Worse news was to come the very next day, but from unexpected quarters. It came in the form of a draft report by the Comptroller and Auditor General (CAG) of India that was leaked to the media (to the two most widely circulated rival English dailies published from the national capital Delhi, the Times of India and the Hindustan Times) that minced no words. The CAG rapped the petroleum ministry and the DGH for favouring RIL by allowing it to double the KG-D6 gas field’s costs. The 193-page report, titled ‘Draft performance audit report on hydrocarbon production sharing contracts’, said the petroleum ministry and the DGH had bent rules to grant ‘huge benefits’ to Reliance when it was allowed to retain entire blocks.3
The draft report of the CAG had been sent to the petroleum ministry on 8 June for comments. It should not have been in the public domain, but it was. The report claimed that the gains made by RIL were huge, but the accounting watchdog said it could not quantify these as yet: ‘However, at this stage, based on the information provided, we are unable to comment on the reasonableness or otherwise of the increase in cost, both overall and in respect of individual line items.’
The CAG report said the ministry and DGH allowed Reliance to raise the cost of developing the nation’s largest gas fields by 117 per cent. ‘The increase in cost from $2.39 billion proposed in the Initial Development Plan (IDP) of May 2004 to $5.196 billion in the addendum to the IDP is likely to have a significant impact on the government of India’s financial take.’
The only thing that the report did not say in as many words was that Mukesh Ambani’s company had over-billed the government and therefore, caused huge losses to the state exchequer. The insinuations, if any, were clear—it was the government that had lost out on revenues. The ministry and the DGH had allowed Reliance to enter successive exploration phases without the stipulated relinquishment of area and then allowed it to declare the entire contract area as ‘discovery area’. This was both ‘irregular and incorrect’, since drilling of wells and consequential discoveries had not taken place in the major portion of the contract area. The CAG did what it usually does not; it made policy recommendations. The report said:
The role of (the) DGH and (the) government of India representative on the Management Committee may be closely scrutinised to see why the operator was allowed to violate the provisions of the production sharing contract (PSC) and not adhere strictly to the terms of the approved initial development plan. We recommend that government should re-examine delineation of the entire contract area as “discovery area” and take immediate steps for relinquishment of excess area in line with the provisions of the PSC, as also fix accountability for those responsible for this decision.
The petroleum ministry at that time was led by Murli Deora and the Management Committee on KG-D6 included director general, DGH, V.K. Sibal and joint secretary (exploration), Anil Jain. The CAG had conducted the audit of the accounts of Reliance after allegations of ‘gold-plating’ or artificial inflation of the cost of development of Dhirubhai-1 and 3 gas fields were levelled by the Anil Ambani group. The charges had been made around 2007, long before the Ambani siblings patched up in May 2010. The draft report did not specifically use the term ‘gold-plating’ but all the pointers were there. The damage control began almost immediately. Among the first things that the new petroleum minister S. Jaipal Reddy, who had replaced Murli Deora in the January 2011 Cabinet reshuffle, did the following morning was to meet prime minister Manmohan Singh. It was described as a routine meeting, but there was little doubt about what was discussed. Jaipal Reddy’s ministry said it would need at least five to six weeks to reply to points raised by the CAG, which had asked for comments in two weeks’ time. The ministry was clearly buying time since this delay would inevitably mean that the CAG’s final report could not be tabled in Parliament in the monsoon session of Parliament in July. The ruse, as Mint (14 June 2011) reported, was that the ministry now had an entirely new set of officials. The idea ostensibly was to stonewall any exposure of the scam.
The petroleum ministry put out a perfunctory statement couched in official jargon:
The draft performance audit report sent by the Office of the Principal Director of Audit, Economic and Service Ministries has been received in this Ministry on 8th June, 2011. The Ministry is examining the draft report. It will prepare a reply to the audit observations after obtaining details from relevant agencies and send it to the Office of the Principal Director of Audit for further necessary action at their end.
