New Delhi: Even as the ruling Congress-led United Progressive Alliance (UPA) government faces pressure from its new-found saviour, the Samajwadi Party (SP), to impose a “windfall tax” on private refiners, it appears that the suggestion was mooted by Reliance Energy Ltd (REL), part of the Reliance-Anil Dhirubhai Ambani Group, last July in a presentation to a decision-making body of the government.
Reliance Industries Ltd, run by Anil Ambani’s estranged elder brother Mukesh Ambani, is the country’s largest private refinery and will be the worst-hit should the UPA succumb to pressure from the SP and levy a “windfall tax”, or a levy on high profits generated by private refiners from high oil prices.
The Mulayam Singh Yadav-Amar Singh-led SP has long been considered close to Anil Ambani, who is engaged in a growing and tense battle with Mukesh Ambani in recent weeks over Reliance Communications Ltd. Anil Ambani was an independent member of the Rajya Sabha, India’s Upper House of Parliament. He was elected to this House in 2004 from Uttar Pradesh during the SP’s rule in the state and Yadav was present when Ambani filed his papers for the elections.
A Reliance Energy spokesperson said he would revert with a comment, but hadn’t done so till late Wednesday evening.
In July 2007, when the government was hearing arguments related to the pricing of gas from Reliance Industries’ blocks in the Krishna-Godavari basin, Reliance Energy had made a presentation on production sharing contracts to the committee of secretaries (CoS), a government body composed of bureaucrats that takes key policy decisions.
A production sharing contract is usually signed between the government, which owns all natural resources, and a private explorer and producer, who has been given the rights to explore for and produce this resource, usually oil or gas, in a particular region.
“Internationally, governments have renegotiated production contracts/concession agreements and/or levied windfall tax whenever the financial equilibrium under the contract has (been) disrupted due to an unforeseen fundamental change of the major circumstances such as high oil and gas prices,” said the opening point in this presentation, which was made by Ambani.
Arguing that the government had every right to collect a windfall tax, Ambani had told CoS that where natural resources are involved, the “concept of sanctity of contract is overridden by the principle of permanent sovereignty over natural resources and public interests”.
“The company (REL) had forcefully argued that the government would be within its right if it were to collect a similar levy here,” said a government official familiar with the matter, who did not wish to be identified.
The presentation went on to say that “nine countries have changed the fiscal terms under existing production sharing contracts/concession agreements”, collecting around “Rs1,650,000 crore”, or around $400 billion.
However, the presentation showed that only three of the nine countries—Algeria, Ecuador and China—levied a windfall tax, with others levying other duties or increasing existing ones. In China’s case, for instance, the presentation showed that the country levied a windfall tax of between 20% and 40% that would become applicable if oil prices exceeded $40 a barrel.
The presentation did not disclose the period during which these nine countries changed the terms of their contracts with oil firms.
Mint couldn’t independently ascertain the claims presented in Reliance Energy’s presentation, which the company ascribed to a “Wood Mackenzie Report on Government Take published in June 2007”.
Wood Mackenzie is a multinational energy consulting firm and its report on “Government Take”, or the earnings of governments around the world from production sharing contracts with private firms, is considered authoritative.
The other six countries mentioned in the presentation are the UK, the US, Venezuela, Russia, Argentina and Bolivia.
The SP, which has agreed to support the UPA government and the Indo-US civilian nuclear deal, has meanwhile said that its statements about a “windfall tax” are just “suggestions”.
On Monday, senior officials in the Prime Minister’s Office told a Mint reporter in Hokkaido, where Prime Minister Manmohan Singh was attending the G-8 summit, that the party’s demand for a windfall tax was “untenable”.
They added that this tax would be “discriminatory” if levied only on private refiners and would hurt state-owned refiners, already losing money from selling fuel at a price lower than the production cost.