GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

He pointed out that getting closer to the US and the European Union would distance India not only from Iran but more importantly from China, Pakistan and Myanmar, all of whom consider themselves targets and potential victims of US imperialism. Anti-Americanism, therefore, runs very high in all these countries. Unless a delicate balance is struck between these conflicting goals of foreign policy, India could end up losing more than it gained. ‘Putting Aiyar out to pasture was definitely not the way to do so.’

  A little over five years after Aiyar’s portfolio was changed, in March 2011, the Wikileaks website put out a ‘secret’ cable from the then American Ambassador to India David C. Mulford, to the State Department in Washington, in which he welcomed Aiyar’s departure from the petroleum ministry. The summary of his communication tells much of the story:

  The UPA’s January 28 cabinet shuffle signifies a determination to ensure that US/India relations continue to move ahead rapidly, and strengthens the cadre of modernizing reformers at the top of the GOI. Removing contentious and outspoken Iran pipeline advocate Mani Shankar Aiyar from the Petroleum portfolio, the UPA replaced him with the pro-US Murli Deora, who was one of several figures inducted with long-standing ties to the Indo/US Parliamentary Forum (IUPF) and the Embassy.

  Mulford went on to add a revealing paragraph:

  One analyst at Petrowatch, an industry publication in Mumbai, noted that Aiyar’s dismissal removes a powerful supporter of the Iran Pipeline project and speculated that it could signal a shift in the GoI’s energy-related foreign policy. Our GAIL contact said the private conglomerate Reliance probably lobbied heavily for Deora, particularly in view of Aiyar’s clashes with Reliance during the five year rule of the National Democratic Alliance.

  More than two years and eight months after he was suddenly—and ignominiously removed—Aiyar gave an extraordinarily detailed and hard-hitting speech about the controversy relating to the pricing and allotment of natural gas from the Krishna-Godavari basin. He referred to the tussle between the Ambani siblings and left nobody in doubt that the government’s role in the entire episode was questionable, if not downright dubious.

  On 26 September 2009, Aiyar, known for his ‘gift of the gab’, was at his wittiest best speaking to a small group behind closed doors. For instance, when he referred to how the price of gas had been increased by the EGoM from $2.34 per mBtu to $4.20 per mBtu, he quipped, tongue in cheek, on the number 420; for the uninitiated, Section 420 of the Indian Penal Code relates to cheating and fraud, and provides for punishment of the convicted.

  Aiyar’s speech was delivered shortly after noon. It lasted close to half-an-hour and was followed by a few questions. Those present were quite taken aback by his command over complex technical facts and terms. ‘Either he had done his homework rather well or had been briefed in considerable detail by someone who knew exactly what was going on—he had his numbers on his fingertips,’ said a person who was present during the meeting conducted under the aegis of the ‘Saturday Lunch Club’ in New Delhi’s India International Centre, a popular venue for many discussions, seminars, conferences and debates on contemporary issues.

  An interesting aspect of the speeches made at the Saturday Lunch Club is that these are largely governed by the ‘Chatham House’ rule that ensures confidentiality of the source of information received at a meeting. Neither the identity nor the affiliation of the speaker or speakers, nor that of any other participant, may be revealed under the rule that allows individuals to express views that may not be those of the organisations to which they belong. The rule originated in June 1927 at Chatham House (known formally as the Royal Institute of International Affairs in London, UK) with the aim of encouraging free discussion in which speakers can voice their own opinions without concern for their personal reputation or their official duties and responsibilities.

  Aiyar’s talk was simply titled ‘Gas Pricing’ and lasted for about half an hour. Hailing the discovery of gas by RIL in the KG basin as an important breakthrough for the country, Aiyar said that in an era when global gas prices had skyrocketed he was hopeful a lot of foreign exchange could be saved even as the country could become self-sufficient in gas. He said:

  ....since Reliance have thus far explored only about 4 per cent of the area allocated to them, and ONGC appear on the verge of announcing almost as significant discoveries in areas they are exploring, India could emerge as a gas-surplus region over the next decade or so. Given that till a decade ago, we were seriously gas-deficient, and that when in 2005 I referred to the Bay of Bengal as the North Sea of South Asia, it was treated as a bit of hyperbole, you can see how the Reliance breakthrough constitutes probably the single most important giant step towards energy security ever...

  Aiyar pointed out that when NTPC floated a global tender in 2002 for 12 mscmd of gas it got a single bid of $2.34 per mBtu from RIL. This rate became the basis of the family MoU between the Ambani brothers but not through transparent price discovery. He said the NELP always distinguished between the price at which gas may be sold (emphasis his) and the price at which gas will be valued for purposes of determining the royalty payable and, more importantly, of determining the government’s share of profit petroleum. ‘However, there was also always the conditionality in NELP that the selling price would not be determined through cosy private or secret deals but transparently through a process of ‘price discovery’ in the market by buyers putting out global tenders and sellers bidding in competition with each other,’ he added, pointing out that ‘...government approval for pricing had to be secured – but only for government to satisfy itself that the price discovery process was transparent and not rigged.’ ‘While... the price agreed upon in the family agreement was patently not arrived at through a process of transparent price discovery, the price stated was a replication to the last cent of a price discovered by a nava-ratna (nine jewels) public sector entity through a global tender in the open market,’ he pointed out.