Reliance Industries too issued a statement insisting that ‘as a responsible operator, it has fully complied with the requirements in the PSC at all times in conducting petroleum operations, and refutes any suggestion to the contrary. The KG-D6 project… has been globally acclaimed for its cost effective, speedy, flawless execution and smooth commissioning.’
This was the first major statement from RIL since the storm had begun brewing because of falling gas output from the KG-D6 field. Most news items on the subject during those days came with a typical phrase along the lines of ‘Reliance officials could not be reached for comments’. It would still be some more days before RIL would come out with something more than a mere statement.
As the word was out about a second-generation (2G) telecommunications spectrum-like scam in the making, the ministry went on the backfoot. It called for restraint from one and all, and contended: ‘It would be ... incorrect for the media commentators, political leaders and civil rights activists to jump to conclusions and thus short-circuit the process’ of the ministry responding to the CAG’s observations.
The government badly needed to salvage the situation. Reliance spokespersons maintained a deafening silence. Mukesh Ambani called on prime minister Manmohan Singh on the afternoon of 24 June. The PMO did not offer any details, and neither did Mukesh’s company. What was discussed and transpired at the meeting could be anybody’s guess. Interestingly, India’s wealthiest man did not meet the petroleum minister to discuss the KG-D6 issue. Meeting the prime minister, after all, was enough.
The situation exacerbated with reports that CBI was hot on the heels of V.K. Sibal, former head of the DGH. This is what a preliminary report of the CBI stated: ‘It is alleged that Sibal favoured RIL and approved a phenomenal increase in the capital expenditure from $2.4 billion to $8.8 billion for KG-D6 field between September and December 2006 in lieu of personal favours/services from (the) RIL group of industries.’
The CAG had taken Sibal to task for allowing RIL to retain the entire area of block KG-DWN-98/3 (which holds the KG-D6 discovery) even though the PSC had outlined that the operator should relinquish 25 per cent of the area each time after phase 1 and phase 2 of the exploration. ‘Arguments put forward by (Sibal) at various points of time that there was hydrocarbon bearing channels throughout the block area and that consequently the whole block should be declared as contract area are specious, irregular and unacceptable in the absence of drilling of wells, and resulting hydrocarbon discoveries,’ the CAG report stated.
Sibal had long fallen by the wayside. But another friend of Mukesh Ambani was to exit the political stage soon: Murli Deora. In the first week of July, with another Union Cabinet reshuffle looming large, corporate affairs minister Murli Deora announced he was resigning citing personal reasons, and affirmed that he would now devote his time to the Congress party. He had earlier been replaced by Jaipal Reddy as petroleum minister on 19 January 2011 at a time when the ministry was facing a lot of flak because the prices of petroleum were being frequently hiked. This was reportedly not going down too well with the Congress party. The ruling party was not just being attacked by its political opponents; there was considerable resentment within the party because of public resentment against inflation being literally ‘fuelled’ by high diesel prices. Deora denied that his resignation was linked to the CAG report (Economic Times, 6 July 2011). The Congress did not want to be in the dock again because of another tainted minister being accused of crony capitalism. Deora had to go; he had outlived his use
fulness to the party.
The Economic Times (6 July 2011) wrote that the tenure of petroleum minister Deora, once one of the Congress party’s biggest fundraisers, was ‘dogged by the battle between the Ambani brothers, record oil prices, long delay in clearing the Cairn-Vedanta deal, and, more recently, the CAG probe into the way the oil ministry dealt with Reliance Industries’. The country’s leading financial daily recalled how Anil Ambani had openly accused Deora’s ministry of favouring RIL and wondered if the reasons for Deora quitting were ‘personal’. The paper added that Deora was ‘not known for his administrative acumen or patience for policy details’ and that his term as petroleum minister ‘was clouded with controversies, corporate battles and policy inconsistency’. It pointed out how the former minister and MP from south Mumbai had refused to grant an extension to the then chairman of ONGC, Subir Raha. The Economic Times editorialised how Deora was ‘perpetually under the spotlight’ and how his resignation offer came ‘amid conspiracy theories’.
