GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  The Pioneer article went on to indicate that the companies run by Harsha Moily began to flourish after his father landed a berth in the Union Cabinet in 2009 as law minister, thereafter moving to the corporate affairs ministry with additional charge of power and finally, in the petroleum ministry. Moksha-Yug Access India Private Limited, a supply-chain company for products used in rural areas that is run by Harsha and his sister Hamsa, supplies over 100,000 litres of milk daily. This company has Ananth Ravi, president, Reliance Industries Limited as an advisor. The Moksha-Yug website, Sarma noted in his complaint to the CVC, mentions that Ravi advises the company on ‘finance related matters’ and goes on to detail his various accomplishments with the Mukesh Ambani-led Reliance group. Incidentally Gopikrishnan’s article states that half of the shares of Moksha-Yug is held by corporate entities based in the US and in Mauritius. Moreover, Harsha reportedly owns a 20 per cent stake in ‘well known’ companies such as Bharat Forge and Jubilant Agro. In his letter to the CVC, Sarma enclosed a report published in the Hindu (13 August) which expressed concern at the transfers of senior officials in the petroleum ministry, especially Aramane. Sarma also expressed his reservations about Moily’s supposed direction to ONGC to ‘share RIL’s infrastructure on which the company had recovered the gold-plated capital expenditure already’.

  On 27 July, the government-owned ONGC had signed a memorandum of understanding (MoU) with RIL to ‘explore the possibility of sharing the latter’s infrastructural facility in the East Coast’. Nearly a month later, on 22 August, the Times of India quoted a spokesperson of ONGC as stating that the public sector company expected to save about $7 billion in capital expenditure and four years of time in developing three gas fields adjacent to the KG-D6 area by sharing RIL’s facilities. The ToI article went on to detail instances when ONGC had used the facilities of RIL for evacuation of naphtha in the Panna-Mukta-Tapti joint venture, as well as Cairn’s joint venture in Assam to transport gas. In an interview in the Economic Times published the same day, ONGC chairman Sudhir Vasudeva was quoted saying:

  Obviously there will be significant saving as we plan to utilise RIL’s existing infrastructure so we don’t have to invest in new infrastructure of our own. It’s difficult to quantify the exact saving right now as a joint study undertaken by ONGC and RIL will be looking into it and only then can we finalise the commercial terms.

  In fact, there seems to be grounds for the belief, that not only was there a campaign to absolve RIL of all responsibility for low production from the KG-D6 area, the responsibility to provide gas for affected industries would be borne by the national oil companies. A news item by Shine Jacob in the Business Standard on 19 August quoted an unnamed petroleum ministry stating: ‘ONGC is set to start production from the KG-DWN-98/2 block by 2016-17. This would be a huge boost to the sector. These fields would have to make up for the shortfall in the KG-D6, as RIL’s new discoveries may come up for production by 2018-19 only.’ With ONGC having 4.85 tcf of gas reserves across nine discoveries in the KG basin, the report quoted sources saying that between six and 10 mscmd of gas could be allotted for the power sector from the fields of ONGC and GSPC for the 25 affected power plants.

  The petition filed in the Supreme Court by Gurudas Dasgupta, with E.A.S. Sarma as the second petitioner, alleged that the government failed in carrying out due diligence before hiking the price of gas. The petitioners urged the court to direct the Cabinet secretary to provide all records pertaining to gas exploration by RIL in the KG basin and the decision to increase the administered price of gas with effect from 1 April 2014. The petitioners sought the enforcement of the relinquishment clause in the PSC between the government and RIL. They argued that the government should be asked to ‘possess forthwith’ those areas as ‘recommended by the CAG in its report’ and as ‘delineated by the DGH’. The petitioners also asked the court to direct the CAG to complete the performance and fiscal audits of the costs of the project quickly and efficiently and argued that the CAG should be allowed to approach the court if obstacles are put in its way. The PIL also called for the setting up of a Special Investigation Team (SIT) by the court that could probe any criminal conduct that may surface from the CAG’s audit. While seeking that the court set up a commission to investigate the ‘real cost of gas at the wellhead in the KG-basin’, the ‘capacity of the basin itself’ and ‘related issues’, it also requested for directions that the price of domestically produced gas be fixed in rupees and not in dollars or any other currency. Finally, the petitioners asked the court to issue directions that the stalled arbitration between RIL and the government over the financial issues related to the shortfall of production of gas should be re-started.