  Between 2003 and 2007 international crude prices – reflected in international gas prices – rose from $25 a barrel to $150 a barrel before it started to recede in 2009 when it reached $60. Even this was two to three times the prevailing price when RIL put in bids for NTPC. With costs of deploying rigs rising, the notional loss being incurred on the output for the life of the field for the next 17 years started running into billions of dollars—which, Aiyar quipped, ‘not even the super-rich can afford to lose!’ and was the reason why the Ambani siblings fell out with each other. The former petroleum minister then explained how the NELP framework was ‘dramatically altered’ by the government in a manner that ran ‘in stark contrast to what was once expected of the direction of economic reforms’. Aiyar’s next few sentences were sharp:

  No minimum selling price was earlier stipulated; on 12 September (2009),’the Empowered Group of Ministers determined a minimum selling price of $4.20 (that is emphatically not a pun on the nature of the decision!): that price applies retroactively to PSCs entered into since 2000. It is almost double the NTPC/RIL price discovery of 2002. It would appear that the $4.20 stipulation relates both to valuation and selling price (or at least, minimum selling price). This minimum selling price provision is backed up by a list of priorities which places fertiliser ahead of power (and is, therefore, detrimental to Anil’s interests, especially as the gas allocations pre-empt all of present gas production for consumers already in operation and privilege the public sector...

  The PSCs under NELP I-VII provided in Article 21.3 that the contractor ‘shall have the freedom to market gas’; now that freedom is conditioned by the phrase ‘and sell its entitlement as per the government policy for utilization of gas among different sectors’. Aiyar pointed out that while earlier too, a reference was made to the government’s gas utilisation policy, the fact is that no such policy was enunciated in detail till seven years had lapsed since the first PSC was concluded. While noting that the law should not be retroactively applied, he wondered whether this should also apply to government policy?
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  Aiyar said that while earlier PSCs provided that the government reserved to itself the right to refer pricing issues to the proposed Petroleum and Natural Gas Regulatory Board when no such Board existed:

  Now that such a Board has been constituted, the new PSC drops all reference to the Board and essentially reserves to the government the right to unilaterally decide all matters pertaining to pricing. Does this constitute a reversal of reforms? More to the point, will this discourage future private sector investors from entering the Indian petroleum exploration and development market? Worse, will it discourage investment decisions by private power producers and others in need of gas by making five-year determinations for the price of gas when investment decisions, involving a six- to seven-year gestation period and another ten years to recoup initial investment, call for stable, long-term contracts for essential inputs? Also, should government interventions be aimed at raising prices for sellers or at keeping prices down for consumers? This appears to be the first case of a government fiat resulting in consumers being asked to pay more for an essential commodity than might have been available from price indications in the marketplace.

  Whereas the new PSCs still talk of the “arms length” determination in the market of gas prices, the amended Clause 2.7 says the price set “shall be applicable uniformly to all the consuming sectors.” That price cannot be lower than the price set by the government but if it is higher “then the higher price would be reckoned for the purposes of government take.” This provision too would have the effect of government intervention augmenting rather than lowering the price of an essential input.

  Aiyar said ‘these large policy issues relate not just to a commercial dispute between two brothers torn by sibling rivalry but fall in the domain of governance and, as in any democracy, are amenable to public discussion over whether the decisions taken constitute good governance or bad governance’ (See Appendix 8: ‘Gas pricing: meaning of “420”’). Aiyar was roundly applauded by those present. A few questions were thereafter posed to him and some points brought up for him to clarify. Those who heard him did so with rapt attention, evidently impressed by the facility with which he explained a complicated issue. More importantly, he was clearly critical of the government led by a political party to which he belonged. When contacted by the lead author of this book, Aiyar refused to either confirm or deny what was attributed to him. He cited the famous Chatham House rules and said he could not speak on the topic.

  The effervescent Aiyar was not the only one who could project the Ambani battle to the prevalent energy scenario. There was another man whose apparently mild demeanour concealed the heart of an aggressive activist. He was known to be blunt in his views, a bit too blunt, perhaps, for a government advisor. Dr Surya P. Sethi was among the country’s foremost energy experts who believed that the battle between the Anil Ambani-led RNRL and the Mukesh Ambani-led RIL was incorrectly labelled as a private spat between two brothers. More important, Sethi insisted, was the ‘vacuum’ in the government’s policy and regulatory mechanisms on the use, allocation, valuation and pricing of a scarce resource that belongs to the people of India.

  Sethi retired on 1 August 2009 as principal advisor, power and energy, Planning Commission after holding the post for nearly eight years. He is now an independent consultant. An engineer and manager who worked on infrastructure projects in 30 countries, he spent 18 years in the United States working for the International Finance Corporation (which is part of the World Bank group and lends to private enterprises), before deciding to return to his country of origin to work for the government of India.

  During his tenure in the Planning Commission, Sethi took on many of his peers on issues relating to energy. He disagreed with Subir Raha, the then chairman of ONGC on the strategy of the public sector company’s overseas arm, ONGC Videsh Limited (OVL), that purchasing oil and gas assets outside India would enhance the country’s energy security and argued that such purchases would merely diversify sources of energy supplies. He also argued against ONGC spending only its own funds to purchase overseas assets, saying that it should obtain loans for ‘producing properties’ and development of (oil and gas) fields so that the lender would share part of the risk and have a stake in the property. He was overruled by Raha, who argued that since ONGC was a cash-rich company, it should not seek loans on which interest would have to be paid and thus increase costs.

  Sethi is among those energy experts who have consistently opposed a formula-driven methodology for pricing natural gas, as is typical for pricing LNG. He argues that unlike LNG, natural gas is not a tradeable commodity and different sets of rules apply worldwide while determining its price. He supports his argument with data compiled by GAIL on the pricing of natural gas from 39 countries. In fact ‘there is no such precedent anywhere in the world’, says Sethi.

  In interviews, portions of which were first broadcast on Lok Sabha Television on 27 September 2009 (conducted by the lead author of this book) and also published in Current (28 September–4 October 2009), Sethi outlined why he is so disappointed with the failure of the government to formulate a sound policy on natural gas which, in turn, has been largely responsible for the dispute between RIL and RNRL, and between RIL and the public sector NTPC. Sethi argued for the need of an integrated energy policy. Prime minister Manmohan Singh, while dwelling on the topic of India’s energy security, had stressed upon the need for an integrated energy policy. The PM said that energy policies followed in different sectors of the government were not always internally consistent. But the facts go deeper. There are 550 million people in the country who have no access to electricity and several million others whose primary source of energy remains sunshine and biomass. This biomass (wood, crop residue, animal residue and cow dung) meets 80 per cent of their total household requirements. This is a unique feature of energy use in the world, as nowhere else is a similar practice followed.

  About 50 per cent of India’s farms are rainfed. To provide them water security, one needs to first provide them with energy security. If the issue of food security is included, that requires a third input apart from water and energy, which is land. Water, energy and land are the three major factors of production. About 40 per cent of farming families do not own land. The average land holding of farmers has halved from what it used to be 30 years earlier. Other parameters that go into the Human Development Index compiled by the United Nations Development Programme(UNDP) bracket India in the same category as countries in sub-Saharan Africa. To improve health services and education, provision of incremental amounts of energy per individual is essential. Inclusive growth is impossible without greater access to energy.

  On India’s energy pricing policy, Sethi thought that it was imperative for the government to formulate a coherent, credible and defensible policy on allocation and pricing of natural gas. The formula approved by the government for pricing domestic natural gas is patently debatable, being unique in the world in both concept and form. The current formula will effectively keep the wellhead price of gas above $4 per mBtu. This is a high wellhead price in the global context. Sethi’s second point was that a natural gas pricing policy cannot be independent of a natural gas allocation policy. Further, this policy must take into consideration the use of gas in a manner that maximises its economic value (inclusive of externalities such as environment) after a careful analysis of value addition in alternate end-use sectors.

  He lamented that despite his entreaties, the country still does not have a defensible natural gas allocation and pricing policy. In the integrated energy policy that he wrote in 2006, it was estimated that commercial energy—which is primary energy that can be traded as opposed, for example, to biomass, which is a non-tradable commodity—needs to grow at around 5–6 per cent a year if India is to support a GDP growth rate of over eight per cent for the next 25 years. This growth is necessary if the country is to eradicate poverty and provide its people with the security of water, energy and food along with other basic amenities of
life. Today, Indians consume only

  3.7 per cent share of the global energy supply. To meet the energy requirements of the future, this supply needs to rise to double its current level over the next 20 years. We would then be energy-efficient. Otherwise, it needs to rise to three times the current level, and India must corner between 13 per cent and 21 per cent of whatever incremental commercial energy comes to the market. The current procurement is rising only at the rate of 1.75 per cent per annum, at which rate it will take 40 years to double India’s share of the global energy consumed.

  The government’s lackadaisical approach in creating a credible framework for the use, allocation, valuation and pricing of natural gas, which belongs to the people of this country, has led to a situation where private interests profit and will continue to profit at the expense of the nation. There has been the proposal for flipping domestic energy prices to match global prices. According to Sethi, it is a myth that we pay less for energy than the rest of the world. Coal is sold to the power industry at roughly 40 per cent below its economic value. This deliberate under-pricing covers up the inefficiencies of the power sector. The reason power is ‘stolen in our country’ is because power tariffs are extremely high. Today, industry is paying about 30–40 cents per unit of power on a purchasing power parity basis. To make up for the theft of power and hide the inefficiencies of the power industry, coal is sold at under-priced values. It thereby destroys the coal reserve, which is the largest energy reserve that India has. By opting for more open cast mining in lieu of underground mining, coal reserves are being sterilised. Open cast mining has many implications including those for the environment. This leads to the ‘resource curse’. Other inefficiencies in the system are being hidden behind the pricing module of natural resources. In the process, India is jeopardising its only significant domestic energy resource.