GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  Neither (the) DGH nor (the) MoP&NG (ministry of petroleum and natural gas) has ever provided any contrary views to the contractor whether in (the) MC (Management Committee) or otherwise, of the requirement of a separate development plan for these five discoveries.... Evaluating the FDP (field development plan) at a sub-market price and then declaring it unviable was not only against the PSC (production sharing contract), but was tantamount to suppressing much-needed production in a country suffering lack of gas....Under normal course it would be considered bad faith to take (a) biased unilateral view, which view first delayed further progress for development, and then turn around to blame contractor for expiry of (the) time period....

  On 6 September, the Supreme Court adjourned the hearing on Dasgupta and Sarma’s PIL for six weeks, giving time to the Union government, petroleum minister Moily, his ministry, RIL’s partners Niko Resources and the BP group to file their replies. In the interim, a new application was filed by the petitioners, which is pertinent when seen in the context of the request made in August by RIL to the Supreme Court seeking the appointment of a presiding arbitrator over its dispute with the government. This application alleged that the petroleum minister, in collusion with the RIL-Niko-BP consortium, intended to use the arbitration proceedings to take the ‘contentious and public issues away from court scrutiny’. It appealed that the respondents and arbitrators be restrained from moving forward. The following day, 7 September, Dasgupta wrote yet another letter to the prime minister, this time calling for a quick decision on the issue of imposition of a penalty on RIL for failing to produce the anticipated quantum of gas. The CPI MP wrote:

  You are aware that the government had imposed a penalty of $1 billion on RIL for deliberate default in production. I had pointed out that this amount works out to $1.8 billion for 2012-13 and $2.4 billion for the current year due to continuing shortfalls. It is learnt that the DGH has agreed with my contention and recommended penalty of $1.8 billion for 2012-13. However, the petroleum ministry has not issued a fresh notice to RIL based on the DGH’s suggestion and the petroleum minister is stalling the matter. I would urge you to the direct the ministry to issue a fresh notice to RIL immediately, both for (the) last year and (the) current year.

  Dasgupta again urged the prime minister to direct the petroleum ministry to ensure that RIL sells gas at $4.2 per mBtu for the ‘shortfall amount’ even after April 2014. He disclosed, for the first time, a copy of a technical report that was prepared by a gas reservoir expert P. Gopalakrishnan, who had studied the decline in gas production in the KG-D6 area. The 13-page report entitled: ‘Analysis of well and pools performance: D1 and D3 fields, KG Basin (RIL)’, which had been commissioned by the DGH and which was submitted to the petroleum ministry in 2011, had observed:

  The shortfall in gas production is due to non-drilling of the adequate number of wells as per the ADP (Approved Development Plan), and therefore drilling as per the ADP may be undertaken immediately.... The well completion policy, and tubing sizes may be re-looked to optimize the wells and the reservoir areas each one targets. Delays in commissioning additional producers would trigger water drive in the reservoir and consequent reduction of the ultimate recovery as a result of water encroachment as well as permanent loss of some of the gas reserves....

  Gopalakrishan had noted that in the first year, RIL’s production performance was as per expectations. Consequently, the report noted, ‘wells were not introduced into the system’ at the end of the first year as had been laid down in the Field Development Plan and, consequently, the rate of gas extraction declined. Since this led to a partial increase in reservoir pressure, new wells were required to be drilled at the earliest. Without a decrease in reservoir pressure, the reserves could be lost by water encroachment. Thus, Dasgupta concluded in his letter to the prime minister that there was ‘no basis’ for RIL to claim that the drop in gas production had been on account of geological complexities.

  Meanwhile, the office of the CAG continued to face non- cooperation from RIL in carrying out what it believed was its mandate. On 10 September, the Hindu reported that the CAG has complained to the petroleum ministry that RIL had allowed the CAG only ‘restricted access’ to financial and material management modules, though a request had been made for access to all modules of the company’s SAP or systems applications and products. Access to data on human resources, sales and distribution and project system modules were denied, the CAG claimed, adding that records from RIL’s SAP would enable government auditors to cross-check various expenditures incurred by the company. The principal director of audit, economic and service ministries, in the CAG wrote:

  The operator had stated on May 20, 2013 that its SAP team is working for providing additional access and in order to provide continued support, persons have been nominated. However, as on date, no additional access has been provided, and the persons nominated are either not readily available or do not have sufficient SAP authorisations so as to resolve audit queries.

