GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  In a strongly-worded press release, RIL replied that these allegations were sub-judice, under which representations have already been made. The company denied that its legal advisor Atul Dayal was either the owner or the director of Biometrix:

  The investments by Biometrix were open, transparent and perfectly legitimate transactions, in full compliance with the extant regulations. These investments in the Indian companies were made by Biometrix out of loans raised from ICICI Bank, Singapore branch. ICICI Bank has confirmed this fact to the regulators. Regulatory authorities have fully investigated the matter and found no substance in the allegations of money laundering. The insinuation that this money was from ‘gold plating’ from KG-D6 is completely irresponsible and false.

  While the AAP relentlessly got after Reliance, the country’s most widely circulated financial daily, the Economic Times, front-paged an article by Rohini Singh on 4 March stating that the company’s fabled relationship with the Congress was of no consequence now and that Mukesh Ambani was losing influence over India’s grand old party. The writer quoted senior Congress leader and party treasurer Motilal Vora as claiming that during the state assembly elections that took place towards the end of 2013, his party had not taken any money from RIL or its associates. It was claimed in the ET article that the Reliance-Congress relationship started cooling after the 2009 general elections and that Ambani was currently inclined to believe that the BJP led by Narendra Modi would come to power after the results of the elections are known on 16 May 2014.

  For some time now, many corporate captains in India have considered themselves infallible. In a perceptive article in the BusinessStandard (26 February 2014), Mihir S. Sharma recalled how the Indian government had increasingly become ‘for, of and by its biggest businessmen’. He recalled how RIL kept claiming that there was not enough gas in the fields till the government was pushed to come up with a ‘formula’ that used import prices of gas in Japan to set the wellhead price of gas in the Bay of Bengal. He pointed out how other industrial houses were arm-twisting government regulators by recalling how in the middle of February, the Tata and the Adani groups reneged on their promises of supplying power from ‘ultra-mega’ power plants in Gujarat to state-owned utilities at a fixed tariff. This happened with the alleged connivance of the electricity regulator which asked buyers of power to pay an extra Rs 830 crore to the Adani group company and Rs 330 crore to Tata Power. It was also decided that in the future, electricity would be sold at a higher price than what the Tata and Adani group companies had agreed to when they won competitive bids to operate these plants. This concession was justified on various grounds, including the fact that imported coal from Indonesia had become more expensive following tax changes in that country. The companies had failed to foresee this development, but did not have to take the hit for their incompetence, Sharma wrote. This was after all, crony capitalism at its best.

  As allegations and counter-allegations flew thick and fast, petroleum minister Moily continued to staunchly defend himself. On 24 February, in a 13-page letter to prime minister Singh, he wrote that the RIL contract for KG-D6 gas fields could not be terminated till the arbitration on the issue of output lagging targets was completed. The minister said that it was economically unviable to produce from several gas fields of both RIL and ONGC at the rate of $4.2 per mBtu. For the first time, Moily mentioned the cost incurred by ONGC to produce a unit of gas, which was $3.6 per unit—more than the current price of

  $4.2 (See ET, 24 February 2014): He wrote:

  In choosing the basis for fixing the gas price, it is tempting to think that by choosing a lower price we are assuring consumers the same amount of gas supply at a lower price. The fact is that the price formula affects the investment that will be undertaken in exploration and production and therefore the total volume of gas likely to be produced.

