GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  While this news was seeping through, Vinod Rai, the then Comptroller and Auditor General (CAG) of India expressed the view that accounts should be settled with Reliance in terms of expenditure towards developing the field, only after accounts submitted for D6 till 2011 were audited. Rai contended before the Public Accounts Committee of Parliament that there need be no haste to validate expenses since they were incurred after 2008, a period sans audit. By the end of April, another Parliamentary panel had stepped into the picture, as the slope got even more slippery for Reliance. The Standing Committee on Petroleum and Natural Gas in its report tabled in Parliament, remarked: ‘Any decline in natural gas production… should be supported by proper evaluation.’

  With production at less than 50 per cent of estimates for the time of the year, the panel indicated its chagrin, directing the directorate general of hydrocarbons (DGH) to ‘monitor these fields closely and take all steps that are required to maintain and increase the production of natural gas from these fields and make them available for the nation’s requirement.’ In a bromide response, the MoPNG reacted that the ‘issue of falling gas production in KG-D6 block has been deliberated in various technical committee meetings held between (the) operator (RIL) and (the) DGH including the field visit by (the) DGH technical team to ascertain the reasons for less gas production.’

  The decline of fortunes of KG D6 for Reliance was a trend that was to continue through the beginning of its summer of reckoning in 2012. On the first Thursday of May, the clash of wills between the government of India’s MoPNG and RIL reached a new level. The ministry slapped a whopping penalty on RIL and its partners of an amount nearly equal to Rs 6,600 crore (or around $1.2 billion assuming an exchange rate of Rs 55 to a dollar) for their inability to meet production targets that had been set earlier. That shortfall meant that Reliance was refused recovery of investments costs, amounting to $1.462 billion. In its letter, the ministry bluntly stated:

  This is to bring to your notice that you have failed to fulfil your obligations under the terms of the PSC (production sharing contract) and have deliberately and wilfully caused breaches, which have led to immense loss and prejudice to the government and the people of India. You have, over a period of time, failed to adhere to the terms of the PSC and have repeatedly failed to meet your targets under the PSC.

  But with the dispute still in court or sub judice that wasn’t a price Reliance would have to pay any time soon, although the government decision to impose a penalty did impact the company’s reputation which had already been tarnished by the news that investors had decided to declare Tata Consultancy Services as India’s most valued company in terms of market capitalisation, displacing RIL. More importantly, the insinuations were clear. Contrary to the company’s claim that gas output had come down essentially because of a combination of circumstances—geological surprises, technical problems and issues relating to reservoir management—the petroleum ministry under Jaipal Reddy in effect suggested that the company ‘wilfully’ lowered output to put pressure on the government to jack up administered prices. After many years, the mandarins of Shastri Bhavan (where the MoPNG is headquartered) seemed to have found their spines while dealing with RIL. The lead author of this book learned from a reliable source close to RIL on 4 May 2012, that the MoPNG debated for almost a month

  But the fall in natural gas production from the D6 block in the KG basin had not quite ceased. Within days, Minister Jaipal Reddy was publicly estimating that the output from D6 would drop further during the 2014–15 fiscal year to a historic low of 20 mscmd. In a written reply to the Rajya Sabha, he added that gas production would average 28 mscmd during 2012–13, before dropping another 4 mscmd for the following cycle. In essence, he was warning that the field would generate nearly a third less gas within two years. Before the month of May 2012 had ended, RIL’s Calgary, Canada-headquartered partner, Niko Resources had issued a formal statement scrapping plans to develop the D4 block in the Mahanadi basin, north of the KG basin, where the principal D6 block is located. In its curtly-worded release, the company stated: ‘Niko along with its partners have chosen to relinquish their various interest in the D4 (MN-DWN-2003/1) block. For Niko this decision is the result of the most current geological assessment related to the size and risk of the trapping mechanism and current commercial environment in India.’

  In June 2012 there were reports that RIL planned to sink an exploratory well to ‘study the reservoir phenomenon’ in two of the larger fields, D1 and D3, the first exploration well to be sunk in these gas fields in almost five years. An RIL proposal for the probe had been submitted to the government stating that these investigations by the company may certainly be required. The KG basin in general and the D6 block in particular had been projected as a game-changer as far as India’s energy scenario was concerned but that dream was beginning to evaporate. By the end of June 2012, information about the prospects of the gas fields appeared bleaker than what had earlier been predicted. In its ‘Reserves and Contingent Resources Update’, Niko pointed out that ‘proved plus probable reserves at D6 as at 31 March 2012 have reduced to 193 billion cubic feet (bcf)but it is important to recognize that coincident with the reduced reserves there is approximately a $700 million reduction in future capital.’