  The company’s alleged non-cooperation with the CAG in providing data for the audit period 2008-9 to 2011–12 has been discussed earlier in the book. The Hindu spoke to petroleum minister Moily on this issue and he remarked:

  I don’t know. That I must find out. We are getting cooperation from everybody. There is no problem at all. The question is we should not destroy them; then you get destroyed yourself, I am telling you. This is what is going to happen. If you destroy somebody, you get destroyed yourself...

  The controversies relating to what should be the price of gas just refused to die down. In his fourth article (Hindu, 10 September 2013), Surya P. Sethi, former principal advisor, power and energy, Planning Commission chose to be deeply sarcastic of the political class for skewing the gas pricing formula in favour of RIL and claiming that this would be ‘the panacea to India’s energy security woes’. He wrote: ‘Politicians worldwide are dream merchants. They sell dreams. Indian politicians are, of course, second to none in this business and have indeed perfected this art form.’ He squarely blamed politicians or ‘dream merchants’ and not the company (RIL), which, ‘like any private enterprise, responds efficiently and effectively to shape the prevailing environment and maximise profits’.

  Sethi commended public sector companies such as ONGC Videsh for resource accretion—he argued that despite various problems with international acquisitions, India had added more value in terms of oil and gas reserves overseas than through domestic private sector investments. He disagreed with Moily’s assessment that Indian companies had invested about $100 billion in acquiring oil and gas assets overseas and contended that this figure would probably be a quarter of the amount. He repeated his disagreement with the formula of the Rangarajan Committee to determine the price of gas arguing that no country in the world offers a ‘guaranteed wellhead price for conventional natural gas’ that was being paid in India and would be paid from 1 April 2014. ‘Can the Honourable Minister name a single wellhead in the world that is currently receiving $8.40 per mBtu or anywhere close to it for conventional natural gas?’ Sethi asked.

  He also trashed the contention that a higher gas price would provide an incentive to RIL to produce more thereby curtailing imports of LNG. He pointed out that minister Moily gave ‘several numbers’ of potentially higher domestic production of gas that could have been realised by end-2013 and by 2014–15 from the KG-D6 basin and the likely savings in LNG imports. Sethi sarcastically wrote that ‘the Honourable Minster blames his own government for failure to give timely approvals to Reliance to achieve these outputs’ and asked: ‘Is the Honourable Minister trashing the findings of his predecessor and the reports of his own ministry and the DGH?’

  He described as ‘dubious’, Moily’s claim that there would be additional production of 40 mscmd of gas annually ‘starting’ 2016–17 and savings of $65 billion in LNG imports. Sethi asked whether the minister could ‘guarantee the promised additional output’. He asked a series of rhetorical questions in his article:

&
nbsp; Will this additional output come from the existing fields or new fields with new investments? Will the additional output result from RIL belatedly fulfilling its long unmet commitments under the addendum to the agreed initial development plan as detailed by the CAG? Finally, will this additional production come from acreage that should have been relinquished years ago as pointed out by the CAG?

  The answers to these questions will probably not be known in a hurry. The tussle between India’s biggest privately controlled corporate entity headed by the country’s richest man on the one hand, and sections of the government, notably the auditor of public finances and the regulatory authority of the hydrocarbons sector, on the other, are unlikely to be amicably or expeditiously resolved.

  13

  CONTINUING CONTROVERSIES ON GAS PRICING

  In spite of the deep misgivings of—and downright opposition from— independent experts, including those well-versed in the technical aspects of oil and gas exploration, serving and former government functionaries and at least one former Union petroleum minister, the government as a whole and the ministry of petroleum and natural gas in particular acceded to the demands of the Reliance Industries Limited-led consortium to double the administered prices of natural gas.

