The former member of the PNGRB reiterated the point that import parity prices for crude produced in the country had not attracted international investors of established technological and financial muscle to put their money into the land and territorial waters of a country that was supposed to be floating on oil and gas, she pointed out that after nine rounds of a NELP in which more than 200 blocks were awarded to investors through a transparent bidding mechanism, ‘we do not have a single global oil major participating in our upstream exploration efforts, the generous terms of our PSCs notwithstanding’. BP preferred to buy into an existing discovered block rather than venture into greenfield areas of doubtful prospects. Cairn, the only other major player in India, is not in the same league as BP or the other big majors, she claimed. Mahalingam’s words dripped with sarcasm when she wrote: ‘Now we have come to the conclusion that it is the low wellhead price of gas that is hindering investors and hence have remedied the situation by giving them a wellhead price that would probably be the highest anywhere in the world.’
She was particularly scathing about the Rangarajan Committee’s decision to pick the highest price of gas prevailing in Japan as one of the benchmarks for determining the domestic price of gas, ‘ostensibly to mimic gas markets until gas to gas competition emerges in five years time’. She said there was no single unified global gas market and that everywhere, gas prices tend to follow ‘whim rather than reason’. ‘Why do we have to reckon with Japanese Crude Cocktail, the most expensive crude cocktail in the world adopted by a desperate country with no domestic energy resource of its own, when pricing our own domestic gas?’ she asked.
The government’s decision on gas pricing would result in ‘demand destruction’, Mahalingam felt, ‘stymying the development of the economy itself, already hamstrung by energy insecurity’. She quoted industrialist Kumar Mangalam Birla who stated that the steep hike in gas prices would hurt domestic manufacturing which might well move out to other countries where fuel is more affordable, taking away jobs and livelihoods in the process. She added that the price hike flew squarely in the face of the Supreme Court’s ‘unequivocal and unambiguous ruling that natural resources are a public asset held in trusteeship by the government to be used for the benefit of the people’.
Approaching the issue from a different angle, Soma Banerjee wrote a full-page article entitled ‘How India Blew The Gas Game’ in the Economic Times (9 July 2013) which was supportive of the government’s decision to increase the price of gas. Quoting a board member of a large private energy company, she would have us believe that ‘India may, after all, miss the century of gas’ for which the blame was to be laid squarely on the UPA government. At the same time, she is deferential to Vijay Kelkar and Rangarajan, who are described as ‘veteran technocrats’ and ‘go-to men for governments in a bind’. Banerjee wrote approvingly: ‘Kelkar drew up the blueprint to unshackle the oil and gas sector in the mid-nineties and it was Rangarajan who fixed the price of natural gas in 2007. It’s 2013, and the two are still doing the same thing for the government of the day.’
The ET writer quoted the former petroleum minister in the BJP-led NDA government Ram Naik stating: ‘We are, today, back and beyond where we had started in 1999’. Naik is described by Banerjee as someone who did not carry strong ideological positions but was an acolyte of former prime minister Atal Bihari Vajpayee, ‘who pulled off several big economic moves, including significant stake sales in public sector undertakings, a road project connecting the four corners of India and oil-sector reforms’. The reforms had a twin approach: handing out oil and gas blocks to companies for exploration through a NELP and a proposal to let the market determine prices of oil and gas. She recalled that through four rounds of auctions, 90 contracts were signed for 124 blocks. One of those blocks was in the KG basin where RIL struck oil and gas in 2002, ‘the biggest discovery in the sector in the world that year and the first significant find in India since ONGC in 1976’. During the NDA period, the first investments in LNG terminals at Dahej and Hazira were also made. ‘These policies were not piecemeal, but a full package with the express intent of positioning India in what was seen clearly as the century of gas,’ she quoted the unnamed board member as saying. She also quoted Sunjoy Joshi, former official in the petroleum ministry who was in charge of exploration during 2004–5 and who currently heads the Ambani-financed ORF, stating: ‘The UPA has rolled back every reform in the oil and gas sector. They did not stop at rewriting new contracts, but went on to change old contracts and commitments.’