It was only after Deora had been divested of the petroleum portfolio after a five-year stint, that the DGH was able to act tough with Reliance. Deora’s exit, Sibal’s indictment and the damning CAG report had all happened too fast. RIL needed to take stock of the situation. And it took its own sweet time to respond—almost a month. Its response on 14 July was more voluminous than the draft CAG report itself—it ran into 250 pages. RIL laid the blame for gold-plating allegations squarely on its corporate rivals: ‘Corporate rivalry motivated a few people with vested interests to indulge in a vicious smear campaign.’
The internecine Ambani hostilities were now being fought on a different turf. It had become a proxy war in which no names were named. There was no need to. Everyone knew who the antagonists were and also the protagonists. RIL stated that ‘baseless insinuations were made through public advertisements questioning the increase in cost estimates’ from $2.4 billion proposed in 2004 to $8.8 billion in 2006 due to a 250 per cent jump in the cost of services between the period of initial assessment and the actual commencement of field development. It took on the CAG’s contention that the increase in field cost would mean a lower profit take for the government. ‘There is no finding or observation in the CAG’s draft audit report that Reliance has falsely inflated its contract cost or that it has dishonestly colluded with any of its suppliers to have them inflate the cost of the goods and services supplied by them,’ the company’s statement added.
Reliance cocked a snook at the auditor arguing that it neither had any expertise in hydrocarbon exploration nor knowledge of ‘good international petroleum industry practices’, that it ‘confused’ the ‘authenticity’ of expenses with ‘desirability’ of expenses. It went on to ask the CAG to state in ‘clear terms’ in its final report that the contract cost had not been dishonestly inflated. It accused the CAG of ‘using the benefit of hindsight’ to question the technical and operational judgements of the operator that were, in effect, the best possible judgements made at the time, based on the best information available. The RIL statement went on to claim:
A number of the sections in the CAG’s draft audit report demonstrate a comprehensive misreading and misinterpretation on the part of authors of the nature of the project, the norms of good industry practice that apply to development of such fields and issues that should have been kept in focus and which are critical to assessment of whether the revenue interests of the government have been properly protected.
Some respite for Reliance, though, was just round the corner. It was the good news that the company had been anxiously waiting for since 21 February. On 22 July, Jaipal Reddy announced that the government had cleared a $7.2-billion deal for RIL to sell a major stake in 21 of its oil and gas blocks to British Petroleum (BP). Though the ministry itself was competent to clear the deal, Reddy instead played it safe and referred the decision to the Cabinet Committee on Economic Affairs (CCEA) which cleared the deal on 22 July 2011, five months after it had been announced. Of the 23 blocks in which BP wanted to buy a 30 per cent stake, the CCEA approved 21. In the other two, there were technical issues to be sorted out between the government and Reliance. The minister gushed that this would be the single-largest foreign investment in the country’s history, and it would also mean induction of vast technical expertise in India’s hydrocarbon sector. If Reliance was linking the efforts to raise KG output to clearance of the BP deal, the government had given the company a chance to come clean. Reliance had all along been hoping that BP’s deepwater drilling expertise would increase output from the KG-D6 field. The participation of a global leader in deepwater oil and gas fields like BP strengthened Reliance’s defence of its high capital expenditure in the D6 block. The view in industry circles was that BP would have diligently scrutinised the cost of development and production before agreeing on a valuation of the assets. Reliance needed BP’s ‘certificate’ and it got it.
Besides exploration, Reliance and BP had agreed to form a 50:50 joint venture. The venture would be for sourcing and marketing gas in India, which would create the infrastructure for receiving, transporting and marketing natural gas. At this point, however, KG-D6 was producing only 46.8 mscmd. Minister Reddy said the consortium would do its best to ramp up production. ‘It (the consortium) needs no instruction. It is its duty,’ he was quoted as saying (Business Standard, 23 July 2011).
