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Gas deal not based on mere family agreement

Gas deal not based on mere family agreement
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First Published: Thu, Jul 30 2009. 12 01 AM IST

Clearing the air: Reliance Natural Resources Ltd’s Anil Ambani. Mohan Bane / PTI
Clearing the air: Reliance Natural Resources Ltd’s Anil Ambani. Mohan Bane / PTI
Updated: Thu, Jul 30 2009. 12 01 AM IST
Mumbai: The dispute between Anil Ambani’s Reliance Natural Resources Ltd(RNRL) and Mukesh Ambani’s Reliance Industries Ltd(RIL) is being fought in the courts, Parliament and the media. Last week, representatives of Anil Ambani offered Mint an email interview with the man himself. Questions were to be sent by Friday, and the responses, the representatives said, would be sent to Mint by Tuesday or Wednesday. On Wednesday, Mint received the responses. The answers echoed Anil Ambani’s Tuesday speech to RNRL shareholders where he lashed out at RIL’s “greed” and the ministry of petroleum and natural gas’ “partisan” approach. Edited excerpts:
Clearing the air: Reliance Natural Resources Ltd’s Anil Ambani. Mohan Bane / PTI
What will RNRL do with the gas even if it is wins the lawsuit, considering it can neither trade it nor use it itself? Is there a gradual shift in RNRL’s stance where it has begun offering to supply gas to government’s priority users?
RIL has created a situation where our power plants stand delayed by over three years, only because of the wrongful conduct of RIL, and its refusal to execute a workable and bankable gas supply agreement.We have consistently made our position clear that while RIL cannot be permitted to benefit in the intervening period from its own wrongful conduct, yet we will ensure there is no disruption of gas supply in the interim to existing gas customers as decided by the government.
There is no gradual shift in stance in this regard — this has been our consistent stand even before the Bombay high court.The rest is a pure commercial issue between RIL and RNRL relating to the treatment of the price differential in the intervening period, occasioned entirely by RIL’s wrongful conduct, and does not amount to trading in gas by any stretch of the imagination.
Should a national resource been made part of a family settlement in the first place?
I’m afraid facts are deliberately being distorted to suggest that the RIL-RNRL agreement, or the MOU, amounts to a private division of sovereign national assets. This bogey of sovereign ownership is being raised with the sole purpose of attempting to bail out RIL. Let us be very clear — we are not claiming any rights to ownership of the KG (Krishna-Godavari) basin gas fields. Our claims to gas supply are based entirely on RIL’s lawful ownership and entitlement of a participating share in gas production under the PSC, which it is free to sell.
Our claim is entirely in line with the government’s own stand in Parliament on at least 15 occasions. On 22 April 2008, in specific reference to the RIL-RNRL dispute, the Government said to Parliament in a written answer: “As per the PSC (Production Sharing Contract), the contractor (RIL) is entitled to sell its participating share of gas in cost petroleum and profit petroleum.”If RIL is entitled to sell its share of gas, where is the question of our agreement carving up national assets or property or valuable state resources? I would also like to correct a factual aspect arising from your question.Our claim to gas supply from RIL is based on a proper commercial agreement, executed by RIL, duly authorised and approved by its board of directors, part of the demerger scheme, approved by RIL’s over 20 lakh shareholders, and sanctioned by the Bombay high court, after receiving the no-objection from the Central government – it is not based merely on just a ‘family settlement.’
What has been PMO’s response to your letter saying the petroleum ministry is partison with RIL? What led you to conclude this?
To answer your first question - I read in the media that the Hon’ble Prime Minister has sought clarifications from the oil ministry. To answer your second question – I would say that the oil ministry’s objectivity would have been visible if it had remained consistent with its replies given in Parliament, and with the decisions taken by the empowered group of ministers (EGoM). Despite this (saying telling Parliament that RIL can sell its share of gas), the Ministry is vocally taking a stand that RIL-RNRL are seeking to divide national property.
Likewise, on 30 August 2007, the government again told Parliament:“As per the PSC signed by the Government under the New Exploration Licensing Policy (NELP), the operators have the freedom to market the gas in the domestic market on an arms length basis. The government does not fix price of gas. The role of the government is to approve the valuation of gas for the purpose of determining government take.”
