The Hindu Business Line : Cap the gushing oil companies

Announcements of oil or gas discoveries are price-sensitive information from the stock market perspective and need to be regulated. The DGH guidelines issued in May are the first such initiative. But, as the Niko episode shows, it is not enough.

Last week, the Canadian oil company, Niko Resources, reported a loss of $17.5 million for the fourth quarter compared to a profit of $47.3 million a year ago. Yet, the company's shares rose almost 4 per cent on the Toronto Stock Exchange.

Strange? Niko had cleverly sugar-coated the bitter news of loss with the announcement of a trebling in possible gas reserves at the KG (Krishna-Godavari) Basin field in India where it is a 10-per cent stakeholder along with Reliance Industries.

Niko's announcement now has the Director General of Hydrocarbons (DGH) up in arms. Only in May, the DGH had put out guidelines for companies announcing new discoveries of oil and gas.

As per those guidelines, any find has first to be reported to the government and the managing committee of the respective field and the company can make it public only after a detailed technical analysis is done on the data by the DGH.

Did Niko, by that yardstick, err in not informing the government or the DGH about the enhancement in reserves before announcing it to its shareholders? The DGH has now sent a notice to both Niko and Reliance Industries on the issue.

How much gas?

There has been conflicting news on the size of the reserves in the KG Basin ever since gas was discovered there in 2002.

Initially, the confusion was over whether it was 14 trillion cubic feet (tcf), as claimed by Reliance, or 8.6 tcf only, as certified by international reservoir consultants DeGolyer & McNaughton (D&M) based on then available data. Now, according to Niko, its engineering consultants — Gaffney, Cline and Associates — have assessed the reserves size at a whopping 35.4 tcf from 11.9 tcf, as revised by D&M. A few questions now arise following the announcement.

First, does the certificate of the engineering consultants, who have an interest in the project, carry greater weight than that of reservoir consultants who are specialists in estimation of reserves? Second, why was the DGH not informed about the revision in reserves before Niko went public? Finally, why was it not clearly stated what the 35.4 tcf represents: The gross in-place reserves or possible reserves or proven reserves?

Proven reserves are normally considerably lower than possible and probable estimates, and represent the actual gas that can be produced from the field.

The timing of Niko's announcement with the Reliance AGM on June 27 is also an interesting sidelight.

Need for regulation

Announcements of oil or gas discoveries are price-sensitive information from the stock market perspective and need to be regulated.

There is no regulatory system in place for this in India; the set of DGH guidelines issued in May is the first such initiative. But as the Niko episode now shows, it is not good enough.

The DGH does not enjoy statutory powers as a regulator; at best, it is accepted as a de facto regulator for the upstream sector.

The Petroleum and Natural Gas Regulatory Board, which is in the process of being set up, does not, however, have jurisdiction over the upstream sector.

There is need now for a statutory regulator for the upstream sector and the government can anoint the DGH as one and bestow it with powers to frame rules and regulations, oversee the upstream sector, and levy penalties for default.

Alternatively, it can create a new regulator and bestow it with these powers.

Given that almost all the big exploration and production companies are listed on the stock market, the DGH/upstream regulator will also have to work in tandem with the stock market regulator, Securities and Exchange Board of India.

At present, market regulations require the announcement of all material developments concerning a company first to the shareholders through the stock exchanges. Oil and gas discoveries qualify for such treatment, too.

However, experience has shown that companies — either intentionally or otherwise — leak such critical information to the market through the media and then follow it up with an announcement to the exchanges.

Such practices cannot be curbed in the absence of a strong upstream regulator which will have to coordinate its role with SEBI.

The time has come for the government to look into the important aspect of upstream regulation and put in place systems to ensure that the Niko kind of episode does not recur.

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