So, was the government trying to bail out Reliance with this mega deal? The deal with BP was described by Times of India (23 July 2011) as Mukesh Ambani’s ‘master stroke’. For one, it was bound to reduce RIL’s exploration risk burden and balance the company’s funds outflow to US ventures to extract shale gas. Mukesh had made BP happy too—the global major had been eager to enter India’s oil and gas exploration sector. With a strong domestic partner such as RIL, BP got the toehold it had been looking for. The oil major also needed to redeem itself and refurbish its tarnished image after the disastrous environmental disaster caused by the Gulf of Mexico spill in April 2010.4 The RIL-BP deal could benefit both.
But the ghosts of the past would return to haunt Mukesh Ambani.
6
MURKY DEALS, MUDDY WATERS
After the initial euphoria over the discovery of the ‘world’s largest gas reserve’ in 2002 by Reliance Industries Limited (RIL) in the Krishna-Godavari (KG) basin had died down, the topic had all but disappeared from the radar of the Indian media for a few years. Until, that is, the summer of 2007 when the offshore gas fields in the KG basin bounced back into the news. Most of the action took place in New Delhi. Over and above questioning the manner in which the price of gas had been determined, the capital expenditure approved by the government for the development of gas reserves by RIL became a contentious issue. Members of Parliament demanded a Central Bureau of Investigation (CBI) probe into the allegedly dubious way in which capital expenditure had been approved.
RIL’s Initial Development Plan (IDP), which envisaged capital expenditure of $2.4 billion, had been submitted to the directorate general of hydrocarbons (DGH) in May 2004 and approved in November that year. The IDP, meant to develop two gas discoveries—Dhirubhai-1 and 3—in the deepwater block then called KG-DWN-98/3, had also projected a gas production of 40 million standard cubic metres per day (mscmd). Reliance Industries literally stepped on the gas once Murli Deora replaced Mani Shankar Aiyar as Union minister for petroleum and natural gas in 2006. It submitted a revised development plan in October that year seeking to double gas production from 40 mscmd to 80 mscmd through an Addendum to the IDP (AIDP). The AIDP proposed by RIL envisaged an increase in capital expenditure by more than three and a half times to $8.8 billion. The DGH acted fast, extraordinarily by the standards of most government organisations in India: it took only 42 days to approve this plan. Since the increased production target was not even proportional to the increase in capital expenditure, the term that started doing the rounds was that RIL was allegedly ‘gold-plating’ its capital costs to fleece the government.1
The United Progressive Al
liance (UPA) government headed by prime minister Manmohan Singh was, at that juncture, going through a turbulent phase. The UPA coalition led by the Congress party was dependent on support from MPs belonging to the Left parties for a majority in the Lok Sabha, the lower House of Parliament, and the Communists were repeatedly taking the government to task on various issues. When the gold-plating charges were flung by Left MPs in the Lok Sabha, Singh promptly asked the Prime Minister’s Economic Advisory Council (EAC), headed by Chakravarthi Rangarajan, as well as the seniormost civil servant, Cabinet Secretary K.M. Chandrasekhar, to look into the controversy.
The EAC reacted promptly and stated: ‘…RIL has twice revised the capex (capital expenditure) without a proportionate increase in projected revenues. Higher capex and/or lower rates of extraction of gas would also reduce the pre-tax investment multiple on the basis of which the profit petroleum is shared between government and RIL.’ The Council’s report even asked the ministry of petroleum and natural gas (MoPNG) to ‘take appropriate action to put in place suitable mechanisms for proper scrutiny of capex, developmental expenditure and production profiles to ensure that gains to government are maximized under profit-sharing arrangements.’
It was, in fact, Chandrasekhar’s report that first brought the production sharing contract (PSC) signed between the contractor (RIL and Niko) and the government (MoPNG) into the spotlight. This was the same PSC that would be severely criticised by the Comptroller and Auditor General (CAG) of India four years later. Chandrasekhar foresaw the pitfalls of the arrangement quite clearly:
GAS WARS: CRONY CAPITALISM AND THE AMBANIS Page 15
