GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  According to Mint, Nariman had stated the following in his opinion to the law ministry on 17 August: ‘The costs/expenditure incurred in constructing production/processing facilities and pipelines that are currently underutilized/have excess capacity cannot be recovered against the value of petroleum’ by the company. He further advised the government not to ‘allow cost recoveries on this account in future periods’.

  The then solicitor general of India, the government’s second- most important law officer, added that the MoPNG would need to ‘fully ascertain the time periods in which and the manner in which the contractor has already made recoveries....’ Nariman added that ‘in the event the contractor does not agree to reverse cost recoveries already made, the government will have to take recourse to the dispute resolution provisions set forth in Article 33 of the PSC (production- sharing contract)’. The legal opinion also noted that RIL hadn’t met production commitments to which it had agreed. The AIDP submitted by RIL projected a gas production of 61.88 mscmd from 1 July 2010 and 80 mscmd from 1 July 2011, whereas the company was at that time only producing 35 mscmd from the block.

  RIL realised it had been tripped up and was quick to react. RIL challenged the government. The company announced on 28 November 2011 that it had begun arbitration proceedings. It issued a statement that it had sought clarification from the petroleum ministry about such a move, but received no response. This is what RIL said in a formal statement: ‘To finally resolve this cost recovery issue so as not to hinder future investments in this block, the company has begun arbitration proceedings against GoI (government of India) to have the company’s entitlement to recover its costs, and the validity of the stance adopted by MoPNG… finally determined by an independent tribunal.’

  In May 2012, RIL was served another notice by the MoPNG claiming the company had not delivered what had been promised in the IDP as well as the AIDP and that ‘cost recovery would now be proportional to gas actually extracted’—as will be explained subsequently—‘cost recovery’ being the recovery of capital investments made by the contractor (in this case, RIL) that can be recovered through sale of gas using a complicated formula which became a contentious issue.

  Simply put, the regulatory authority for India’s oil and gas industry, the DGH told RIL in so many words: ‘You said that so much gas would be produced and so many wells would be drilled. You got your data wrong. You haven’t produced the amount of gas you said you would because you did not drill the number of wells you were supposed to and hence, you should be penalised.’

  The dispute had to be arbitrated upon, but this was easier said than done. Who would be the arbitrators? The names of two former Chief Justices of India were suggested by the contending parties. RIL suggested the name of Justice S.P. Bharucha while the MoPNG’s nominee was Justice V.N. Khare. A third arbitrator would also need to be appointed. This arbitrator would act as the ‘presiding’ arbitrator whose decision would have to be acceptable to both RIL and the government, but in March 2014, when this book was being completed, arbitration proceedings had not commenced.

  All the while that the controversy over extraction of gas from the KG basin remained in the news, what almost escaped coverage was another set of findings published in the same CAG report—that of exploration in the Panna-Mukta and Tapti basins. The CAG had not minced words on that either. This controversy, also involving Reliance, had, in fact, begun long ago (see Appendix 5: ‘The Great Indian Oil Robbery: Panna- Mukta and Tapti’). The September 2011 CAG report on the PMT JV (Panna-Mukta Tapti Joint Venture) was as damning as the KG basin one. The government auditor virtually pleaded helplessness, saying: ‘Despite our repeated efforts, the PMT JV operators did not provide important and relevant records on the ground that scrutiny of these records did not fall within our audit scope.’

  The CAG based its report on whatever records were made available. It did point out that the Indian government had incurred a substantial loss on account of royalty by failing to finalise the norms for post- wellhead costs, and consequentially, gas wellhead prices. The MoPNG and its nominee for gas purchase (the public sector GAIL, formerly known as the Gas Authority of India Limited) had not complied with the terms of the PSC during 2005–8. The CAG also found irregular declaration of the entire contract area as discovery area. It also unearthed numerous deficiencies in functioning of the management committees for individual blocks. There were also deficiencies in the timely submission of stipulated periodic reports. The similarities were uncanny. There could be speculation about why the CAG toned down some of its language in the final report on KG gas (in comparison to its draft report), but there could be no doubt on where the problem lay—the PSCs. The CAG was clear. It laid the blame squarely on the faulty PSCs. If anyone was to blame, it was the ministry of petroleum and natural gas, that is, the government.

