Ambani Versus Ambani or Giving Away the Country’s Natural Resources?

The two Ambani brothers are waging a bitter and a public battle over the price of Krishna Godavari Gas. The battle started as a court case in Mumbai High Court and has now spilled over to the newspapers and electronic media. The role of the Ministry of Petroleum has come under the scanner and by all accounts seems quite dubious. Is this just a private battle between two corporate houses or are their larger public issues at stake? Why has the Government linked the domestic gas prices to the international price of oil?  Why is Reliance being allowed to create a monopoly in gas – production, transmission and distribution – when the same government swears by trifurcation of these in the electricity sector? Why has the plan for a national gas grid with GAIL as the nodal agency been given up? 

Reliance Industries Limited was given an exploration license for KG basin and struck gas there. Subsequently, they offered NTPC gas for its Kawas and Gandhar plants against a global tender that NTPC had floated in 2004 for 12 Million Metric Standard Cubic Meter Per Day (mmscmd) at the price of $2.34 per million BTU. 

At the time of the split of Reliance, Anil Ambani got the power and telecom part of the Empire and Mukesh Ambani the gas, petroleum and the chemical part. The agreement drawn up at that time between the two groups stated that RIL would supply 28 mmscmd gas to Anil Ambani group at $2.34 per mbtu for its Dadri plant.  

Subsequently, RIL reneged on both the contracts – the one with NTPC and also the one with Anil Ambani Group. NTPC went to court on this and received no support from the Government, who called this a commercial dispute between two companies. However, when the Ambani bothers went to Court, the Government not only intervened in the legal battle between the two Ambani brothers but also came out virtually in support of RIL, contending that the RIL-NTPC deal was not concluded and therefore not binding. NTPC and the Power Ministry were furious and slammed the Government counsel for misleading the Court. Subsequently, the Government withdrew its affidavit in the Court.  

RIL has been emboldened on reneging on its contracts due to the price of gas set by the Government. An Empowered group of Ministers (EGoM), in September 2007, set the price of gas at $4.2 for five years with no transparency and without giving any reason for this price. It was supposedly done on the basis of RIL's price “discovery”, the entire so-called discovery process being shrouded in mystery. Not only that, this gas price is linked to the price of crude in the international market and will only drop if the crude price goes below $25 to the barrel. The EGoM also decided that all sectors would pay the same price for gas even though the power and fertiliser prices are regulated, making it difficult for these sectors to use gas as a feedstock. 

Why should the gas prices be set in dollars when the costs are incurred in Indian rupees? Why should the gas price be set at $4.2 when RIL was willing in 2004 to sell NTPC gas at $ 2.34? Why should the gas prices today be at the same rate as decided in September 2007, when the international price of gas today is much lower than $4.2? Finally, what is the justification of pegging the domestic gas price to the price of crude in the international market?  

The question goes to heart of the gas pricing policy. We either follow a principle of a regulated market – and gas and electricity are regulated worldwide – or we allow markets to operate. Fixing gas prices without examining cost figures and a mechanism of converting the cost figures to a gas price is making gas pricing another way of handing out private largesse. No basis of the gas price rate of $4.2 has been given, so we have no way of knowing the basis of the decision of the Ministers concerned. By all accounts, the cost of gas at the head is not more than $ 1, even with inflated capital costs that RIL has now produced. So how did the Ministers pull this figure of $4.2 – straight out of their collective hat? 

The role of the Ministry of Petroleum is murky at best. It virtually supported RIL in its Mumbai High Court case, against the interests of even NTPC.  After extensive public outcry and sharp attacks in the Parliament, it has now agreed to support NTPC in its court case, and retreated somewhat in openly endorsing Mukesh Ambani’s case. It has now staked the Government’s right to allocate the gas in accordance with its gas utilisation policy and not decided as a private agreement between two brothers. 

Without doubt, the gas utilisation policy is the prerogative of the Government, especially as gas available is still a scarce resource. The Government has not produced a gas utilisation policy for deciding the sectoral or the regional use of the gas. What it has done is producing an ad hoc a list of industries showing their priority. If the Government takes the gas utilisation issue seriously, it must allocate gas the same way it provides coal linkages to power plants. This must take into account not only different sectors but also a regional balance. Otherwise, providing a list of priorities is as good as allowing Reliance to make itself the major beneficiary of the Krishna Godavari Gas. It is not surprising that the gas pipeline set up by RIL is primarily to supply its own units with gas. The eastern region, which is much closer to Kakinada, the gas head, gets no gas from there – the pipeline runs west and north. Nor does Kerala, Tamil Nadu or Karnataka. 

Again its role in accepting capital cost figures is dubious.  The Production Sharing Contract (PSC) that the Government had struck with RIL in 2000 envisaged that there would be something called “cost petroleum”, which would cover all the costs of exploration of the block, the capital cost of producing gas and the operating costs of the plant. This would be exclusively RIL's share. After the cost petroleum is fully recovered by RIL, the rest would be profit petroleum, which would be shared between RIL and the Government.   

Obviously, if capital costs are gold plated, Reliance stands to gain. And this is what appears to have happened. Originally, the total capital investment proposed for the RIL Gas and oil field was of $2.47 billion for a target production of 40 mmscmd. Subsequently, RIL increased its capital cost to $8.83 billion for an increase of production to 80 mmscmd – a four times increase in capital cost for a mere doubling of production. No logic can explain why doubling of capacity to should lead to such an increase – economies of scale normally ensures that a doubling of capacity would cost about one and half times the capital cost. Not only did the Directorate General of Hydrocarbons accept this increase in capital cost, it did so in unseemly haste – it took a scant 53 days! The amount involved is huge – to the tune of Rs. 25,000 crore. If we look at the time line of the events, it makes this even more dubious. The EGoM was meeting to fix the gas price and a hefty increase in capital cost would obviously strengthen the case for a higher gas price. That is why the unseemly hurry to accept the highly inflated capital costs. 

The last issue is one of monopoly. At the moment, Reliance is major gas producer, Reliance Gas Transportation and Infrastructure Limited (RGTIL) owns the pipeline and again Reliance is getting orders for citywide distribution of gas. Unlike the electricity sector, the Government does not have a problem in gas sector with a vertical monopoly of the type that Reliance is building. Originally, there was a proposal of a national gas grid, which would have GAIL as the nodal agency. This also makes economic sense as whoever owns the gas grid effectively dictates to both the producers as well as the consumers. That is why generally such facilities are independently run, with the state playing a crucial role. Unfortunately, all such policies in the country come a cropper when Reliance is in the picture. So also with the original gas grid. If we have a gas grid now, it will largely be a Reliance grid, with GAIL and others playing second fiddle.  

We are already seeing the effect of this monopoly, with Government owned GAIL becoming a junior partner to Reliance and the transportation cost of $1.25 being charged by Reliance. 

What does all this mean for the Indian people? Simply put, we are facing a double bind. On one hand, scarce national resources are being given away at a pittance. Gas and coal resources are being handed over to Amabanis, Tatas and sundry others at throw away prices. However, this is not helping the consumers, who are being asked to pay international oil prices. On one hand we give away our energy resources, on the other we price in the name of markets – this is the essence of neo-liberal economic policies. Private loot of public resources coupled with public loot of the consumers.