  Even as the government kept harping on the need to go along the arbitration route to resolve its disputes with RIL, writing in Outlookmagazine (3 March 2014), Lola Nayar stated that petroleum ministry officials put the responsibility for the delay in appointing the third arbitrator squarely on RIL. These unnamed officials also said that RIL was exerting pressure on the government to finalise the issue of furnishing a bank guarantee to smoothen the way for the issuance of a notification for the price hike. It may be recalled that in the face of criticism, the government had agreed to ask RIL to furnish a bank guarantee equivalent to the incremental revenue that it would earn as a result of the new price of gas, with the understanding that the guarantee would be encashed if it was conclusively established that RIL hoarded gas or deliberately suppressed production from the D1 and D3 fields in the KG-D6 block from 2010–11 onwards. Nayar wrote that petroleum ministry officials would rather not have RIL dictate terms on the bank guarantee but draft a format for the guarantee that would hold till the final arbitration decision. The Times of India(22 February 2014) reported that Moily had presumed that the bank guarantee issue would be cleared by 10 February but this had not happened because officials in his ministry were nervous and were slowing down the process by double-checking each and every word in the fine print to ensure that there were no procedural lapses that could land them in trouble if there was an investigation in the future.

  It was not unexpected that bureaucrats in the MoPNG and other ministries should have been extra-cautious in dealing with RIL. On 6 February, career civil servant R.N. Choubey was replaced by a ‘technical’ person, B. N. Talukdar. In his first public statement on 22 February, the new DGH called for creating a more ‘investor friendly’ climate. He said in a message on the website of the DGH that incentives would have to be provided for developing and applying advanced technologies necessary to explore, develop and produce energy to meet the growing demand of the progressing nation. He also said that the DGH would have to have a relook at its functioning, strike a balance between the various kinds of roles required of the regulator, in order to promote sound management of oil and gas resources. He said the focus should be on exploring new areas, increasing recovery from existing reservoirs, and at the same time formulating guidelines for proper evaluation of discoveries, reserves and development strategies that would avoid undesired controversies.

  Choubey, who had recommended in April 2013 that RIL surrender discoveries for failing to meet deadlines and for refusing to conduct the drill stem test to evaluate the gas reserves in the D29, D30 and D31 fields, contested the grounds on which minister Moily had overruled his recommendations. In October, the minister had ordered RIL to relinquish five discoveries but not the three for which development timelines had expired as per the file notings of the DGH. The minister in his own file notings on 9 October 2013 had stated that it was the DGH which had delayed reviewing the Declaration of Commerciality which had been submitted by RIL on time. The minister said that the DGH had failed to take a categorical stand on the matter that the contractor must conduct the test. However, Choubey in his final notings in mid-January just before demitting office, emphasised that RIL had failed to conduct tests in spite of repeated requests for almost four years. Incidentally, Choubey’s recommendations had been supported by the topmost bureaucrat in the MoPNG, the then petroleum secretary Vivek Rae (who on superannuation at the end of February 2014 went on join the Seventh Pay Commission as its full-time member).

  Moily had, in the mean time, recommended that the chairman and managing director of ONGC Sudhir Vasudeva be granted a year’s extension of his term on grounds of ‘merit’ since the public sector corporation needed his presence to ‘complete ongoing strategic initiatives’. Prime minister Singh, whose role in the various controversies relating to RIL and KG gas had by and large been perceived as one of a passive observer, overruled his minister on this occasion. He said Vasudeva’s term as ONGC head would not be extended. Instead, D.K. Sarraf, who used to head ONGC’s overseas arm, ONGC Videsh, replaced Vasudeva as the chairman and managing director of India’s biggest oil and gas exploration and production company in the public
sector. Nirmala Sitharaman, BJP spokesperson and Gurudas Dasgupta noted that there were pending vigilance cases against Vasudeva and his appointment had not been cleared by the Central- Vigilance Commission. AAP leader Bhushan stated on 27 February that there were six cases pending against Vasudeva that had not been taken to their logical conclusion by the petroleum ministry. When Vasudeva was appointed in 2010 to lead ONGC, his vigilance clearance had been initially rejected by the CVC. It was rejected a second time and Bhushan claimed that thereafter two situations were possible: either his appointment was cleared after a third attempt or that he had been appointed without clearance from the CVC. In response, Moily’s office came out with a statement that the names of both Vasudeva and Sarraf had been presented to the government for an appropriate decision and that no attempt had been made to bypass the vigilance process.