  RIL was not alone in being embroiled in controversies over gas extracted from the KG basin. Another company, this one set up and owned by a state government, the Gujarat State Petroleum Corporation (GSPC) was also involved in a set of questionable transactions relating to KG gas that were (as in the case of the CAG report on Panna Mukta) uncannily similar. Like RIL, GSPC had initially inflated claims about the quantum of gas discovered and then blamed low output on geological complexities. Like RIL, GSPC made identical arguments that a high price of gas would ensure that exploration is conducted in a more efficient and diligent manner. Finally, there was a third common factor between the two companies: their association with Niko Resources of Canada and a geologist named Jean Paul Roy. The controversies surrounding GSPC’s involvement in gas exploration in the KG basin were highlighted by critics of Gujarat chief minister Narendra Modi as he gained political prominence in his party, the right-wing, Hindu nationalist Bharatiya Janata Party (see Appendix 7: ‘Deen Dayal West: No Gas, All Lucre’).

  7

  THE INSIDER

  The Ambani brothers, Mukesh and Anil, had fought a pyrrhic war to control India’s natural gas resources. That was only one side of the story. There were three individuals who were well-acquainted with the controversies surrounding the tussle on the utilisation and pricing of natural gas produced from the Krishna-Godavari offshore basin. They were Subir Raha, former chairman of the Oil and Natural Gas Corporation (ONGC), Surya P Sethi, an energy expert who used to work with the Planning Commission, and former Union minister for petroleum and natural gas, Mani Shankar Aiyar. They knew exactly what was going on, especially Raha.

  The three had differed with one another on important issues. During his tenure as petroleum minister, Aiyar often disagreed with Raha who was then heading ONGC, a public sector enterprise under the administrative control of the ministry. As for Sethi, he too had occasion to disagree with Raha on the manner in which ONGC’s overseas arm, ONGC Videsh Limited, went about leasing or purchasing oil- and gas-bearing properties outside India. Despite their differences, the three experts concurred with one another on key issues related to the dispute between the Ambani brothers on the pricing and use of the KG basin gas.

  When Raha met the lead author of this book on 17 September 2009, the cancer in his lungs was spreading. His hair had thinned after several rounds of chemotherapy. Still, he was remarkably alert. His words poured out in torrents; he was crystal clear about his convictions and his conclusions. He was the technical expert who patiently explained complex issues to a lay person. He imposed only one condition before he started talking—he wanted to go through and vet the detailed transcript of the interview before a single word attributed to him was published. The transcript was sent to him, but he never got back. On 1 February 2010, Subir Raha passed away. He was 62.

  Newspaper obituaries gushed about how he was a ‘poster boy for government-run organisations’ and that ‘Raha was arguably the most influential chairman the state-owned ONGC ever had—for that matter, any chairman any government-run organisation has ever had.’ One obituary published in the Domain-B website read:

  Undoubtedly, he was responsibl
e for single-handedly transforming ONGC into one of the most valuable companies in India, leaving even fancied brand names in the private sector trailing in his slipstream. He was an embodiment of qualities that government- run organisations, and its employees, are not supposed to display— vision, aggression, efficiency and exceptional dynamism. It was during his tenure that ONGC became the nation’s largest oil and gas producer. During his tenure as Chairman and Managing Director of ONGC, (the company’s) … market capitalisation increased more than ten times to Rs 200,000 crore, and it became the single most valuable public or private sector company (in the country) in terms of (its) net worth.

  The obituary did not stop there:

  Too strong a personality to allow himself to be dominated by the worn-out bureaucracy and political leadership of the land, he was denied an extension as ONGC chief and eased into ineffectual retirement. In a strange way, the year he retired also saw the company slip from its starred position as the country’s most valuable company. The company has singularly failed to match his dynamism since. He acquired Mangalore Refinery … securing the company’s vertical integration and behaved like any other more- hyped MNC (or multi-national corporation) predator, seeking assets overseas. When Raha assumed control of the company, it had just one property in Vietnam. During his tenure, the inventory of its overseas subsidiary, ONGC Videsh Ltd (OVL), expanded to 24 properties (31 Blocks) in 14 countries….It was Raha’s deep seated commitment and workaholic ways that transformed ONGC into an integrated energy major on a global scale.

