GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  The court’s order opened doors wide for corporate lobbyists to influence government policies. Many saw this as contributing to corruption and crony capitalism in the extraction of minerals (including hydrocarbons) even as ministers swore by the virtues of ‘economic liberalisation’. One interpretation of the Supreme Court judgement was that it set the clock back to the days of the licence- quota raj. Henceforth, only those who were close to politicians and decision-makers would benefit. A more charitable view, from the government’s perspective, was that the judgement reaffirmed the sovereignty of the state over India’s natural resources. It was a separate matter altogether whether the government was capable of acting as a genuine custodian of the natural resources that belonged to the people of the country.

  It was apparent that the government and the Supreme Court didn’t really delve into this issue in particular detail. Some contend that this could have derailed India’s frenetic economic growth by dissuading investors, both foreign and domestic, from participating in auctions under the NELP in the future. In the past few auction rounds between 2010 and 2012, some of the largest global oil companies absented themselves. A few experts went further and said that this was exactly what would happen as the Supreme Court snatched away, in one stroke, the contractor’s (RIL’s, in this case) freedom and right to market its share of the gas reserves. The effects of the NELP on India’s policies in the natural gas sector, and implicitly on the Ambani controversy, are discussed in a later chapter, which is based on the text of a previously unpublished lecture delivered behind closed doors to a select group by Mani Shankar Aiyar, a former Union minister for petroleum and natural gas. In his speech, Aiyar mentioned how the EGoM had increased the price of gas from $2.34 per mBtu to $4.20 per mBtu and then sardonically remarked how the number ‘420’ had a special connotation in India—Section 420 of the Indian Penal Code relates to conviction and punishment for cheating and fraud.

  Retired bureaucrat and former chairman of the Disinvestment Commission G.V. Ramakrishna, who was petroleum secretary in 1985 when the first successful round of bidding for exploration and production of oil and natural gas took place, raised this point in an article in Business Standard on 13 May 2010. He pointed out that under the PSC, there is a cost-sharing and profit-sharing arrangement between the successful exploration company and the government. Of all the gas reserves discovered in a field, the cost share allows the exploring party to sell a specific quantity of gas to recover its investments, which are huge and encumbered by risks. The causes and effects of the PSC between the government, RIL, and RNRL are vital to comprehending the personal and corporate dynamics of the conflict and, as such, they are explored in a later chapter in this book.

  Under the cost- and profit-sharing arrangement, the government determines the royalty and other charges to be paid to it. However, the government has the right to buy the company’s cost and profit shares of the natural resource (gas, in this case) at an agreed price determined by prevailing international prices or as agreed to in the PSC. If the government chooses not to buy it from the company, the company is free to sell the gas to anyone at a price determined by it.

  Ramakrishna wrote: ‘The remaining part of the share of gas belonging to RIL can be sold by the company to a party at a price of its choice. If it chooses to sell gas at $2 per mBtu, it is a contractual arrangement between the seller and the buyer. In exercising its sovereign right over the gas, the government has already taken its share of the gas and paid to RIL a predetermined price under the PSC. Having paid the government its dues, RIL will be free to sell the gas to any party of its choice and at a price agreed by it to the third party.’

  He asserted that the government ‘cannot exercise the sovereign right twice over, once in determining the price, in which it will get its share, and again in fixing the price at which the company can sell its share….’

  E.A.S. Sarma, another retired bureaucrat who, like Ramakrishna, has a reputation for probity and honesty, pointed out that in the wake of the May 2010 ruling of the Supreme Court, the Union government could not abandon its own obligations to exercise due diligence and prudence in fixing the price of natural gas. In a letter written the same day to prime minister Manmohan Singh, Sarma, who had been secretary, economic affairs in the ministry of finance, said the government must ‘take all such measures necessary to prevent the supplier from exercising monopolistic leverage to the detriment of public interest’.

  The reason why Sarma adopted this position was because he felt, as he had expounded in an earlier letter to the prime minister on 22 August 2009, that the ‘price fixed by the EGoM was based on a contrived bidding format that was more beneficial to RIL than the public’. He added: ‘The present arrangement of the EGoM administratively fixing the price goes against all canons of competitive price fixation.’ Sarma further stated:

  When I requested both the Ministry of Petroleum and the Cabinet Secretariat to provide me copies of the EGoM proceedings under the RTI [Right to Information] Act, the government chose to cite “confidentiality” as an excuse and deny me the same.… The mechanism of pricing should not be politicized. Instead, it should be entrusted to a statutory authority like the petroleum regulator, as already envisaged in the PSC itself.

  Sarma and others, like Dr Surya P. Sethi, who used to serve as principal advisor, energy, in the Planning Commission (and whose views are covered in detail in a later chapter) feel that as there are no homogeneous gas markets the world over, it becomes difficult to ‘discover’ the market price. Accusing the government of acting non- transparently in exercising its discretionary powers, Sarma raised three valid questions: ‘Should the government not, on its own, disclose all such information to the people of this country? Should private gas developers be allowed to wield monopolistic power over strategic resources? Should gas developers dictate to the government as to which agency should evaluate their operations?’