Banerjee wrote that in contrast to the ‘commonsense, cohesive approach’ of the NDA, since 1994, the UPA government fielded four petroleum ministers in nine years, ‘each one distinctly different from the other in his vision and notions of how energy policies are to be shaped’. From an opposing ideological perspective, she contended that even after the first gas price increase in five years, the government has fallen short of moving to a system of ‘market pricing’ and that companies may still remain cold to stepping up gas exploration and production. She wrote that international collaborative ventures with countries in Central Asia and the Middle East for gas supply through trans-national pipelines, ‘once a foreign policy lever, failed to take off’ and that the pipeline network in India remained sparse and sketchy. Mani Shankar Aiyar, the first petroleum minister of the UPA government, with his foreign policy background was credited with initiating ‘bilateral dialogues on four trans-national pipelines: Iran-Pakistan-India; Myanmar-Bangladesh-India; and TAPI (Turkmenistan-Afghanistan-Pakistan-India)’. Banerjee quoted Aiyar saying how optimistic he was. ‘I was sure the KG find would make this the North Sea of (the) Bay of Bengal,’ reportedly remarked. At the same time, the ET writer portrayed Aiyar as a slightly incompetent minister who had ‘voluble’ intentions but who could not measure up to his charge. He was, to use his own words, a ‘dreamer’ who had embarked on what he called his ‘great oil hunt’ across Central Asia. In 2005, on reaching Baku, Azerbaijan, Aiyar is supposed to have said rather grandly: ‘This is the time to break geographical barriers and herald an Asian resurrection. We are ready to tap every possible source (of oil and gas) in the region.’
Banerjee recalled that Aiyar had traversed Central Asia and the Middle East ‘pitching with countries to build gas pipelines to India or transport gas in liquid form, or LNG, via large ships’. He went to Iran with a Cabinet decision that India could enter into a trilateral agreement with Iran and Pakistan for gas imports. But nothing happened. The writer suggested that despite the strong backing of his government, Aiyar’s plans to ship 20 million tonne of LNG from Iran and the Iran-Pakistan-India pipeline were given a quiet burial. While talks have moved ahead on the TAPI pipeline, the Myanmar-Bangladesh-India pipeline is lost in the region’s geo-politics. And, then, wrote Banerjee, the ‘overseas piece disappeared’ when Murli Deora replaced Aiyar in 2006. She recalls the then US ambassador to India being quoted in a Wikileaks document saying: ‘Unlike Aiyar, who cultivated a reputation for anti-Americanism, Murli Deora has been associated with the US-India relationship for years. Lacking Aiyar’s ambitions (or entrepreneurial zeal), he will be a more cautious minister.’
She analysed the price difference between domestically produced natural gas (at say, $2 per unit) against the landed cost of LNG ($12–14 per unit) after it is converted into liquid, transported and regassified. Moving gas through pipelines results in costs being somewhere in between, depending on the distance the gas has to travel. Why have pipelines not been developed in Asia unlike North America and Europe, she asks and attributes it to pricing. Howard Rogers, director, natural gas research programme, Oxford Institute of Energy Studies, an independent energy think tank is thereafter quoted: ‘...progress has been marred by distrust, stalled negotiations, in large part driven by the realities of the price level necessary to underpin such investments.’