  What did this have to with the controversy surrounding the pricing and utilisation of natural gas found in the Krishna-Godavari basin? A lot. As head of ONGC, Raha was a key player in India’s oil and gas industry and understood how the country’s resources could become hostage to the vagaries of corporate rivalry and the infamous nexus between politics and big business. Raha knew the industry like the back of his hand and realised how small changes in official policy could translate into huge profits for a few. For five years from May 2001 onwards, Raha headed India’s largest government-owned company engaged in the exploration and production of crude oil and natural gas. During his tenure as executive head of ONGC, he fought many a skirmish against less-than-scrupulous politicians, bureaucrats and businessmen to conserve the country’s precious hydrocarbon resources and have these priced in a manner that would best serve national interests. He had a fatal flaw: he loved his cigarette a bit too much—paradoxical for a person who had spent much of his working life in industries that dealt with highly inflammable substances.

  Before he became the head of ONGC, he had spent 31 years working with another public sector major, the Indian Oil Corporation (IOC), the country’s largest refining and marketing company for petroleum products, including the period between June 1998 and May 2001, when he served as Director (Human Resources) on the board of directors of IOC. As ONGC chief, he had sharp differences of opinion with petroleum minister Aiyar over issues of governance and what he perceived as political interference. Raha felt he should be given the autonomy to run the corporation he headed in a business-like manner. Aiyar’s notion of what was ‘autonomy’ clearly differed from his. After his death, Aiyar not only praised him as ‘a truly outstanding public sector executive’ but added that he found in him ‘a man worthy of my steel, particularly when we disagreed.’

  Raha’s term in ONGC was not extended beyond five years. He was just over 57 then. At that time (25 May 2006), Business Standardwrote: ‘Raha, who has been at the helm of India’s most valuable company for five years, is seen as an efficient manager who chose to disregard ministry mandarins and pursue a business plan that has won him admirers.’ A trade publication, Upstream, had earlier lauded his leadership qualities and written: ‘Subir Raha has dragged ONGC, often kicking and screaming, into the 21st century.’1

  There was more to Raha. He was privy to facts that were germane to the controversy over the pricing and utilisation of the KG basin gas and the dispute between the Ambani siblings, especially the role that was played by the former V. K. Sibal the former director general, hydrocarbons. The Resource Digest (February–March 2010), a specialised industry publication, published certain details about Raha that had important implications, direct and indirect, for the tussle between RIL and RNRL as well as the legal dispute between RIL and NTPC. Here is an extract:

  Raha’s ideal vision of a corporate leader was somebody who may not be uniformly liked, but nobody (was) … able to point an accusing finger at his moral and professional integrity. That is certainly how he would have liked to be remembered. And this determination to maintain professional integrity saw him taking up (cudgels) … even against the government. Recall the tiff that arose over the Petroleum Ministry’s insistence on appointing the Director-General of Hydrocarbons (DGH) to the board of directors of the ONGC. The ONGC chief pointed out that having the DGH on the board would involve a conflict of interest since (the DGH was) … the petroleum industry regulator. He had threatened to file a counter-resolution offering his resignation from his post as chairman in case the Ministry insisted on appointing the DGH on the board (of ONGC). The Ministry accepted Raha’s view.

  What is more, the then Minister … Aiyar defended his CEO when verbal duel broke out between Raha and Sibal… Raha in a letter to the then Petroleum Secretary M. S. Srinivasan had charged (the) DGH of being biased against the public sector. He protested against (Sibal’s) … ‘sarcastic’ and ‘derogatory’ remarks ‘denigrating the company in public and (in the) media’. As an example, he pointed out how Sibal had taken a dig at ONGC becoming the second company in the world, after Chevron-Texaco, to drill at depths in excess of 3,000 metres under water.