  The counter-argument of the government is that as gas is a scarce commodity and crucial to India’s energy security it cannot ‘arbitrarily’ give away to private companies complete freedom to market the resource. Unless an independent regulator is in place, it is the government’s responsibility to ensure that private companies neither charge too high a price for gas, nor sell cheap to interested persons (as was the case between the two Ambani brothers). Similarly, price is not a constant figure, but a fluctuating one, and the government needs to look into this issue at regular intervals.

  In his letter, Sarma raised another issue as a citizen that had hitherto not been touched upon. He wrote:

  Gas development is known to cause land subsidence. In the case of [the] KG basin gas, the Ministry of Environment (and Forests) had conveniently bypassed evaluating this aspect while according environmental clearance to RIL. Some concerned citizens had to approach the Andhra Pradesh High Court to intervene and order a fresh environment appraisal of the project. The KG basin comprises the heartland of agriculture of Andhra Pradesh and if there is land subsidence in that basin, it will break the backbone of the state’s economy. The state and the central governments are oblivious, indifferent and perhaps insensitive to this impending calamity that is waiting to happen.

  Even as the issue of the environmental consequences of offshore extraction of gas is dealt with in a chapter in this book, it was argued that Sarma’s views are unduly alarmist.

  However, within weeks of the 7 May 2010 Supreme Court judgement, an important development took place. On 19 May, the cabinet more than doubled the government administered prices of natural gas to the level of $4.20 per mBtu from $2.34 per mBtu, ostensibly on the ground that government-owned companies were incurring losses on their sale of gas. This suited the interests of not just public sector undertakings like ONGC and OIL (which had been given gas-fields to mine by ‘nomination’ and not by competitive bidding) but notably RIL as well, even if it translated into higher power tariffs and fertiliser prices.

  India’s best-known sibling rivalry-cum-corporate soap-
opera in real life also raised important issues about the ‘resource curse’ that plagues not just India but many other developing countries. What is, after all, common among developing countries scattered across different parts of the planet, nation-states (in no particular order) such as Azerbaijan, Kazakhstan, Turkmenistan, Russia, Angola, Nigeria, Sierra Leone, Congo, Botswana, Sudan, Chad, Papua New Guinea, Saudi Arabia, Venezuela, Mexico, Peru, Bolivia, Ecuador, and Indonesia? At some point or other in the past, ordinary people belonging to each and every one of these diverse nation-states have failed to benefit from the presence of valuable natural resources in their soil.

  It is also important to appreciate why the resource curse is not prevalent in developed countries like the United States. A gas industry insider pointed out why shale gas exploration in the US took off from 2010 onwards. First, high rates of royalty were paid to private landowners who, in turn, were encouraged to develop technical skills and expertise. Second, the shale gas fields were developed by small firms, not large corporations. Third, the government facilitated the building of a countrywide gas pipeline infrastructure and fourth, prices were market driven. Consequently, US gas prices came down from $9–10 per mBtu in 2008–9 to an average of around $3 per mBtu in 2012. Thanks to new findings of both shale gas and natural gas in deep offshore wells, the US is expected to become a net exporter of energy by around 2020, a December 2012 report of the National Intelligence Council has claimed.

  Returning to the issue of the ‘resource curse’ in India, a question can be raised as to what is common among parts of neighbouring Nepal, the states of Bihar, Jharkhand, West Bengal, Chhattisgarh, Odisha, Maharashtra, and Andhra Pradesh, where the so-called ‘red corridor’ runs at a stretch from the Pashupati temple in Kathmandu to the Tirupathi temple in Andhra Pradesh, from the Himalayas to the Bay of Bengal. Is it coincidental that these large tracts of the subcontinent also happen to be those areas that are richest in mineral wealth and forest resources, but where inequalities of income and wealth are at their starkest? Should one be surprised then that it is in this belt that the so-called ‘menace’ of Maoists is at its height, even as the various state governments woo mining magnates and corporate conglomerates of all varieties, public and private, domestic and multinational, to exploit their natural resources, as well as the local population, in particular, indigenous people?

  Each and every question raised above is rhetorical. In other words, the answers to the questions are obvious. Some of the ‘richest’ parts of India and the world also paradoxically happen to be the poorest because their scarce (and hence, very valuable) natural resources have attracted the most corrupt and venal entrepreneurs to these areas.

  The phrase ‘resource curse’ was first coined by Richard M. Auty in Sustaining Development in Mineral Economies: The Resource Curse Thesis (Routledge, 1993) and thereafter deployed widely in academic texts and popular journalism to signify a widespread phenomenon: how the presence of natural resources in developing countries, whose economies depend on such minerals or forests, have contributed to corruption, conflict, and the absence of democratic governance. Joseph Stiglitz, in his book Making Globalization Work (Allen Lane/ Penguin, 2006) has devoted an entire chapter to the topic entitled ‘Lifting the Resource Curse’. He says the problem is simple, and uses an analogy of a pile of diamonds sitting in the middle of a room. Everyone grabs at them . ‘The biggest and strongest are most likely to succeed, and will be reluctant to share them unless they absolutely have to ….’

