New Delhi: State-owned Steel Authority of India Ltd (SAIL) and Russia’s steel plant equipment exporter Tyazhpromexport have failed to resolve a dispute over a contract to modernize the Bhilai steel plant, threatening India’s quest to secure energy resources.

The contract for the steel plant, built in the 1950s with the assistance of the erstwhile Soviet Union, is engaging the attention of both governments, with the Russian firm alleging discrimination on the part of SAIL as the tender was cancelled twice even though Tyazhpromexport was the lowest, or L1, bidder.

Capacity hurdle: Steel Authority of India’s rail mill at the Bhilai steel plant in Chhattisgarh. The expansion plan for the plant has been reviewed and shelved, a spokesman for the company said. Maitreyee Handique / Mint

Sticky issues such as these have become a test of the country’s ability to balance commercial and diplomatic interests and to secure energy resources. Russia has withheld India’s request for a stake in the Sakhalin-3 crude oilfields until another row over a Technoprom Exports contract is resolved. Russia’s stand was spelt out by Prime Minister Vladimir Putin during petroleum minister Murli Deora’s visit to Russia in November 2008.

“The important thing to recognize is that Russia, specifically from the gas perspective, is the most important supplier in the world. If India has to achieve energy security, some kind of solution that is acceptable to the Russians is critical," said Anish De, chief executive at Mercados Asia, an energy consulting firm.

India is the fifth largest crude steel producer in the world and the largest producer of sponge iron. SAIL had plans to increase the installed capacity of hot metal from 14.6 million tonnes per annum (mtpa) to 26.2 mtpa by 2011. Because of delays in expansion plans, the target can only be reached by 2014.

A SAIL spokesperson said in an email response to queries that the expansion plan of the Bhilai plant had been reviewed and shelved.

“Tyazhpromexport (TPE) had emerged as L1 bidder with quoted price much higher than the estimate... During negotiation, TPE was requested to give substantial discount and they agreed to revert back with discounted price after discussion with their consortium partner, M/s MICCO. However, M/s TPE did not respond with discounted price," the SAIL spokesperson said.

“M/s TPE was informed about cancellation of the tender. Also, all SAIL tenders have an inbuilt clause reserving the right of the company to cancel the tender. In view of the above, the contention of M/s TPE is not correct," the spokesperson added.

Interestingly, minister of state for steel A. Sai Prathap, in a written reply in the Rajya Sabha on 4 December, said that orders for “part packages of expansion" of the Bhilai steel plant and other projects had been placed. These ordered packages are under various stages of execution, he said.

Questions emailed to the Russian embassy in New Delhi and the Russian trade representative were not answered at the time of filing this story. A Tyazhpromexport representative in India did not respond to questions emailed on 15 December.

While both India and Russia believe that trade between the two growing economies has lagged at around $7 billion (Rs32,830 crore), relationships between the old allies have been strained on account of India’s growing warmth towards the US.

The other high-profile commercial dispute yet to be resolved is the controversial Technoprom Exports contract. The Russian firm, under investigation for pay-offs it allegedly made to secure the order for an NTPC Ltd project, is demanding an additional Rs1,700 crore citing higher steel prices, which India’s largest utility is unwilling to pay.

“The question of bias creeping in can only come up when someone edges Tyazhpromexport out of the contract. This is a commercial decision that any organization will take," said a senior Indian government official aware of the Tyazhpromexport dispute. The official did not want to be identified.

India depends on imports to meet most of its energy needs, and is particularly vulnerable to price volatility.

As the world’s fifth largest energy consumer, India imports 75% of its requirements and accounts for some 3.5% of global consumption. As part of India’s strategy to achieve energy security, state-owned firms such as ONGC Videsh Ltd are actively seeking stakes in hydrocarbon-rich Russia.