  The CNBC-TV18 television channel reported that this figure was ‘80 per cent less than originally estimated’.

  By June, gas output from D6 kept falling, averaging just over 31 mscmd. This cascade of negative information was certainly having its effect on shareholder morale, just ahead of RIL’s 38th annual general meeting in Mumbai. As summer progressed, the tension was palpable. Mukesh Ambani, though, gave the appearance of being unruffled, if not untroubled. As prime minister Manmohan Singh was seeking greater investments in the country’s infrastructure, RIL seemed amenable to deliver. During the shareholders meeting, Ambani announced a grand plan for investing over $18 billion over five years, across a range of sectors, including additional petrochemicals forays. The London-based Financial Times sensed an ‘upbeat tone’ in Mukesh Ambani’s pronouncement that day in June.

  The meet wasn’t without confrontation. Business Standard quoted one shareholder, identified as S. Mehta, expressing his disenchantment: ‘I am deeply perturbed with the falling gas output of RIL’s KG-D6 gas field. Why doesn’t RIL hire some expert to check the falling output? BP (British Petroleum) has been on board for over a year now, but nothing much has been achieved.’

  To Mehta, and those of his ilk, Mukesh countered that they did not quite get what Dhirubhai Ambani, and by inference, his successors, stood for. He lectured:

  It is very easy to sit here and criticise. But the very fact that we have found, after 30 years, oil and gas in the Krishna Godavari basin should not be undermined by anybody...I expect you, me, my board and the entire country to appreciate and support our young people.

  As his company grappled with a string of regulatory issues, on 2 July 2012, Mukesh met the deputy chairman of the Planning Commission Dr Montek Singh Ahluwalia for nearly an hour. Ahluwalia is acknowledged to be the ‘right-hand man’ of prime minister Manmohan Singh who was at that time holding the portfolio of finance minister after the position had been vacated by Pranab Mukherjee. The richest Indian did not interact with waiting journalists after the meeting saying that he would not take any questions. He rushed out of Ahluwalia’s office, according to Press Trust of India. The otherwise media-friendly Ahluwalia too did not respond to journalists’ queries about his discussions with Ambani, merely saying that it was a ‘courtesy call’. There were, of course, few who believed that the two discussed the weather at a time when RIL was facing the prospects of paying a hefty penalty for the sharp fall in gas output from its KG-D6 fields and when the company had been clamouring for a trebling of the administered prices of gas from the prevailing rate of $4.20 per million British thermal units (mBtu) after 1 April 2014. (Incidentally, Anil Ambani met Ahluwalia two days later.)

  A few days earlier, on 29 June 2012,
Vikas Dhoot wrote in the Economic Times that the country’s premier police investigating agency, the Central Bureau of Investigation (CBI) was deeply divided over converting a ‘preliminary enquiry’ on corruption charges against former director general, hydrocarbons V.K. Sibal into a full-fledged criminal case. He reported that the CBI joint director (anti-corruption) and the agency’s legal cell—the directorate of prosecution—had both recommended the registration of a regular criminal case against Sibal, his subordinates at the DGH and Reliance Industries for the grant of undue favours under the production sharing contract (PSC) for the KG-D6 gas block. However, one of CBI’s special directors had opposed this move by raising doubts about whether the alleged offence could qualify as a criminal case. He is learnt to have argued that the violations in question related to a civil contract and that relaxations allowed by the DGH to RIL for the KG-D6 block had the approval of the petroleum ministry. Due to the difference of opinion within the investigating agency, the special director had suggested that the matter be referred to attorney-general of India Goolam Vahanvati for his opinion.