  As Stiglitz and others have documented, resources are both the object of conflict and the source of the financial wherewithal that enables the conflict to continue. This is what he wrote:

  Sadly, in the struggle to get as big a share of the pile as possible, the size of the pile itself shrinks as wealth is destroyed in the fighting. Nowhere is this aspect of the resource curse more evident than in parts of Africa, exemplified by the heinous fighting between government and rebels in Sierra Leone during the 1990s that killed 75,000 people and left 20,000 amputees, two million displaced people, and large numbers of children psychologically damaged by having been forced into combat, or worse….

  Will India go the way of some of these African nations? Can India learn from the mistakes of others and ensure that resources that belong to the people—from natural gas in the Krishna-Godavari basin to bauxite in Niyamgiri, Odisha, where the Vedanta Resources/Sterlite group wants to set up the world’s largest aluminium manufacturing complex—do not benefit only a select few?

  As for the Ambani versus Ambani saga, the drama was far from over although there were frequent claims that the brothers had patched up.

  2

  GAS AND FIRE

  A photograph published soon after Indira Gandhi returned to power in January 1980 created quite a stir, especially in the country’s business community. It showed Dhirubhai Ambani sitting beside the then prime minister of India in the capital’s grand public sector Ashoka Hotel. The occasion was a victory celebration hosted by newly-elected MPs from the state of Gujarat.

  If anyone nurtured any doubts, the photograph left little room for speculation about Dhirubhai’s proximity to the most powerful Indian. A strong signal was sent that the ‘Only Vimal’ advertising slogan used by his Reliance group to sell textiles would now reverberate within government circles. It did. From January 1980 till October 1984, when Indira Gandhi was assassinated by her bodyguards, several government policies were ostensibly framed or ‘designed’ to help the Reliance group. Licences and permits were generously doled out

  The mid-1980s were a period during which the Reliance group got locked in a bitter turf battle with Bombay Dyeing headed by Nusli Wadia. The two corporate groups were producing competing products—Reliance was manufacturing purified terephthalic acid (PTA) and Bombay Dyeing, di-methyl terephthalate (DMT), both used to manufacture synthetic fibres. Wadia lost the battle and reportedly became the source of information for many articles against the Ambanis that subsequently appeared in the Indian Express. In 1985, the Mumbai police accused a manager in a Reliance group company of conspiring to kill Wadia, a charge that was never established in a court of law. Many years later, a newspaper owned by the Ambanis (Business and Political Observer) would accuse Wadia of illegally holding two passports and played up the fact that he was Mohammed Ali Jinnah’s grandson.

  The year 1986 was a crucial year for Dhirubhai. He suffered a stroke in February that year. A few months later, the Indian Express began publishing a series of articles attacking the Reliance group as well as the Indira Gandhi regime for favouring the Ambanis. These articles were co-authored by Arun Shourie who, ironically, as Union minister for disinvestment in the Atal Bihari Vajpayee government, presided over the sale of 26 per cent of the equity capital of the former public sector company, Indian Petrochemicals Corporation Limited (IPCL), to the Reliance group in May 2002. By gaining managerial control over IPCL, the Reliance group was able to dominate the Indian market for a wide variety of petrochemical products (for more on this and subsequent episodes, see Chapter 3 and Appendix 1).

  Shourie’s co-author for the famous series of anti-Reliance articles was Chennai-based chartered accountant S. Gurumurthy who happens to be a leading light of the Swadeshi Jagaran Manch, an outfit that espouses the cause of economic nationalism and is closely affiliated to the Rashtriya Swayamsevak Sangh (RSS), the ideological parent of the Bharatiya Janata Party (BJP). The Express articles written by Shourie and Gurumurthy meticulously detailed a host of ways in which the government of the day had gone out of its way to assist the Ambanis. One article was on the subject of how the Reliance group imported ‘spare parts’, ‘components’ and ‘balancing equipment’ of textile- manufacturing machinery to nearly double its production capacities. The article provocatively claimed the Ambanis had ‘smuggled’ in a plant. Another story detailed how companies registered in the tax haven, Isle of Man, with ridiculous names like Crocodile Investments, Iota Investments and Fiasco Investments had purchased Reliance
shares at one-fifth their market prices. Curiously, most of these firms were controlled by a clutch of non-resident Indians who had the same surname, Shah. Though the then finance minister Pranab Mukherjee had to change a reply he gave in Parliament on the investments made by these firms, an inquiry conducted by the Reserve Bank of India could not find any evidence of wrongdoing. Yet another article detailed how the group had been the beneficiary of a ‘loan mela’—a number of banks had loaned funds to more than 50 firms that had all purchased debentures issued by RIL.