GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  The formula still arrives at a price which energy for energy is at a 60 per cent discount to oil. It is at (a) 40 per cent discount to the price at which LNG is being imported into the county. For that reason the Rangarajan Committee also said this is not the market price and that the country would need to transition to the true arms-length market price as per the PSC. As producers, is this price good enough for us? It is clearly not good enough because it is not the arm’s length market price I was promised...

  The Reliance top executive suggested that it was for the buyers to decide whether the price of gas was too high, and they could switch to cheaper alternatives. In a chilling submission of the company’s intent, Prasad said if the price of gas was too low, the sellers had ‘the option of not producing it (gas) and investing elsewhere in resources that are cheaper to produce’. He added that the ‘producers’ vantage price will determine how much gas will be produced, because it decides which fields will be viable, and which technologies will be worth investing in’. Prasad went further to claim that gas-based energy was counter-inflationary. He compared, what some would contend, apples with oranges.

  Given that gas-based energy comes at a tremendous discount to oil there is every logic that gas be used to substitute oil. We should import more gas. At $108 per barrel of oil, energy equivalent gas prices are $18 per mBtu. Yet even LNG today is available at $13-14 per mBtu. At a 20 per cent discount it makes sense to promote the usage of gas, provided this gas substitutes oil.

  Rather combative on the question of the price of gas, Prasad told the ET: ‘The point is what is right? Okay, you don’t want to pay the domestic producer. Fine, the gas will not come out. The money is not going into my pocket. Why should a company produce when it is going to make losses on every mscmd of gas it produces?’ He used the example of the government-owned national oil company, ONGC, to prove his point. ‘Why is ONGC not developing KG-D5?’ asked Prasad, adding that the discovery made in 2001 had not been developed as it was unviable. It was only after ‘substantial deep water gas infrastructure on the east coast’ was constructed that the viability of the prospect had increased. He commented that RIL was ‘happy to provide’ it to ONGC, the latter having expressed a wish to use it.

  Would sharing infrastructure with ONGC absolve RIL of charges of gold-plating? Prasad chose to reiterate that the there was ‘no incentive to gold plating’. He added: ‘The more I spend, the less I earn. Costs are not profits. Adding costs does not give me returns. It only increases my interest burden and pushes profits into the distant future.’ Taking a generous stance, he said that existing facilities were meant ‘to be used by whoever can benefit’ and that if the presence of these facilities (built by RIL) made ‘discoveries of ONGC viable to produce’, the country could benefit. He added that RIL did not need to rely on ONGC since it had the facilities already in place. Prasad said,

  My own discoveries, if allowed to be developed will take production back to 50-60 (mscmd) in the next few years. If I hadn’t created that infrastructure, I would not have been able to monetize.... Building separate infrastructure for each discovery would have cost 1.5 to 2 times at current market rates making them unviable to be developed.

  RIL’s president and chief operating officer (exploration and production), Bibhash Kumar Ganguly also came out with an article in the Economic Times on 29 August taking on Dasgupta’s assertions on the so-called plunder of natural resources by corporate interests. His article, predictably, began with a familiar refrain articulated earlier in the same newspaper by Prasad. Any natural resource, irrespective of who owns it, is fiction until it is discovered and produced. Undiscovered oil and gas has no value until it is discovered and the quantity established. Discovered oil and gas resources buried 5 km under the seabed and overlaid by 2-3 km high seawater are worthless until they are produced, stated Ganguly, describing himself as a ‘30- year veteran of the oil and gas industry’.