Banerjee quoted RIL’s P.M.S. Prasad saying ‘pricing controls are a dampener’ adding that ‘under an APM (administered pric
ing mechanism) regime, there is uncertainty among investors about either sourcing gas on a long-term basis as LNG or through transnational pipelines, or making investments in domestic exploration and production’. The RIL executive director then said that ‘investors are willing to take market risks, but not the risk of predicting the level at which the government may fix domestic prices at any time’. She wrote that RIL had laid out a Rs 4,500-crore plan for a domestic pipeline network covering 100 Indian cities and towns at a time when CNG was pitched as the fuel of choice for public transport. Companies including Reliance Power, Adani, GMR and Lanco had set up power plants to be fired by gas. The setting up of a gas regulator cleared the way for building the pipeline infrastructure. Banerjee then blames the government for ‘intervening’ in the fight between the Ambani brothers. She quoted an unnamed former petroleum secretary saying that the then petroleum minister Murli Deora’s proximity to the Ambani family made decision-making difficult and reiterated the main point that this book has sought to emphasise over and over again, namely, that the fight between Mukesh and Anil was essentially over the terms and conditions of supplying and pricing natural gas from the KG basin. Banerjee quoted Naik observing: ‘The government getting into a private fight between two brothers as a party was the worst point in the energy sector. This not only reflected on the petroleum ministry, but also on the political leadership in the country.’
Towards the end of Deora’s tenure, exploration had slumped, gas output from the KG basin was way below expectations, relations between RIL and the CAG had turned ‘testy’ and the petroleum ministry had not get its act together. Banerjee quotes Sunjoy Joshi of ORF remarking: ‘This was the time when decision-making at the petroleum ministry got outsourced to special committees and panel of ministers, leading to utter chaos.’
While India’s attention on natural gas focused on a court case, gas producers around the world scouted for new reserves. ‘We had started off at the same time as China with our LNG plans,’ A.K. Jain, a former petroleum ministry official dealing with gas who is now with the Planning Commission, was quoted by ET as saying; he added: ‘But look at where we are now.’
Banerjee wrote that the petroleum secretary who was appointed in 2011 (G.C. Chaturvedi) ‘in what was seen as a damage-control measure’ brought the sector ‘to a halt’, with the ‘unexpected candidature’ of Jaipal Reddy. With Reddy’s increased ‘scrutiny of the project’ when RIL’s gas production fell, from ‘62 million standard cubic metres a day (mscmd) in April 2010 to below 28 mscmd in 2012’, planned investments from new players like BP (in RIL) and Vedanta (the new owner of Cairn India) also ‘waited for months for approvals, and policy files stopped moving’. The ET writer’s antipathy for Jaipal Reddy was evident from what she wrote, although a source close to the former petroleum minister was adamant that what Jaipal Reddy did was ‘merely play the game by the rules of the book’—as he had been asked to by Ahmed Patel, the political secretary to the UPA chairperson and Congress president Sonia Gandhi. This, the source added, was not liked by either Reliance or its supporters in different wings of the government. Hence, Jaipal Reddy had to be ‘kicked upstairs’ and replaced by a more pliant Veerappa Moily.
Banerjee wrote that Moily was brought in when investments in the sector fell to $1.8 billion in 2011–12, from $6 billion in 2007–8 as he was seen to be a ‘doer’. The pace of clearances picked up and the gas price revision followed. The ET writer then approvingly quoted Sudhir Vasudeva, chairman and managing director of ONGC, the country’s largest producer of oil and gas and a big beneficiary of the gas price hike, saying the increase in the price of gas would ‘help in attracting investment for exploration and development of gas assets even in challenging frontier areas’ and boost the building of pipelines.
Like Mahalingam, E.A.S. Sarma does not believe any of this is likely to take place. Writing in the Economic and Political Weekly (13 July 2013), Sarma argued that by doubling the administered price of gas using very questionable methodology, like a similar decision taken in 2009, the government had compromised economic reasoning at the altar of crony capitalism and political expediency. In the absence of a homogeneous gas market which throws up a market price, the only option should have been for an independent, professional and quasi-judicial regulator to compute efficiency-based costs and determine the price on the basis of a reasonable return. Instead, a group of ministers had taken a decision which could transfer up to Rs 26,000 crore a year to producers, especially benefiting one private company, RIL. He wrote that the 27 June 2013 decision of the Cabinet Committee on Economic Affairs had given the company ‘an unearned bonanza’ and if it produces 80 mscmd of gas as it has promised, the annual largesse could amount to up to Rs 26,000 crore. With the falling rupee, there could be more outflows from the exchequer in the future, he contended.