  Within a fortnight, another writ petition with related concerns was filed in the Supreme Court by ‘Common Cause’, an NGO founded in 1980 by the noted social activist H. D. Shourie, and three eminent co-petitioners, former Cabinet Secretary T. S. R. Subramanian, former Chief of Naval Staff, Admiral (retired) L. Ramdas, and former water resources secretary to the government of India, Ramaswamy R. Iyer.1 The petition, drafted by eminent lawyer and Aam Aadmi Party leader Prashant Bhushan and filed on 14 August, urged the Supreme Court to cancel the PSC itself. It stated:

  This petition highlights how only to favour a corporate house, i.e. Reliance Industries Limited (RIL), the government first unilaterally doubled and now has redoubled the gas price causing a huge loss to the public and the country. This petition seeks a quashing of the said decision, cancellation of the allotment in favour of RIL and a thorough investigation by an SIT/CBI into the said scam, which is probably one of the largest scams in independent India.

  The petitioners argued that the entire gas field allotted to the RIL consortium should be re-auctioned without allowing RIL to bid as it had time and again failed to successfully explore, discover and produce gas or petroleum. They alleged in their submission that RIL had been escalating costs, resisting audit, squatting on potential gas bearing assets without surrendering it and thereby securing undue price increases by holding the nation to ransom through engineered gas shortages, thus jeopardising huge capital costs incurred by downstream projects. They also asked for adjustment of the $7.2 billon premium collected by RIL from British Petroleum at the time it sold a 30 per cent stake in the venture towards reduction of the costs of exploration and extraction of oil/gas from the oil fields. Besides the prayer for cancellation of the contract and re-auction, the petition also urged the court that an ‘appropriate penalty’ be levied against RIL and its associates because of their ‘persistent failure in adhering to their commitments, deliberate underproduction, gold-plating and mala fide conduct’.

  The apprehensions outlined in the PILs were soon reflected succinctly in a report prepared by a committee of MPs. On 7 August, the Standing Committee on Finance chaired by former finance minister and BJP leader Yashwant Sinha tabled a report titled ‘Economic Impact of Revision of Natural Gas Price’ asking the government to review its decision on the price of gas. A draft report of the committee had been circulated earlier on 27 July which was approved by MPs in the Parliamentary panel who were affiliated to the Left and the BJP. A week earlier, on 20 July, the Hindu had quoted BJP spokesperson Prakash Javadekar confirming that the party’s position was the same as that of Sinha, who headed the committee. This was corroborated by senior BJP leader and leader of the opposition in the Rajya Sabha, Arun Jaitley in the same newspaper a month later. The BJP had earlier been perceived to be sitting on the fence and not taking a position even as the debate on hiking the price of gas was raging. Questioned by Shalini Singh of the Hindu (20 August 2013) Jaitley said that he had gone along with the views of the Standing Committee on Finance that had already recommended a reconsideration of the decision to increase the price of gas.

  Predictably, there were dissenting notes to the final report of the committee tabled in Parliament from certain members, notably from Sanjay Nirupam of the Congress, Dharmendra Yadav and Naresh Agarwal of the Samajwadi Party
(which was tacitly lending support to the ruling UPA coalition at that juncture) and Y. P. Trivedi of the Nationalist Congress Party (which is part of the UPA). According to the Times of India (22 July), Nirupam and another Congress MP, Deepender Hooda had argued during a meeting of the committee ‘that the panel was not competent to examine gas pricing... (as) a policy measure’. The final report of the committee was based on evidence provided by officials from different departments of the ministry of finance. besides the ministries of petroleum and natural gas, power and steel and the department of fertilisers, between November 2012 and June 2013. The report observed that a hike in gas prices from $1.72 per mBtu to $4.20 per mBtu had only been accompanied by a fall in private investments in this sector. The committee of MPs, thus, expressed doubts about whether raising the administered price of gas substantially would actually bring in additional investments, be it from home or abroad. The committee questioned the rationale for dollar-denominated gas pricing in a rupee-denominated regime with an adverse exchange rate and stated that the higher gas price would place a bigger subsidy burden on the fertiliser and power sectors. The panel felt the government should ensure that RIL delivers the shortfall in gas from the level promised at the old price of $4.2 per mBtu and not at the new price that would be effective from 1 April 2014. The committee of MPs also recommended a cap be placed on the suggested price of gas and argued for tighter regulation of the activities of gas producers, especially on aspects of cost recovery and technical parameters related to production. The panel suggested that a comprehensive technical study on cost estimates of gas production be conducted (See Appendix 9: ‘Review decision to increase gas price’).