  This was not the only instance when the focus of the media was not just on RIL but on ONGC as well. There was, in late-2013 and early-2014, a major dispute between RIL and ONGC with the public sector company accusing its private sector counterpart of ‘encroaching’ on its territories in the KG basin. This dispute had first cropped up in October 2013 and was continuing till the time this book was being completed in March 2014. On 11 February, ONGC wrote to its administrative ministry asking for a ‘neutral expert’ to be appointed to ascertain whether RIL was ‘stealing’ from ONGC’s wells. RIL’s wells, D6-A5, D6-A9 and D6-B8 and ONGC’s gas ‘pools’, G4-2, G4-3 and D-1, are within a ‘few hundred metres’ of each other. ONGC had not started production from the areas designated for it.

  The corporation’s director, exploration, N. K. Verma had stated that the data provided by RIL had been analysed and ONGC was confident that two adjoining blocks had the same ‘pool’ and that based on international practices, should be apportioned between ONGC and RIL. ‘It appears that (the) endeavours of ONGC to come to a common ground with RIL are now failing and also considerable time has elapsed since DGH directed RIL on 28 August 2013, to share the data with ONGC,’ Verma stated in his 11 February letter addressed to the MoPNG’s joint secretary, exploration, Giridhar Aramane (ET, 27 February 2014). Verma’s letter also asked that the DGH should intervene in this dispute since the regulator was mandated under the PSC to deal with situations wherein adjoining gas blocks shared a common reservoir. A formal statement put out on 5 March by ONGC read: ‘Under (the) PSC, (the) DGH has (a) role to play in such situations. However, ONGC was asked to resolve the matter independently with RIL, in the first instance’. RIL wrote to ONGC on 25 February claiming that while ONGC had taken its data, it was not sharing its own data with RIL and called for a meeting on 11 March.

  As Moily and others have pointed out time and again, a hike in the price of gas would benefit not just RIL. ONGC and the government would arguably be bigger beneficiaries. It was calculated that with the administered price of gas doubling to around $8.4 per mBtu, ONGC’s turnover would swell by an impressive Rs 16,000 crore, of which nearly two-thirds would accrue to the government by way of higher taxes, royalties and dividends with the public sector corporation keeping a ‘net retention’ of around Rs 5,200 crore. At the same time, Sarraf has argued that even with a price of $8.4 per mBtu, many gas reserves (including some in the basin of the Mahanadi river off the coast of Odisha, north of the KG basin) would remain commercially unviable. Missing from this discourse was of course, the consumer who will stand to lose once the prices of electricity and fertilisers rise besides the government which has to foot the higher subsidy bill by incurring higher deficits.

  Meanwhile, the CAG has reportedly come out with fresh draft audit reports alleging that RIL has crossed the approved spending limit on the KG-D6 block where it is operating. The Management Committee for the D1 and D3 fields and the DGH had failed in their regulatory duties, the CAG observed, according to Shine Jacob writing in the Business Standard (3 February 2014). The same draft audit report also indicted RIL for under-utilisation of facilities built at a huge cost and claimed that the company failed to carry out appraisal programmes before moving on to the commercial stage as has been mandated in the PSC:

  Till March 2012, RIL has incurred expenditure of $5.76 billion on development of D1 and D3, against the MC-approved cost of $5.20 billion for Phase-I. MC and DGH are responsible for ensuring that cost calculations are reasonable and realistic, but there is no evidence that they verified it. There also were deficiencies in the existing PSC, as it did not provide for DGH/government to effectively regulate the deficiencies on the operator’s part.

  The CAG had been conducting an audit of the expenditures incurred on the KG-D6 field between 2008–9 to 2011–12 following a request from the MoPNG. The total shortfall in production from the KG-D6 block during the four years leading up to 2013–14 stood at 154 units. When compared to the target, the shortfall in gas output was five units in 2010–11, 28 units in 2011–12, 55 units in 2012–13 and 66 units in 2013–14. The government auditor stressed that ‘deficiencies’ in the PSC made it difficult for the government to take punitive action against the operator, RIL:

  Though the (ministry) had issued notice for proportionate disallowance of cost of production facilities amounting to $1.005 billion up to 2011-12, MoPNG itself admitted before the Parliamentary Standing Committee on Petroleum and Natural Gas (October 2013) that ‘It is not penalty as such .... Default is punishable only by termination of the contract. There is no other remedy....’