  It was the view of an expert versus that of the generalist. Ganguly trotted out the ‘numbers’. While there was no sign of the mandated gas, the operations man of RIL’s KG-D6 venture offered details of the trouble his company had taken to build their sterling infrastructure. He spoke of the ‘thousands of tonne of equipment’ that were used to get inside ‘the bowels of the earth to create seismic maps covering thousands of square kilometres’. He spoke of geological modelling by experts ‘who try to locate that elusive spot where a 6-inch hole can be guided 5 km underground, to reach that perfect depth where it might hit hydrocarbons’. He said that well after well could be drilled and declared dry. A deepwater drilling ring was expensive, costing about Rs 7 crore a day to lease or hire and an exploration well had a price tag of Rs 600 crore. Apparently awestruck with the infrastructure that he had helped build, Ganguly added:

  Every delay in obtaining a clearance, and there are dozens required, raises costs. Success is not guaranteed to create value. The toughest part is still to come. Appraisal and production wells have to be drilled. Then, a veritable Eiffel Tower, in terms of the steel required, has to be designed, laid underwater and connected through hundreds of kilometres of pipelines to these wells.

  He went on to describe the expensive imported precision engineering technology that went into tightening each nut and bolt and laying high voltage electric cables. He asserted that the price of gas could not be based on the cost of production. He complained that when costs were recovered after production, the cost of capital invested in successful blocks was not allowed to be recovered. And, the discovery-to-development process could take upto a decade. Ganguly scoffed at Dasgupta’s figure of RIL earning profits of Rs 81,000 crore in five years at the new approved price. ‘My numbers show that to reach this figure, RIL will need to develop and produce 16 tcf (trillion cubic feet) of gas from KG-D6 block, which the block doesn’t have, in these five years. This means 250 million cubic metres a day, about three times India’s current production, from this block alone.’ He added sardonically that if he believed the figures provided by Dasgupta, the government’s takings would be at least Rs 1,40,000 crore in five years, which would push the country into the club of gas exporting nations and offset part of the subsidy burden of the government. Ganguly also tried to dig holes in the contention made by the CPI MP that the gas price hike would cost the power sector Rs 33,000 crore per year. He wrote:

  Even assuming that $10 is the new delivered price of gas, it does not result in a power tariff of Rs 6.40 per unit. With a heat rate of 1,750 kcal (kilocalories) needed to produce one unit of power, the variable cost of generating power is Rs 4.20, or Rs 1.80 a unit more than the current variable cost of Rs 2.40. Gas-based power is barely 5 per cent of the total today. So, the actual impact is only 7-8 paise per unit rather than the Rs 2 presumed by Dasgupta.

  Other advisors of Mukesh Ambani’s came to the fore as the days progressed. On 29 August, Mint published an interview with Harish Salve, senior advocate, Supreme Court, who had earlier spoken at length to Vivek Law of Bloomberg Television. Salve, who routinely appears on television on behalf of RIL, among other corporate groups, complained about decisions on energy security taken by a ‘bunch of bureaucrats in Delhi’ with ‘low credibility’ as opposed to a ‘bunch of experts sitting across the table’ arriving at sound judgements. Salve said that he had advised clients such as RIL to ‘go slow’ since ‘tomorrow some kids from the CAG’s office will come and say you are gold-plating and tomorrow you are prosecuted’. Salve concurred with interviewer Law’s view that not just international investors, but Indian investors as well, were disenchanted with the state of the crisis-ridden Indian economy in the last year of the second UPA government. Taking the example of Reliance, Salve, one of India’s best-known lawyers, complained that the group which had invested $12-15 billion in natural gas was being shabbily treated, with allegations of out-of-turn favours towards Mukesh Ambani’s flagship venture. ‘We are happy to import energy at $12-18. We are not willing to let our own producers a little bit of elbow room. You want a CAG on t
heir head but you don’t mind importing at $18 and then you complain about (the high) current account deficit,’ he said, thereafter highlighting the example of another private oil and gas company, Cairn Energy, which is part of the Vedanta group, which was ‘beating at the door’ to gain clearance to ‘double production’, and was ready to invest, but was being stalled.

