Mumbai/New Delhi: In its game-changing Monday verdict on natural gas from the Krishna-Godavari (KG) basin being supplied to Reliance Natural Resources Ltd (RNRL) by Reliance Industries Ltd (RIL) at a price lower than that specified by the government, the Bombay high court has quoted key parts of the hitherto secret memorandum of understanding (MoU) between Mukesh and Anil Ambani, signed in 2005 when the two parted ways, that may have far-reaching policy implications.
These key sections of the family agreement suggest that the Reliance-Anil Dhirubhai Ambani Group (R-Adag) will have a first right of refusal on all future gas discoveries by RIL, though at market prices. Such an arrangement could thwart the government’s gas utilization policy not just now, but in the future as well.
Mint has reviewed the relevant parts of the 324-page judgement by the two-member bench of justice J.N. Patel and justice K.K. Tated.
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The clause has made the government sit up and take note even as it strategizes on its role in the gas dispute that shows no sign of abating.
Sector analysts explain that while this was unlikely to affect the future revenues of RIL, India’s largest company by market capitalization and developer of India’s largest gas discovery situated in the KG basin, this open-ended option with R-Adag may make it more difficult for the government to hand-pick buyers of the gas or stick to any priority list for gas utilization for all time to come.
An official from the petroleum and natural gas ministry said the government had taken cognizance of the issue but was guarded about the implications, while analysts argued otherwise, claiming that it could lead to the government intervening and challenging the verdict in a possible Supreme Court appeal.
RIL had on Monday said it was seeking legal advice on the future course of action. The company spokesperson said on Thursday that this stance had not changed. The R-Adag spokesperson did not respond to Mint queries.
The high court on Monday asked the Mukesh Ambani-owned RIL and estranged younger brother Anil Ambani’s RNRL to sign a “suitable arrangement” for supplying 28 million standard cu. m of gas a day (mscmd) for 17 years at $2.34 (Rs112.55 today) per million British thermal unit (mBtu)—44% lower than the government specified price of $4.20 per mBtu. RIL is contesting RNRL’s claim to this gas at the lower price.
Quoting from the largely undisclosed family demerger MoU that formed the basis of the separation between the Ambani brothers in 2005, the ruling says: “It is also agreed between the parties that for entire future of the balance reserves (including new discoveries of gas from new explorations and/or bids as may be submitted from time to time), the quantity of gas would, at the option of the Anil Ambani Group (exercised from time to time) be split in the ratio of 60:40 with 60% to Mukesh Ambani Group and 40% to Anil Ambani Group,” adding later that “this is clearly mentioned in the MoU and is binding on both the parties.”
“This clause, if implemented, will not affect RIL at all. It (the option before R-Adag to buy 40% gas) is at the market price, after all. The stakes will be really high for the government as it will have trouble framing and thereafter applying its gas utilization policy in the future,” said a Mumbai-based sector analyst with a foreign brokerage. Another analyst, also with a foreign brokerage who did not want to be named, agreed, saying it will be hard to sign gas supply agreements in the future according to the priority list since this option with the the Anil Ambani group could come in the way.
The judgment, which came as part of a three-year-old lawsuit that is expected to escalate, asked the two companies to sort out the issue within a month or consult their mother Kokilaben Ambani, or invoke the indemnity clause in the scheme of demerger arrangement that provides damages to the aggrieved party, or approach the company court to modify the scheme of arrangement.
“Let us see how this case progresses. These (the issue) are matters of detail and being examined by us. The status quo continues. No one has approached us to intervene in the case. There is no need for action on the part of the government. There has been no decision on the part of the ministry to intervene in the case,” said a senior petroleum ministry official, who did not want to be named due to the sensitivity of the issue.
In balance hangs the applicability of the government’s present and future gas utilization policy—a regulatory guide map it drew up to decide the priority in which users across sectors will be allowed to access gas at $4.20 per mBtu plus transportation costs. The current utilization policy has named existing firms in the fertilizer sector to be the priority users, followed by power, petrochemicals and city gas projects.
If RNRL gets 28 mscmd, allocation to others may have to be reduced or some users eliminated. The ministry is still debating various aspects of the issue, including whether its profit share of RIL gas should be at $4.20 or $2.34 per mBtu.
“It is a very serious matter. It is for the government to take a view on this. However, it will be very difficult for RNRL to utilize all this quantity of gas even if they exercise that option, and they can’t give it to any other party. Where is the land and water available today to set up power projects? It is not that easy,” said a senior NTPC Ltd executive, who did not want to be named.
NTPC and RIL are fighting a separate case in the Bombay high court that has to do with the price at which the latter will supply 12mscmd of gas for 17 years. NTPC claims the two companies agreed to a price of $2.34 per mBtu. While RIL wants to sell it at $4.20 per mBtu price set by the government, India’s largest power generation utility is yet to sign the gas sale and purchase agreements, or GSPA, with it.
RIL’s future and potential gas finds are expected to be substantial and are keeping sector analysts, as well as its minority partners in the exploration and production process, excited.
In a 3 December report, Macquarie Research’s analysts Jal Irani and Scott Weaver had written that “our forensics suggest that RIL has at least five other basins that could replicate KGD6”. Various blocks in the river basins of Mahanadi (MN D4 and NEC 25), Krishna-Godavari (KG D9 and KD D3) and Cauvery are expected to be big hydrocarbon—oil and gas—finds.
In end-May, Hardy Oil and Gas Plc had estimated “resource potential” of the D3 and D9 blocks at 9.5 trillion cu. ft (tcf) and 10.8 tcf of gas after it received a technical assessment report. The report is currently under review of the Directorate of Hydrocarbons, the regulator for exploration and production activity in the country.
Soumya Shanker in New Delhi contributed to this story.