  On 23 August, the Pioneer reported that the cost of production of RIL in KG-D6 block in 2011–12 was $2.48 per mBtu excluding levies and $2.74 per mBtu including levies, quoting a communication dated 2 August from the petroleum ministry to the Standing Committee on Finance. The document clarified that the figures had been computed from financial statements of 2011–12, based on projected levels of production. In effect, RIL stood to earn excellent profits even at the current price of gas at $4.2 per mBtu, the note suggested. The newspaper wondered if Moily, who had become such a strong votary of the gas price hike, knew this bit of information? Dasgupta captured the nub of the debate over the elusive cost of gas production by RIL in a letter to the prime minister dated 22 August: ‘We have been persistently raising the question of verifying the cost of production per unit in RIL KG Basin, production of natural gas before deciding upon the process of pricing. No governmental agency has clarified this question to us.’

  Dasgupta said that there was a ‘lack of due diligence’ on the part of the Rangarajan Committee when it recommended its formula to arrive at the administered price of gas. The MP requested the Prime Minister to ‘revisit’ the question of pricing natural gas and ‘clear the air of suspicion that the government had only acted to benefit the corporate giant undermining the national interest.’ In an article published on the editorial page of the Economic Times—a newspaper that has been largely supportive of the government’s and RIL’s views on gas pricing—on 15 August, India’s Independence Day, Dasgupta wrote that RIL would make supernormal profits of around Rs 81,000 crore over a five-year period from the increased prices. The MP alleged that the petroleum and finance ministries and the Planning Commission had played a ‘dubious role’, with various Cabinet papers available in the public domain, indicating that all three government bodies favoured a gas price lower than what was recommended by the Rangarajan Committee. According to the CPI leader, the petroleum ministry tried to obfuscate this issue in a Cabinet note by stating that profits of contractors (including RIL) could not be precisely quantified due to various assumptions that would have to be made.

  The finance secretary, while deposing before the Standing Committee on Finance, had bluntly stated that evaluating the cost of production was not his ministry’s job and was, therefore, not taken into consideration. The secretary to the Planning Commission too admitted that before giving out its views on the pricing of gas, the Commission had not studied the impact of a higher price of gas on overall price levels. The highest increase in the gas price was pushed for by petroleum minister Moily, ‘repeatedly overruling’ officers of his ministry ‘on file’. Dasgupta wrote:

  Two increases were planned over and above the Rangarajan formula, a stepwise increase in the three years of the 12th Plan at $8, $10 and $12 per mBtu in 2014-15, 2015-16 and 2016-17 respectively and then, moving to import-parity pricing in the 13th Plan. The latter would amount to a price of $14 per mBtu in the last two years of the five-year period for which the formula was valid.

  Dasgupta also pointed out that power and fertiliser would become costlier because of the increase in the price of gas but the government had been silent on how to meet the resulting additional outgo on subsidies. The increased subsidy burden would be up to Rs 2,20,000 crore over a period of five years and it was ‘unlikely’ that the government would be able to meet current subsidy targets for these two sectors (Rs 11,000 crore per annum for urea production at current levels, and Rs 33,000 crore per annum for power assuming an enhanced price of Rs 6.40 per unit). If the price of natural gas goes up from $4.20 to $8.40 per mBtu, the increase in the cost of power would be Rs 2 per unit while urea prices would go up by Rs 6,000 per tonne. The MP also expressed concern at the shortfall in production—14 mscmd against the approved 80 mscmd a year. Dasgupta said that the petroleum minister’s claims that by 2016–17 production would increase by 40 mscmd with prices going up, was a conjecture that was yet to be tested. There were huge production shortfalls in the three years between 2011–12 and 2013–14 amounting to 28 mscmd, 55 mscmd and 66 mscmd respectively, ‘a loss of Rs 1,13,000 crore to India in terms of lost power and fertiliser production’. Dasgupta also reminded the readers of ET in his article that Moily had ‘personally scrapped the process of arbitration’ arising out of the shortfall, that had been initiated by his predecessor Jaipal Reddy, after expressing the view that he (Moily) favoured a negotiated settlement. The CPI MP reiterated in his article that Reliance continued to refuse to relinquish a large part of the unexplored area, which, if this were not the case, could have been ‘bid out to other global players for exploration and production’.

  Some of the concerns raised by the critics of the government and RIL came up during the August 2013 monsoon session of Parliament. MPs highlighted the ‘acute’ shortage of power due to the ‘non-supply of mandated gas’ from the KG-D6 wells. Replying to a question raised by CPI(M) MP Ram Chandra Dome in the Lok Sabha, power minister Jyotiraditya Scindia presented a list of power plants lying idle or working at low capacities because supply of gas from the KG-D6 area had been ‘zero since March 2013’ and that the ‘quantum of gas supplied to power plants during first and second quarters of 2013 (till August 19) from KG-D6 was zero’. Of the 31 power plants that were expected to collectively produce 15,000 MW every year, 12 were lying idle and electricity generation in the rest was affected. As a solution, minister Scindia informed Parliament that the government was making efforts to obtain additional gas for the power sector by increasing domestic production and facilitating the import of R-LNG or re-gassified liquefied natural gas.

  Dasgupta soon made another revelation in the form of a note that was circulating in the petroleum ministry that would allegedly enable RIL to get away from making good the shortfall or pay the penalty as recommended by the DGH on ‘technical grounds’. The note suggested that RIL would not be awarded the revised increased price till the reason for the shortfall was ascertained. However, if it was proved that the reasons for shortfall were indeed geological complexities as has been claimed by RIL, then the penalty factor would be waived. Dasgupta claimed the note ‘exposed the duplicity of the petroleum minister’ and reiterated that the move ran counter to the notice served on RIL by the petroleum ministry (on the recommendation of the DGH) seeking to disallow cost recovery of $1 billion for flouting the terms of the P
SC. The MP reminded the prime minister that the DGH had written ‘as many as seven letters between December 2010 and April 2011’ pointing to ‘lapses’ by RIL and rejecting the company’s contention that gas output had fallen on account of ‘geological uncertainty’. He said the government should engage the services of independent auditors to assess whether RIL had hoarded gas. The Economic Times (23 August) quoted an unnamed senior government official as saying that RIL would have to make up for the shortfall in gas production at the old price if it was found to have hoarded gas. The official added that the ministry could not impose a penalty without any proof since any action by the ministry had to be legally sound. Incidentally, on July 2013, the DGH had compounded the penalty on RIL by slapping an additional fine of $792 million for not drilling its promised quota of wells thereby leading to a fall in production.

  The debate over gas prices was kept on the boil by important functionaries of Reliance as well. On 26 August, the Economic Times published an extended interview conducted by Shuchi Srivastava and Himangshu Watts with Prasad, RIL, Mukesh Ambani’s confidante and chief pointsperson in the oil and gas sector. This was Prasad’s first detailed interview to the media after his 2009 interview to Business Standard which has been quoted earlier in this book. Prasad told ET that his company was still waiting for a notification from the government on the pricing of gas, as also approvals on various ‘work programmes, budgets and decisions on discoveries notified in the past to the government’. He was clear that the price would determine the viability of investments, and final investment decisions would have to be evaluated and cleared by the boards of each consortium partner. Prasad claimed that RIL had been denied the arm’s length market price that ‘was promised’ under the NELP and the PSC. On whether the Rangarajan committee’s formula would raise gas prices, he said that the actual price would be higher than what had been suggested if the market price had been determined in a ‘true’ arm’s length manner: