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RIL holds the upper hand in negotiations

RIL holds the upper hand in negotiations
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First Published: Mon, May 10 2010. 01 21 AM IST
Updated: Mon, May 10 2010. 09 59 AM IST
Mumbai: The habitual reticence of executives belonging to Reliance Industries Ltd (RIL), India’s most valuable company, was laced with relief over the weekend, even as their counterparts in the Reliance-Anil Dhirubhai Ambani Group (R-Adag) held hectic parleys internally and briefed reporters extensively.
That’s largely the frame of mind in which the Mukesh Ambani-owned RIL is going to initiate renegotiations, as it sends out a formal note outlining terms to Reliance Natural Resources Ltd (RNRL), the fuel-trading firm owned by estranged younger brother Anil Ambani.
With a clear upper hand at the bargaining table over the next six weeks, “it is impossible to envisage a scenario where gas could go for anything lesser than $4.2” per million British thermal unit (mmBtu) in the negotiation process, said a Mumbai-based analyst with a domestic brokerage.
RIL did not respond to Mint queries on how it intends to take the gas supply discussions forward. RNRL wanted 28 million standard cu. m of gas a day (mscmd) for 17 years at $2.34 per mmBtu or 44% cheaper than the government’s $4.2 per mmBtu price tag, basing its claims on a 2005 family division pact.
All of that is now up for discussion, except perhaps for the price.
RIL’s executive director P.M.S. Prasad said in television interviews right after the court verdict—and before his trip to Tirupati—that the company too wanted an expeditious resolution on this with RNRL, but added categorically that it would be in keeping with government’s pricing and allocation policies.
A battle-weary executive with the oil-to-yarn conglomerate who did not want to be named, said he wasn’t sure his first reaction after watching the verdict on television was “relief, happiness or fatigue...”
An RIL lawyer told Mint on condition of anonymity that Atul Dayal, founding partner of law firm AS Dayal and Associates would head its negotiating team while an RNRL lawyer confirmed that J.P. Chalasani, chief executive officer of Reliance Power Ltd (RPL) would lead its team during the negotiations.
The apex court in its judgement on 7 May had given directions to both RIL and RNRL to renegotiate the gas supply master agreement (GSMA) in accordance with government policy.
AS Dayal and Associates specialises in advising RIL companies and the firm had fought its case in the Bombay high court. Both parties are studying the judgement and negotiations are likely to start in four-five days in Mumbai, the lawyers said. Mint could not independently verify the information.
R-Adag executives know RIL is holding the whip hand as they go back to the drawing board and rework their options. Utility firm Reliance Infrastructure Ltd’s chief executive Lalit Jalan said that R-Adag was “open to other suppliers of gas as well as liquified natural gas” to provide feedstock for its 7,480MW Dadri power project.
Edelweiss Securities Ltd analysts Niraj Mansingka and Ruchi Vora wrote in a 7 May note to their clients that RNRL may have no option on price.
“We always understood that the PSC (production sharing contract) provided marketing freedom for hydrocarbons,” they wrote. “But the court directive indicates marketing freedom subject to government...approval. This may leave little room for flexibility on pricing. Hence, it is likely that RNRL may contract gas at $4.2/mmBtu.”
Edelweiss upgraded RIL “stock to a ‘BUY’, as overhang may be over and on positive E&P (exploration and production)/refining outlook”.
RIL’s shares had underperformed the benchmark equity index, the Sensex, by 22% in 2009-10—the first dip in five years and the largest in this decade—and the gas dispute was cited as one of the reasons by Anil Sharma and Ravikumar Adukia, analysts with Nomura Financial Advisory and Securities (India) Pvt. Ltd in a 5 April note.
The decline was “after four straight years of outperformance ranging from 8% to 49% (an average of 26% for the last four years)”, they had written at the time.
The family memorandum of understanding (MoU), which the Supreme Court has said is subservient to government regulations, however, has certain other clauses regarding gas assets which aren’t clear. Besides the Krishna-Godavari (KG) basin, D6 gas, Anil Ambani has right of first refusal on 40% of all future gas finds by RIL at market rates. It is not clear if this condition still applies after the court ruling.
RIL, in a late Friday statement, said the court has held that “MoU amongst the family of the promoters does not bind the corporate entity RIL,” while Anil Ambani told reporters the same day that the MoU which “is the guiding force and the basis of the scheme of arrangements for business reorganization of RIL”, would be the basis of the negotiations.
If RNRL doesn’t get the gas, then its entire business plan will have to be reviewed, predicated as it was on this source.
On the other hand, if it does get the fuel, it may disrupt the plans of three dozen hand-picked, fertilizer and power users that were nominated by the government for the same gas.
Edelweiss analysts estimate that if 40 mscmd gas is supplied to RNRL and state-owned power utility NTPC Ltd (fighting another lawsuit for cheaper gas from RIL), there will be a shortage of the fuel and an increase in demand for liquefied natural gas, especially from Petronet LNG.
Much therefore hangs in balance as the two companies thrash out a solution over the next month and half.
bhuma.s@livemint.com
Manish Ranjan contributed to this story.
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First Published: Mon, May 10 2010. 01 21 AM IST