  Coincidentally, the writer of the ET article was the same journalist who had personally conducted a meticulous investigation into how Sibal’s daughter had been ‘favoured’ by RIL as has been detailed earlier in the book. At that time, Dhoot had been employed by the Indian Express which chose not to publish his findings. Although at this point of time, the Ambani siblings were at loggerheads and Anil’s confidantes were keen on tarnishing the reputation of Mukesh, it was still not easy for journalists to publish negative stories about the older Ambani sibling, even when the reports were based on verifiable facts and incontrovertible evidence. The story about how Sibal’s daughter had received benefits from Mukesh’s associates was eventually picked up by other newspapers and magazines, including the Pioneer, the Mint and Tehelka. After spending weeks collecting facts and obtaining documents, Dhoot, unfortunately, had to be content writing ‘follow-up’ articles for the Express after competing publications had come out with the facts he had diligently gathered and collated.

  In the meantime, the fall in gas output from the D6 block of the KG basin prompted a letter from former power secretary and economic affairs secretary to the government of India E.A.S. Sarma (who had already been highlighting issues relating to the alleged environmental damage caused by the offshore extraction of gas in his letters to the prime minister and others) to U.K. Sinha, chairman of the regulator of the country’s capital markets, the Securities and Exchange Board of India (SEBI). Sarma wrote that information about the fall in gas output from the KG basin should have been disclosed by the RIL management to its shareholders much before it actually did. Urging SEBI to examine the issue, he referred to three key issues of contention: as a result of the non-disclosure of information relating to the fall in gas output, what had been the loss to the investors who have invested their hard-earned savings on the premise that the quantum of gas deposits/reserves was much higher? Had RIL transacted in its equity on the basis of inflated reporting of gas deposits and their value? What action should SEBI take to safeguard the interests of RIL’s shareholders?

  These questions which were raised at this time remain unanswered. There were other questions to follow. There were apprehensions that the government of the day was following a line on the pricing of domestically produced natural gas which could only lead to unbridled profits for one corporate firm at the cost of India’s consumers. What follows is how the story began to play itself out towards the end of 2012.

  It was late in the afternoon on Saturday 27 October 2012 when the phone rang in the residence of Sudini Jaipal Reddy, then minister for petroleum and natural gas in the government of India. As soon as his personal assistant mentioned the address of the person who was on the other end of the line, the minister’s ears perked up. The call was from ‘10 Janpath’, the address of the most powerful person in India, more powerful than even the prime minister: she was, of course, Sonia Gandhi, the Italy-born widow of former prime minister of India Rajiv Gandhi, chairperson of the ruling United Progressive Alliance (UPA) coalition and president of the Indian National Congress, the country’s ‘grand old party’. Jaipal Reddy was told that the following day, that is, Sunday 28 October, his ministerial portfolio would be changed. ‘Madam’, as she is often called, asked him whether he would mind being moved as minister for science and technology. She sounded almost apologetic, said one of his close aides to whom the minister had confided.

  Jaipal Reddy was expecting this call for some months. He took it stoically, or so claims this person close to him. He muttered something about how the choice of ministerial portfolios was the prerogative of the prime minister and how he was a ‘loyal soldier’ of the party. After this phone call got over, Jaipal Reddy told his aide that he was reminded of another telephonic conversation that had taken place nineteen months earlier on 18 January 2011. That call too was from 10 Janpath. But it was not ‘Madam’ who spoke to him on that occasion but her influential political secretary Ahmed Patel. He had told Jaipal Reddy (who was then holding the urban development ministerial portfolio) that the party leadership was keen that the petroleum ministry be run by an ‘independent’ person, someone who would go by the rule book and not be accused of favouring any particular business group—he, of course, knew which business group was being referred to. The following day, soon after the Cabinet reshuffle took place in the ornate Durbar Hall of Rashtrapati Bhavan, the Presidential Palace, his new portfolio was announced.

  Within days of his assuming his new job as petroleum minister, Jaipal Reddy had two important visitors in his office at Shastri Bhavan: Mukesh Ambani and his right-hand man in the oil and gas exploration business P.M.S. Prasad came to pay the newly-appointed minister a ‘courtesy call’. Over the next nine months, Mukesh and Prasad were to visit Jaipal on several occasions. At specific meetings, they were accompanied by Sashi Mukundan who heads the India operations of British Petroleum. Then the visitors stopped coming. Why?