  What is the point of drilling the deepest water well if it turns out to be a dry hole,’ Sibal had said… Raha, obviously, was not amused. ‘Some exploratory wells go dry, and some do not. There is no exploration and production company in the world, including the DGH’s favoured Indian private sector company, as would be known to Shri Sibal,’ Raha wrote in his letter.’ (The not-so-veiled reference in this instance was, obviously, to Reliance Industries.)

  The Resource Digest article added that ‘Raha was not alone’. ‘Even the then SEBI (Securities and Exchange Board of India, the regulator of the country’s capital markets) chief, M. Damodaran, had complained to the then Petroleum Secretary S. C. Tripathi against Sibal for publicly trashing a series of oil/gas strikes by ONGC, including the one confirmed by the- then … Minister ... Aiyar from Norway,’ it stated.

  Sibal had to quit his post in ignominy in October 2009 after he was accused of ‘gross abuse and misuse of public office’ and of having a ‘nexus with private parties, obtaining pecuniary advantage in award of contracts and supply of information of sensitive data of resources’ and an investigation was instituted against him by the CBI. The agency asked the ‘competent authority’ in the MoPNG for permission to investigate further the alleged offences by Sibal during his tenure as the country’s regulator for the upstream hydrocarbons exploration industry.

  In the 17 September 2009 interview with the lead writer of this book, Raha explained the nexus between business and politics. He spoke in measured tones, had all the facts at the back of his head. Like an instructor explaining the basics of a new subject to the uninitiated, he painted a backdrop to India’s oil and gas sector before elaborating on specific developments relating to the two disputes between RIL and RNRL, and RIL and NTPC.

  Raha began with an overview of the issue of India’s energy security and the dispute between the Ambani brothers. He explained that India had about 0.4 per cent share of world’s oil and about 0.6 per cent share of its natural gas, that is, India had around 0.5 per cent of the entire planet’s oil and gas put together. At the same time, India had roughly 17 per cent of the population of the globe—over 1.2 billion out of 7 billion. The per capita consumption of oil and gas in India was about one-third the global average and approximately one-fifth the average consumption in develo
ped countries. The global average consumption was roughly 500 kg per capita per year (in 2009). India’s average consumption was 200 kg of hydrocarbon fuels per capita per year.

  Raha also touched upon two other points of note. He said that with 0.5 per cent of the world’s oil resources, it was not possible to meet 17 per cent of the global demand, even if that demand materialised and Indians started consuming oil at an international average. The second point, he said, concerned the aspirations of Indians for a better quality of life. If that happened, India’s per capita consumption of energy would at least double from 200 kg to 400 kg, which would still be lower than the global average leave alone the average energy consumption level in developed countries. To increase the per capita consumption by one kg per year, 1.1 billion kg of hydrocarbon fuels was needed. This is where India and China have identical problems. China’s numbers are larger since it has a larger population. However, the ratios are similar in terms of available domestic resources to actual consumption. India currently imports over 80 per cent of the country’s total requirements of crude oil and petroleum products.

  With 0.5 per cent of the world’s oil and gas resources, India’s capacity to attract global oil and natural gas corporations for exploration is limited. Indian companies in this industry have an annual turnover that is equivalent to $20–30 billion, while international oil companies in 70 countries do annual businesses of around $250 billion. Thus, it does not make great commercial sense for them to mobilise resources for such a small market. When ONGC and other public sector companies like OIL were formed, multinationals refused to give India access to their technology. Technology was finally obtained from the Russians. This happened in the 1960s and 1970s. In order to source technology and also to get foreign direct investment (FDI), the government first tried to offer exploration blocks to global corporations in the 1970s and 1980s. But there was hardly any response. These offerings were called ‘exploration block contracts’ and the term that was used for the offers were ‘bidding rounds’. In view of the poor response, in the 1980s, instead of offering exploration blocks, the government offered discovered properties to global corporations so that the risks of not finding any oil or gas upon undertaking exploration activities were almost entirely mitigated.