  Salve wondered that if ‘every corporate today’ were to be branded ‘criminal or potential criminal’, why would they ‘bother’ to invest? RIL also started putting out statements that contracts between the government and the company were not being honoured by the former, and that RIL was facing delays with various approvals. On 3 September, speaking on the sidelines of a conference, Prasad hit out at the government saying that the country did not have ‘the stable policy regime’ necessary for any ‘investor to come in and invest either in technology or put in big risk investment that are required in (oil and gas) exploration, appraisal and development’. RIL’s Ganguly had taken an almost identical line speaking to Kalpana Pathak of Business Standard (22 August 2013) when he said that the company ‘would have to take a call on whether to invest in future E&P bid rounds in India.’ He said that with the ‘government going back on its own policies and words in the last couple of years, with talks of price controls and regulatory hurdles’, the country was ‘going back to the pre-1991 era’.

  In his letter to the Standing Committee on Finance, Prasad had written that at least ‘70 per cent’ of the country’s gas was ‘produced by public sector companies such as ONGC and OIL and that RIL’s KG-D6 block had a mere ‘15 per cent share in the total domestic production in India’. He stated that ‘output from ONGC’s blocks in the KG basin, which was expected to be 16 mscmd, never crossed 6-7 mscmd and finally dropped below 3 mscmd’. Thus, Prasad implied that RIL had been unfairly singled out for criticism for falling production. India’s public sector oil exploration and producing companies were sought to be painted as major beneficiaries of the gas price hike even as ONGC and OIL, unlike RIL, had to contribute to subsidising diesel, cooking gas and kerosene from their profits. Lola Nayar wrote in Outlook (26 August) that the scales were weighted rather heavily against the public sector. She quoted A. K. Banerjee, ONGC’s director, finance, pointing out that the company had to bear a financial burden as high as Rs 2,14,000 crore in the form of subsidy payments to the government in the nine years from 2003–4 to 2012–13. Banerjee said,

  This ensured that, in the first quarter of 2012-13, instead of getting the market price of some $100 per barrel, ONGC ended up getting $45 per barrel. During the corresponding quarter this fiscal, this has slipped to $40 per barrel. But for the depreciation of the rupee, ONGC would have seen its revenues hit further. In addition, public sector companies like ONGC and OIL also have to pay cess and royalties—which private companies like RIL are exempted from paying—which are subsequently recovered from the government as expenses.

  The leadership of another major public sector organisation in India, this time, from the power sector, NTPC, which has at least 4,000 megawatt of gas-based power generating units running at low capacity, was clearly not convinced about the economic viability of power generation using natural gas. Speaking to Business Standard (6 September 2013), Arup Roy Chowdhury, chairman and managing director, NTPC, said that ‘consumers who may want power, may not buy’ from their plants if the price of electricity was excessively high. He said NTPC had no alternative but to lean heavily on coal-based power generation. The NTPC head spoke of his company’s plans to import 60 million tonne of coal, since it did not expect more than 145 million tonne from yet another public sector corporation, Coal India Limited.

  Towards the middle of 2013, it was clear that a series of regulatory and legal battles were in the offing relating to the fall in production from the KG-D6 venture and the gas price hike. The results of these were yet to be seen but it was clearly a process that could make the first serious dent in the crony networks that characterise the nexus between business and politics in India. On 6 September, the Hindureported that the CAG had questioned the petroleum ministry over the gas price hike. A letter dated 14 August from the office of the principal director of audit, economic and service ministries, queried whether the ministry had taken any steps to ensure that the KG-D6 operators, RIL-BP, delivered gas at pre-hike prices of $4.2 per mBtu under the approved production plan. The auditor also questioned the ministry on its failure to exercise its right to fix the price of gas, mandated under Article 21.6.3 of the PSC. The clause provides for the government to approve the formula or basis for the price of gas before it is sold to consumers.

