive care and logical reasoning.
10_RIL investment in Oil.indd 11610_RIL investment in Oil.indd 116 6/5/2012 3:33:39 PM6/5/2012 3:33:39 PM

Get Case Studies in Business Ethics and Corporate Governance now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.