The Bombay high court has asked the two billionaire Ambani brothers to renegotiate, within the next four months, a natural gas sale agreement that has turned into a messy court battle.
At stake is the price at which the Anil Ambani-controlled Reliance Natural Resources Ltd (RNRL), which negotiates fuel supply contracts for associate Reliance Energy Ltd (REL), will get gas from the Mukesh Ambani-controlled Reliance Industries Ltd (RIL).
The court said that the two companies could approach it again if they failed to arrive at an agreement.
The high court’s order may have a bearing on the coming initial public offering of Reliance Power Ltd (RPL), two of whose projects rely on gas supplies from RIL.
RPL is a subsidiary of REL and said in its filing with the stock market regulator that it expects to source gas and coal for two projects through RNRL. In its filing, RPL said that it had not arranged for any alternative source of “coal or gas”.
The new agreement on gas prices would have to be in line with the June 2005 agreement between the brothers, carving up the Reliance Group between themselves; take into consideration the government’s policy on gas pricing; and be “commercially acceptable and bankable”, said justice A.V. Mohta in his order.
While RNRL saw the order as being favourable to it, a person familiar with the case said that this might not necessarily be the case.
An executive of the Reliance-Anil Dhirubhai Ambani Group, of which RNRL and REL are a part, said a price of $2.34 (Rs102.19 then) per million British thermal units (mBtu) was part of the June 2005 agreement and that since the court had upheld this agreement as “binding”, RIL would have to supply gas to RNRL at this price.
However, the person familiar with the case said the price of gas would be one of the issues that will be discussed when the two companies begin to renegotiate their agreement.
The government has already rejected an earlier application by RIL for gas sales to RNRL at $2.34 per mBtu, saying that this was not “arm’s length” or fair-market pricing. On 12 September, RIL had got government approval to sell gas from its finds in the Krishna-Godavari (KG) Basin at $4.2 per mBtu. However, in its press note announcing this price, the government said that this was “without prejudice” to the ongoing court cases between RIL and NTPC Ltd, and RIL and RNRL. India’s largest power generation firm, NTPC, and RIL are battling it out in the Bombay high court over a similar gas pricing agreement.
A lawyer representing RNRL said that an earlier interim order of the court restraining RIL from selling gas committed to RNRL to third parties would continue for four months. “But we are hoping that before that, a new agreement would be worked out,” added the lawyer, Manali Singhal.
RIL is expected to pipe out around 80 million standard cubic metres a day (mscmd) of natural gas from its finds in the KG Basin by mid-2008.
According to the June 2005 agreement between the brothers, RIL has to supply 28mscmd of gas for REL’s Dadri power plant for 17 years from the commencement of supply. RNRL has claimed that under this agreement, it is entitled to an additional 12mscmd, if the agreement between NTPC and RIL for the supply of gas falls through. RNRL has also claimed that it is entitled to the first right of refusal on all gas produced by RIL after leaving 25mscmd for the latter’s captive consumption, albeit at market prices.
Shares of RNRL moved up 4.01% to close at Rs96.05 a share on Monday, while those of RIL rose 3.79% to end at Rs2,664.15 on the Bombay Stock Exchange (BSE) on a day the bourse’s 30-stock benchmark index, Sensex, rose 3.5% to 19,058.67. BSE’s oil and gas index moved up 4.51% and closed at 11,052.81 points.
In an unrelated development, on Monday, REL said that it had allotted 559,139 equity shares to various foreign institutional investors on conversion of foreign currency convertible bonds.
The equity shares of Rs10 each were allotted for cash at a price of Rs1,006.92. REL’s shares closed 12.90% up on BSE at Rs1,847.35 each.
PTI and Bloomberg’s Manash Goswami contributed to this story.