Despite this, today the ministry is saying that it alone has powers to fix the sale price.The Bombay high court too has upheld this legal position, and said that as long as the government gets its royalty and share of production on the basis of the government approved price for valuation, they have no concern with the sale price at which the Contractor (RIL) sells the gas.
Thirdly, in September 2007, when the EGoM met, it took note of the RIL-RNRL gas supply agreement. The Union Minister for Petroleum was an integral part of this sub-group and represented the ministry’s point of view.The Cabinet sub-group categorically recorded that its decisions were “without prejudice to the NTPC vs RIL & RNRL vs RIL cases which are sub-judice.” This has been reiterated, reinforced and restated twice in the Cabinet sub-group meetings, in October 2008, and January 2009. Through this entire period, the petroleum ministry was a party to, and concurred with, this decision, and did not make any attempt to question the corporate restructuring agreement between RIL and RNRL.
It is only now, after the adverse verdict of the Bombay high court against RIL, that the petroleum ministry has suddenly decided to intervene in this purely corporate dispute.
Fourth, if the petroleum ministry is genuinely aggrieved, why don’t they exercise their powers and terminate the PSC? Fifth, why has the ministry not approved the NTPC price of $ 2.34, and compelled RIL to honor that contract? So far as the RIL-NTPC dispute is concerned, obviously there is no ego, no emotions, no family, and no corporate restructuring.
This is a unique case where the actions of one arm of the government are ostensibly harming the interests of another, ministry of power’s jewel in the crown NTPC — all for sake of a monopolistic gas producer RIL.
Why have repeated attempts at an amicable solution on this issue failed? What have been the deal breakers?
It is simply the refusal of RIL to have bilateral negotiations in a fair and honest manner, keeping in mind commitments made in the past.Just last month, we addressed several letters to RIL to meet and arrive at a workable agreement as per the high court judgement. RIL refused to cooperate, and instead sent us a letter on 1 July, declining to participate in any such discussions. Thereafter, they unilaterally decided to proceed to the Supreme Court.
How do you clap with one hand? I am truly and deeply saddened by RIL’s conduct in this matter, and its blatant refusal to honour a bonafide commercial agreement. RIL is no run-of-the mill company or fly-by-night operator — it is India’s largest private sector company. What it does, the signals it sends out have relevance not just for its own business partners, but for India at large. And what RIL has been communicating in the last few years is that it has no regard for its own solemn word, no respect for the sanctity of contracts, and most of all, there are no limits to where it will go in its pursuit of corporate greed.
Is the government overstepping its bounds by asking the court to declare the family MOU null and void? How does it impact the R-Adag?
I would first correct your question—the government has not asked for declaring the MoU null and void—the petroleum ministry has —and at this stage, their petition has not even been admitted by the Hon’ble Supreme Court, much less accepted, so it is far too early in the day to speculate on consequences.
I am also concerned that the ministry’s stance is, in effect, that it will solely decide: who should sell gas,to whom, at what price, in what quantity and when, without any heed to commercial considerations or contractual provisions!
Through its intervention, the ministry is aiming to re-write the PSC after nearly 10 years, and also seeking to cancel a contract between third party corporate entities!What then is the sanctity of a contract, which is the fundamental cornerstone of any law-abiding, market-driven economy? And will this not set a precedent, allowing any ministry to alter any contracts in the future at will?
This will also naturally have adverse policy implications for private investments in all natural resources, which are subject to similar considerations.
The last two weeks have seen a spate of petitions filed in SC by Gautami Power, GVK and Vemagiri Power against RNRL’s “spoiler claims”. Do you find the odds piling up against RNRL with these developments?
There are no odds piling up against RNRL. These petitions have not even been admitted as yet, and they have no basis, as all these power companies have knowingly signed the gas supply contracts, expressly recognizing the court case between RIL and RNRL, and categorically accepting that their supplies will be subject to the court outcome. We have made it amply clear that there will be no disruption of gas supply to any existing user, if gas is supplied to RNRL in the interim as prayed for by us in the Supreme Court, so there is no cause for them to file these frivolous petitions.
NTPC is considering impleading itself into the RIL-RNRL case. If they do, how will that impact your case? Is RNRL also planning to implead itself into the RIL-NTPC case in Bombay HC, by way of abundant caution?
We will formulate our legal strategy, keeping all our options open.
Mint had sought responses for the first seven questions alone, the remaining five questions and answers were sent in by Anil Ambani
In your speech at the AGM yesterday, you made certain comment about Reliance Gas Transportation and Infrastructure Ltd. Please clarify how you are concerned with the same?
Firstly, all pipeline networks in India are operating on a cost plus basis. Accordingly, end users like us, in power and fertilizers, are ultimately paying for the pipeline network, and we are naturally concerned about costs of the same.To my mind, there is a strong case to revisit the issue of transportation costs for KG-D6 gas, probably the highest in the world, by the PNGRB, the pipeline regulator. Presently, these are pegged at a prohibitive $1.25, or 30% of the base gas price! Further, with new tax breaks recently announced, the entire cost of setting up the gas pipeline network has been allowed to be written off in the very first year –a special and unique benefit not given to any other capital intensive sector. It is only fair that the benefits of these tax breaks be passed on, and gas transportation costs be brought down to near zero. I expressed the hope that the regulators in gas and power sectors such as PNGRB, CERC and SERC, would examine this aspect more carefully.Secondly, as many of the persons at the AGM were also shareholders of RIL, just like me, I simply pointed out that we should all note that the gas transportation company is no longer owned by RIL, but by RIL’s promoters. In 2005, when I was the vice-chairman and managing director of RIL, RGTIL was a 100 per cent subsidiary of RIL. But soon after I resigned, it ceased to be a subsidiary; having been sold to the promoters of RIL for a princely sum of Rs 5 lakhs, and turned into a privately held company.
You made certain comments at the AGM yesterday regarding the capex incurred by RIL on the KG-D6 gas fields. How is RNRL concerned with the same?
The reality is that not just RNRL but the government of India and all of us—a billion Indians—need to be concerned with the same —and this is no exaggeration. The reason is that, based on the way the PSC is structured, all of us who buy gas from RIL are effectively paying for the entire capital expenditure – the power consumers, the fertilizers end-users, the common man buying any and all products that uses petrochemicals, steel, etc. which have used gas as an input, and so on.Secondly, because of the way the PSC is structured, RIL is entitled to first recover its entire capital expenditure from the revenues from sale of gas, before even the government gets any meaningful share. Accordingly, the more RIL claims to have spent on capital expenditure:—the more we have to pay for gas,—the less the government gets as its share from the revenues-and the more delayed is the timing when the government gets its revenues.Clearly, this mechanism embedded in the PSC requires complete transparency and independent validation of the capital expenditure claims of RIL – because all of us are paying for it!Most of us are aware that each expenditure of Rs150 crore or more made by the any arm of the government goes to the Cabinet Committee of Economic Affairs for approval. I am deeply concerned that, on the other hand, RIL’s capital expenditure of nearly Rs45,000 crore on KG-D6—as confirmed in Parliament by the petroleum minister just yesterday, and which is nearly 33% of India’s total defence budget—was cleared by a management committee of just four persons, comprising one junior official each from the petroleum ministry and director general of Hydro Carbons, and two representatives of the contractor (RIL)—talk about conflict of interest!As per records, the budgeted expenditure of RIL for peak production of 40 mmscmd in 2004 was only Rs12,000 crore, which, according to most experts, should not reasonably have exceeded Rs20,000 crore or so when the production was doubled to 80 mmscmd—especially given RIL’s known competitiveness and project execution strengths.However, it has surprised independent observers that RIL’s capital expenditure has actually gone up by Rs 25,000 crore to a staggering Rs45,000 crore!Expert analysis shows that if— and I say, if - this was gold-plating of costs, the government could have lost upwards of Rs 30,000 crore. Given the incredibly high stakes involved, and the fact that each and everyone of us is ultimately paying for RIL’s capital expenditure, I have expressed the sincere hope that some of our esteemed public accountability bodies like Comptroller and Auditor General (CAG) and Central Vigilance Commission (CVC) will examine all relevant facts, and take appropriate action, if – and again, I say, if - indeed they find that the capex has been over-stated, and as a result huge losses caused to the public exchequer and all end-users of the gas produced from KG-D6.
Shouldn’t the Petroleum Ministry rightly be concerned about getting higher prices for gas, as the Government gets a major share of the revenues from sale of gas?
I wish it were so!As per the terms of the PSC, if RIL gets a higher sale price from us based on the price the petroleum ministry wants to fix for the first few years, 99% of all revenues and profits will go to RIL, and only a measly 1% will accrue to the government!In other words, of the initial revenue of Rs 50,000 crore, RIL gets almost all, i.e. Rs 49,500 crore vs. the government’s Rs 500 crore only. Just makes you wonder why the Petroleum Ministry is pushing so hard for higher gas prices, when 99% gains will go to RIL!Also, I am concerned that the petroleum ministry is apparently acting as if the only priority for economic growth is to maximize gas prices!We have to balance overall priorities to accelerate the country’s economic growth.Isn’t it as much a priority for the country to set up substantial new power capacities to generate clean, green power, with competitive input costs for gas feedstock, and eliminate staggering power cuts such as those that plague Delhi and much of northern India - in line with our respected Prime Minister’s vision of “Power for All” by 2012?Isn’t it as much a priority for the country to eliminate subsidies in the fertilizers sector, thereby reducing rising fiscal deficits, and for that purpose, to bring down input gas prices to competitive levels as is done the world over?
Aren’t high gas prices justified in view of the demand-supply deficit scenario?
This entire concept of scarcity of gas in India is actually a myth -- in the medium to long run. The gas production in the country is set to double to over 200 million cubic meters of gas per day in the near future, based on further production from RIL’s KG-D6 fields alone. In addition, there will be production from gas reserves already found by various other players like GSPC and ONGC.Besides, RIL has so far reportedly explored only 4% of its total fields in KG-D6. The balance 96% area is still to be explored, and given past finds, it is reasonable to expect similar huge discoveries of reserves in the future.In a few years, India will become a gas surplus nation provided contractors are subject to an independent process of assessment and verification which prevents the hoarding, under-reporting or sub-optimal production of gas. A gas price of $4.2 is exorbitant and can in no way be justified. One must bear in mind that gas prices in the international market have crashed by as much as 80% in the last few months. Yet, that seems to have made no difference to the petroleum ministry’s push for even higher prices in India, much to the detriment of power and fertilizer consumers. In the Middle East, gas prices are currently ruling at $1.5, or just under one-fourth of the delivered price in India. India now has among the highest short-term gas prices in the world, nearly 30% higher than even in UK and the US, where short term prices are currently hovering around %3.5. In our view, it would be against public interest to price gas in India for any user above $1.50. Natural gas should in fact be priced substantially lower than $2 for all power and fertilizer customers.
Won’t RIL suffer huge losses if it has to sell gas at the lower price of $ 2.34?
Not at all.The production cost of KG basin gas is only Rs43 or 89 cents, as submitted by RIL to the petroleum ministry. Therefore, at a price of $2.34 applicable to NTPC and our company, RIL makes a profit of over 100% on its cost of production, which translates into over Rs30,000 crore just from NTPC and us over the life time of our contracts. There is no question of RIL suffering a loss—it will still make good profits at $2.34, as also confirmed by RIL’s counsel in the Bombay high court. The problem is it wants to make super normal profits—talk of greed vs need!The simple fact is that RIL has a short term monopoly, and to perpetuate this monopoly, and earn disproportionate profits, RIL is spreading misinformation in the public domain to get a higher price for its gas.We are not talking loose change here - at the price of $4.20, RIL wants to make super normal profits of over Rs50,000 crore, which will ultimately be paid for by hundreds of millions of end-consumers in the power and fertilizer sector.
Utpal Bhaskar contributed to this interview.
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First Published: Thu, Jul 30 2009. 12 01 AM IST