  With the Union Cabinet formally approving the higher gas prices on 19 December 2013, RIL welcomed the new year with glad tidings on output from the KG-D6 gas fields. On 2 January 2014, RIL officials announced that the MA-8 well in KG-D6 block had started production thereby increasing output from the block by about 15 per cent to about 13.7 million standard cubic metres per day (mscmd). The seventh well in the MA field, this was the first producing well on the eastern basin in nearly four years. The additional output was made up of about 8.7 mscmd from D1 and D3 gas fields and about 5 mscmd from the MA field. In December, production had fallen to 11.7 mscmd. The KG-D6 fields, which began gas production in April 2009, had hit a peak output of 69.43 million standard cubic metres per day (mscmd) in March 2010 before water and sand ingress is supposed to have compelled the shutting down of one well after another, or so the company claimed. RIL shut down 10 of its 18 producing wells at the D1 and D3 fields and two of the six wells at the MA field. It was also announced that a third of the wells shut at the main D1-D3 gas field were being repaired to boost output by March (PTI, 9 January 2014). The following day, it was reported that RIL and its partner, British Petroleum, had pumped up gas volumes by 20 per cent (Timesof India, 10 January 2014).

  RIL’s P.M.S. Prasad told reporters on the sidelines of the government’s biennial Petrotech conference in Greater Noida (near New Delhi) on 13 January: ‘We can’t drill any more wells on (main) Dhirubhai 1 and 3 (D1&D3) fields. We are doing work-overs on three shut wells’. As water ingress is cut off by the RIL-BP technical teams, a compressor would be installed at the onshore terminal to pull gas up from wells that are a kilometre below the surface of the sea. ‘We are currently doing water shut-off job on three wells on D1&D3 gas fields before we install a compressor in the first half of 2015,’ added Sashi Mukundan of BP. ‘Work-overs are fraught with risk so we have to see the result of the current work-overs,’ said Prasad (PTI, 13 January 2014).

  At the same conference, petroleum minister Veerappa Moily profiled 46 of the 65 blocks that would be offered for auction. Of the 46, 17 are on land, 15 in shallow water and the rest in deepwater. The blocks offered included most of the 6,198.88 sq km of the KG-D6 block that the ministry had taken away from RIL—the five discoveries D4, D7, D8, D16 and D23—for which the DGH had said that RIL had missed deadlines for submission of investment plans. The area taken away in KG-D6 had five gas discoveries holding an estimated 0.805 trillion cubic feet of gas reserves, or about one-fourth of the restated reserves in the currently producing D1&D3 fields, and were said to be worth $10 billion at current imported prices (PTI, 12 January 2014).

  During this period, the outcome of elections to the state assemblies of the five states of Delhi, Rajasthan, Madhya Pradesh, Chhattisgarh and Mizoram was declared. The ruling Congress party could retain power only in the northeastern state of Mizoram. The party was virtually decimated by the BJP in Rajasthan and Madhya Pradesh which was also able to hold on to the government of Chhattisgarh. The big surprise was the unexpected performance of the Aam Aadmi Party (AAP) in the national capital, which went on to form the government in Delhi with outside support from the Congress. Arvind Kejriwal, the most prominent leader of AAP who went on to become Delhi chief minister and his party colleague and advocate Prashant Bhushan, had publicly attacked the Congress-led Union government for granting ‘undue favours’ to Reliance in the manner in which natural gas prices had been hiked. Like many corporate captains in the country who were in favour of the chief minister of Gujarat Narendra Modi becoming the next prime minister of India, Mukesh Ambani was surely not overjoyed at the prospects of AAP emerging as a significant political force in the run-up to the general elections scheduled in April–May 2014.

  On 11 January, the petroleum ministry notified the ‘Domestic Natural Gas Pricing Guidelines, 2014’ which would be valid for all natural gas produced domestically, irrespective of the source, whether conventional, shale or coal-bed methane. The new guidelines would be valid for five years. An unnamed spokesperson of RIL reacted promptly with a statement, part of which read:

  We welcome the adoption of (the) Rangarajan Committee formula as a step in the right direction. However, gas sales under NELP have to be at competitive arms-length market prices. Accordingly, we hope the same momentum is maintained and, as per the PSC, gas markets are allowed to develop and transition to market price soon....