  The ministry, on its part, the Business Standard reported the same day, was preparing a proposal to bar RIL from levying the higher price for discoveries from the D1 and D2 areas in the KG basin, if it was proved that RIL had deliberately gone slow on production from these fields. In an apparent move to untie the ever-tightening knots in the legal contractual tangles, the ministry had also asked the DGH to look into RIL’s revised development plan, filed in August 2012 for the fields in which it was already operating, and for which it had forecast lower production, proposing a lower capital expenditure (from $8.836 billion to $5.928 billion). It was also reported that an approval of the revised plan by the Management Committee would mean the government’s acceptance of RIL’s argument about geological difficulties in the KG-D6 block, and in the case of a rejection of RIL’s contention in this regard, the petroleum ministry had plans to bring in a third party consultant to look into the shortfall in production.

  RIL had, in its counter-affidavit to the writ petition filed by Dasgupta and Sarma in the Supreme Court, said that despite the proposed revision in the price of gas, the company had no ‘intention’ of drilling fresh wells in the D1 and D3 blocks ‘giving a complete lie to the suggestion that the drilling of wells was held back to await a price hike’. RIL’s Ganguly was quoted (Times of India, 6 September 2013) saying: ‘RIL’s position, based on expert advice, is that drilling more wells will not increase production and in fact compromise the reservoir. The government on the other had has taken a view that more wells should not be drilled.’

  The news report also mentioned that the company had filed an arbitration petition before the Chief Justice of India P. Sathasivam requesting that the third, presiding arbitrator be appointed since the nominees of RIL and the Union government had been unable to decide on one.2 Three days earlier, RIL’s Prasad had written to Moily protesting against the widely reported moves to force the company to sell gas from the already discovered fields at $4.2 per mBtu. ‘Neither the PSC nor the field development plan (or investment proposal) even suggested that a shortfall in production can be considered a breach for which penalties can be levied,’ protested Prasad in his letter.

  This letter was followed up by another from Prasad to petroleum secretary Vivek Rae that was aimed at the regulator. In an aggressive tone, RIL accused the DGH of acting in an ‘inconsistent, wayward, and arbitrary’ manner. Upset with the DGH’s move to make the company surrender 86 per cent of the KG-D6 block, including gas discoveries worth $10 billion, on the ground that it had exceeded the time given to develop the fields that had been specified in the contract, RIL alleged that the DGH ‘s arbitrary actions were responsible for the delay. Jaipal Reddy had appointed R.N. Choubey as the first civil servant to head the technical wing of the ministry after S.K. Srivastava’s term as DGH got over. The Economic Times reported on 12 September that Reddy’s successor Moily had found ‘procedural flaws’ in Choubey’s appointment and was in the process of choosing a new DG, DGH. In his letter to petroleum secretary Rae, Mukesh Ambani’s right-hand man challenged the DGH for questioning RIL:

  (the) contractor is of the view that the action is clearly an afterthought, based on (an) arbitrary decision and is tantamount to disputing completely valid discoveries made at the contractor’s risk....We earnestly request you to advise the concerned to rectify the errors and remove the hurdles which are needlessly delaying further
progress in these discoveries. As a contractor having spent enormous amounts of time and money on bringing these discoveries to fruition, we stand to suffer immensely if pushed to a situation of forced relinquishment of rightful discoveries.... Needlessly projecting RIL as a defaulter and forcing the contractor to relinquish discovered resources will not only hurt the investor but considerably reduce the chances of many of these discoveries ever being produced in the future....

  The DGH had questioned RIL about three discoveries (D29, D30 and D31) because the company did not conduct a ‘drill stem test’ to ascertain the viability of the discoveries. Moreover, the regulator wanted RIL to relinquish other five discoveries (D4, D7, D8, D16 and D23) because the company did not or could not—depending on one’s position—submit the development plan on time. Prasad claimed his company had agreed to conduct the particular tests at the insistence of the DGH but had to hold back plans because of uncertainty about these three finds. Prasad said the development plan for the nine discoveries, which included five finds under question, was never withdrawn. He wrote: