Thursday 1 November 2012

RIL - Risk or Benefit?

The new "revelation" by Arvind Kejriwal that Congress and BJP both work for RIL and have given the organization considerable benefits. Two arguments are given for the same. One is that, RIL is not producing 80 Million Metric Standard Cubic Metre Per Day [mmscmd] gas as per the agreement. The second is that the price for gas was increased from initially decided $2.4 per Million Metric British Thermal Units to $4.25. Though there have been some differences from what was initially decided with RIL there are multiple issues when it comes to a project like gas exploration. It is high risk, long gestation period and very high fixed/sunk cost activity. Such projects are high risk not only in terms of manpower usage but also that after years of investment and exploration, one may not find substantial amount of natural gas. Such risks are carried by the exploration firm and would not be compensated when such thing happens. Not that KG Basin is successful, obviously RIL would be earning a lot of money at such prices decided. But it is also true that a private firm has not decided to become part of such work for philanthropic purposes and expects high gains. Also, high gains come with high risks and someone who has taken risks should be compensated with high returns (as the risk-return theorem says). Asking RIL to sell the gas at very low price would not make any sense because it is RIL which has incurred the costs and taken risks. I am not saying that KG Basin has become RIL's property now and it can charge the any amount that it wants to but should be properly compensated for the risk and costs incurred.

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