  On the question of termination of the government’s contract with RIL, Prashant Bhushan was very clear that it was indeed possible. He told Frontline (21 March 2014): ‘I am quite certain that the contract contains adequate provisions to allow the government to cancel the contract. Underproduction itself can be a clause for terminating the contract.’

  For the record, RIL put out an optimistic scenario. On 11 March, the company claimed that gas production was ‘likely’ to rise from 13 mscmd to 15 mscmd and remain at that level for the next two years. Analysts like Morgan Stanley stated that the earnings downgrade cycle for RIL is over and even as a significant increase in gas volumes will take up to financial year 2016–17, benefits would start accruing to the company from the 2014–15 financial year itself.

  The debate raged on. One of the more articulate critics of AAP, Dhiraj Nayyar wrote in Firstpost.com (25 February) that crony capitalism, the theme of Kejriwal’s ‘latest angst’ against the ‘system’ must continue ‘if India wants to grow at near double digits in the near future’. He claimed: ‘The fact is that anyone who has governed any part of India in the last decade can stand accused of crony capitalism if the latter is defined simply as the use of taxpayers’ money or money that belongs to the coffers of (the) government, to finance corporate profit’.

  Taking up cudgels on behalf of Reliance, he stated that the group runs India’s most efficient, globally competitive, refinery and that ‘Kejriwal would rather see the crony before the capitalist’. Nayyar concluded his opinion piece thus: ‘ Unfortunately, if the UPA sits at one extreme on crony capitalism, Kejriwal and AAP sit at the other. India cannot escape the reality of taxpayers’ financing some corporate profit unless it wants to live in Kejriwal’s utopia, which delivers a complete separation of the Government and the private sector but delivers no growth and no jobs. For the sake of prosperity, India could do with some cronies.

  ’On the social media and on YouTube, RIL sought to counter what was described as ‘canards’, ‘propaganda’ and a ‘fear psychosis’ being spread by the AAP about higher natural gas prices leading to higher consumer prices for cooking gas and higher transportation costs adding to food inflation. The company claimed there was no relation between the prices of natural gas and cooking fuel and that carriers of goods (including trucks) run on diesel not gas. That was not all. Kejriwal claimed on March 7 at a conclave organised by India Today magazine that Gujarat chief minister Modi had made a son-in-law of the Ambani family, Saurabh Patel, a minister in his government because of his ‘close relations with Mukesh Ambani’. A f
ortnight later, Reliance released a video on YouTube ‘setting the record straight’ which stated that Patel—who is minister for energy, petrochemicals, mines, minerals, salt industries, printing, planning, tourism, civil aviation, labour and employment in the Gujarat government -- could not have helped the group even if he wanted to, as natural gas and petroleum are sectors over which state governments have no jurisdiction.

  What placed a spoke in the wheel of the government’s intention to double the administered price of gas was an intervention by the Election Commission of India. On 13 March, the newly-appointed petroleum secretary Saurabh Chandra met the chief election commissioner V.S. Sampath seeking the commission’s approval to announce the hike in the price of gas with effect from 1 April 2014 for a period of five years. On 20 April, Kejriwal had complained to the Election Commission that the government’s decision to increase the price of gas was tantamount to a corrupt electoral practice and would violate the model code of conduct that comes into force after elections are announced. The following day, Election Commissioner H.S. Brahma said the ‘urgency’ of the going ahead with the decision would be examined, while his senior CEC Sampath remarked that the decision to hike gas prices had been discussed for long and ‘could be put on hold for another two months’. The writing on the wall was clear.