Sarma wondered if RIL sought to hoodwink the government and the people of the country by claiming in 2006 that the franchised area it controlled had potential reserves of 11.3 trillion cubic feet of gas. He wrote that thousands of small investors invested their savings in the company’s equity and several power companies also invested in downstream gas-based electricity generation facilities. As the company’s shares perked up and as the power plants came on stream, gas production dipped, at times, below 20 mscmd or a quarter of the quantum initially promised. With power plants idle, Andhra Pradesh, the state of origin of KG-D6 gas, suffered a serious power crisis. Six years later, in June 2012, RIL’s Canadian partner (Niko Resources) declared that the basin had reserves of just 1.93 tcf gas. Effectively, the savings of many small investors got locked up in the company’s equity.
The former power secretary and secretary, economic affairs, in the ministry of finance, alleged that the ‘government acquiesced in the company’s sleight of hand’. Since the exploration and production deal was governed by a PSC (between the government and the private operator), the government should have penalised the company for the cutbacks in reserve estimation and shortfall in production, Sarma believed. Under Articles 4.1 and 4.2 of the PSC, the company was required to relinquish a certain proportion of the exploration area at the end of each phase of exploration. The company evaded the clause, and the government did not press its case. RIL, emboldened by the government’s vacillation, ‘made it appear as if the government was to be blamed for its own failures’. The company orchestrated a campaign to obfuscate its past failures and build up a frenzy to prompt a willing government into deciding on the next big gas price hike. Sarma pointed out that RIL placed ‘several obstacles’ in the way of the CAG carrying out a comprehensive audit of the implementation of the PSC. He wrote:
Every time a conscientious Union petroleum minister tried to discharge his legitimate responsibility of overseeing enforcement of the PSC, he would be replaced by another, making it clear that when it came to dealing with influential industrial houses strict compliance with the contract would never be on the agenda of the “reform friendly” government.
It was significant, he added, that exactly a year after declaring the low output of gas from the KG-D6 basin, in June 2013, RIL’s Canadian partner Niko Resources announced a ‘new discovery’ in the D6 block that resulted in the gas reserves jumping by as much as 160 per cent. The share prices of RIL rose once again. This announcement coincided with the decision of the petroleum ministry to overrule the DGH, the regulator, on a proposal that the producer should relinquish 86 per cent of the franchise area as per the PSC. It also coincided with the decision of the government to consider the Rangarajan Committee’s report and increase the administered price of gas.
Describing the government’s logic that a higher gas price would encourage exploration and production as ‘dubious’, Sarma changed track in his EPW article to highlight how local farmers were complaining about land subsidence due to gas extraction, which was under adjudication in the Andhra Pradesh high court. On the issue of higher subsidies on power and fertilisers, he said it was ironical that the gas price hike came ‘at a
time when the government had recently allowed private power producers to pass on the cost of imported coal to electricity utilities, throwing to the winds the tender ethics of an elaborate competitive bidding process adopted by the utilities.’
Concurring with Sethi and Mahalingam, Sarma said it was ‘inappropriate’ to benchmark domestic gas prices against ‘international’ prices applicable to either piped gas in different parts of the world or LNG imports by various consuming countries. The high costs of storage, liquefaction, regassification, pipeline transportation of gas and so on had rendered the global gas markets opaque and fragmented, he stated, adding that LNG is traded globally, whereas piped gas is traded within each region. Prices of piped gas, and even LNG, depend on regional supply-demand pressures and suppliers’ and consumers’ options on long-term contracts and spot transactions. He then provided a comparative analysis of trades in gas at different prices in different countries using data compiled by British Petroleum that showed wide variations. Such countries included those in the Commonwealth of Independent States, Africa, the Asia Pacific region, Europe, South East Asia and South and Central Americas. The short point was that it would be ‘futile’ to talk of any specific set of ‘international’ prices of gas to use as benchmarks to determine the domestic price of gas.
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