  The price increase was announced. But an important provision was added that the operator would have to furnish a bank guarantee in case it was conclusively established that RIL had deliberately suppressed gas production. The need to include such a provision had been in the air for well over two months as a way to counter the criticism that the government’s June 2013 decision to give RIL a higher price of $8.4 per million British thermal units (mBtu) was meant to make up for the shortfall in production of gas from the D1 and D3 fields and would be encashed if it was proved that the company had hoarded gas. Petroleum minister Moily said that the way in which the bank guarantee would be furnished would be worked out in consonance with the law ministry. He also said that the Cabinet Committee on Economic Affairs (CCEA) had decided that there would be no cap on the new price. Petroleum secretary Vivek Rae explained that the bank guarantee would accrue on a quarterly basis and would probably equal the incremental revenue RIL would get from the gas price increase and would also depend on the quantum of shortfall and the eventual price emerging from the Rangarajan formula. The Hindu(18 November 2013) put a figure to the bank guarantee at around $135 million a quarter.

  Under the Rangarajan pricing formula, it had been decided that the prices will be revised quarterly. In each quarter, the prices would be decided on the basis of a 12-month trailing average without taking into account the rate of the preceding quarter (that is, the price for the January to March 2014 period will be calculated based on the average prices for the period of 12 months that ended in September 2013). The import price of LNG would be considered with a lag of a quarter. The bank guarantee would be applicable for D1 and D3 wells only, and that too if charges of hoarding were proved. The 10 January notification of higher gas prices, otherwise, would benefit RIL for all existing fields like MA in the KG-DWN-98/3 or KG-D6 block or upcoming ones such as the R-series, the satellite fields in the KG basin block and the North East Coast block, NEC-25. The new rates would also apply to public sector companies, notably ONGC. The Times ofIndia reported on 11 January that the price of compressed natural gas (CNG) (Delhi prices) could shoot up by Rs 8 to Rs 16 per kg because of the twin impact of the application of the new pricing formula as well as the increased use of costlier imported gas to compensate for the fall in the supplies of domestic gas.

  At the 19 December 2013 meeting of the CCEA, there had been a lone dissente
r—former petroleum minister Jaipal Reddy who reportedly maintained his position that RIL had broken contractual obligations, failed to make up for shortfall in gas production and that this was an unprecedented case of a defaulter being rewarded. He was critical of the bank guarantee mechanism and described it as an ‘eyewash’. He had made the point that the huge bank guarantee— the Cabinet note having suggested that it could run into $9 billion if arbitration lingered on—would be almost impossible to execute. Finance minister Chidambaram had suggested that the disputed amount be placed in an escrow account in addition to the bank guarantee.1

  The Cabinet note that had been placed at the CCEA meeting too had a dissenting view. The Times of India of 21 December reported that the note had proposed that the D1 and D3 wells be excluded from the new gas pricing guidelines on the ground that the RIL should first make good the production shortfall as on 31 March 2014. On the other hand, the note had also suggested that the pending arbitration and attendant legal matters be satisfactorily settled in favour of the contractor. The note also suggested that the bank guarantee mechanism could end up diluting the government position on arbitration proceedings—that RIL was at fault for the shortfall on gas output which was not on account of geological surprises as had been claimed by the company. At the time of the CCEA announcement, the government had also been bracing for the next round of auctions of oil and gas blocks, slated for January 2014. The petroleum ministry planned to showcase about 56 new oil and gas blocks during the Petrotech 2014 conference under a new revenue-sharing regime. The ministry planned that the profile of these oil and gas blocks likely to be auctioned under the 10th round of the NELP be placed before national and international delegates at the conference. The notice of bids under the revenue-sharing regime would come later, in a month, after formal Cabinet clearance. The new revenue-sharing regime was announced at the turn of the year, on New Year’s day. It was claimed that the NELP, under which nine rounds of auctions had taken place since 1999, would be replaced with ‘a non-controversial model’ for the launch of the 10th round of auction of blocks with ‘extended tax holidays, zero royalty payment and (a) longer contract tenure to attract investors’ (Economic Times, 1 January 2014).