  Before this story is told in detail, let us fast-forward to the Cabinet reshuffle that took place on Sunday, 28 October 2012. The evening before, soon after Jaipal Reddy’s conversation with Sonia Gandhi, he had confided to a friend about what had transpired between him and the Congress president. This friend couldn’t believe his ears although Jaipal Reddy repeatedly told him that he was expecting this to happen for roughly a year. He told his friend that he was going to be moved out of the petroleum ministry because powerful lobbies were not happy that he was playing by the rules and that he lasted in his position as long as he had merely because the Cabinet reshuffle had been delayed. His friend could not contain himself. He called up a journalist he knew, a person he trusted and who he knew would trust him. The journalist knew about this person’s proximity to Jaipal Reddy and the minister’s friend was sure his trust in him would not be breached and he would remain the proverbial ‘source’ who spoke off-the-record on condition of anonymity. The journalist literally leapt when he heard his trustworthy source. He knew his story would make headlines. Sunday morning’s edition of the Hindu ran an exclusive article by Sujay Mehdudia with the following banner headline: ‘Manmohan set to end Reliance on Jaipal for oil and gas’. If there were a few who may have had doubts about the pun in the headline, the subtitle made things amply clear: ‘Minister has been resisting Mukesh Ambani on gas prices, audit’. Mehdudia’s article left nothing to the imagination. The first line read: ‘S. Jaipal Reddy — the minister who took on Mukesh Ambani in a regulatory battle on gas prices that saved the exchequer thousands of crores of rupees—is set to be divested of the crucial petroleum and natural gas portfolio, the Hindu has learnt.’

  Mehdudia’s article went on to state how the minister ‘resisted’ pressures and ‘rolled back’ the vice-like grip that RIL had begun to exert over the MoPNG during the tenure of Murli Deora. Jaipal Reddy had questioned the ‘steep decline’ in gas output from the KG-D6 gas block. The ministry officials had ‘doubts’ since in 2011- 12, i
t was expected that RIL’s output should have ‘averaged around 70 mscmd’ whereas it stood much lower at 42 mscmd and by 2012-13 it had dropped further to 25 mscmd’, resulting in a loss of Rs 45,000 crore (approximately $90 billion) to the exchequer. The article quoted a ‘senior official’ on the impact the fall in gas output had had on important sectors of the Indian economy. Each unit drop in production of gas meant a loss of 210 megawatt (MW) of power generation. Gas-based power plants in various parts of the country with an aggregate installed capacity of nearly 20,000 MW, financed with bank guarantees worth Rs 30,000 crore, were lying idle without gas. In addition, the fall in gas output from the KG basin meant lower production of fertilisers resulting in higher imports and higher subsidies. The unnamed official quoted in Mehdudia’s article wondered if gas production was being deliberately suppressed in anticipation of a higher administered price.

  It was argued in the Hindu article that Jaipal Reddy was able to ‘block’ RIL’s demand to hike prices of domestically-produced natural gas well before the date for revision, that is, 1 April 2014. The expenditure incurred by RIL to bring the KG-D6 gas fields into production, as claimed by the company, was scrutinised on the minister’s and thereafter, the company was penalised for its failure to maintain gas output, and an expenditure of $1.46 billion (or cost recovery) was ‘disallowed’. The article claimed that there had been tremendous pressure on Jaipal Reddy but he was able to withstand it. Mukesh Ambani had been lobbying ‘Raisina Hill’ and there was concurrent pressure on the petroleum ministry from ‘other ministers and also the Prime Minister’s Office’. Mehdudia’s report quotes the ‘senior official’ saying there was ‘strong pressure within the EGoM’ as well as the Prime Minister’s Office to revise the price of gas. When the issue was referred to the attorney general of India for his advice, he came back saying that ‘it was a matter of policy and not law’ and that the April 2014 deadline for gas price revision was still valid. The official quoted argued that minister Jaipal Reddy resisted the move to increase the price of gas as it would lead to a ‘loss of $6.3 billion to the exchequer and put a huge burden on the common man, the farmers and the fertilizer industry in the shape of a sharp hike in the price of power and fertilizers’. That was not all. Jaipal Reddy brought RIL ‘under the scrutiny of the Comptroller and Auditor General’ in the face of the company’s insistence that it was a private corporate entity and that its accounts could not be scrutinised by the government auditor. The petroleum ministry led by Jaipal Reddy, however, maintained that it could seek a ‘second audit’ of the company under ‘section 1.9 of the production sharing contract’. The ministry told RIL that if they refused to submit to CAG scrutiny, they could face non-approval of their investment plans for field development of satellite oil and gas fields in the KG basin.