GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  In March 2000, the name of the contractor underwent a change from Reliance Platforms Communications.com Private Limited to Global Fuel Management Services Limited, and then to RNRL. In April 2000, a production- sharing contract was signed between the MoPNG and the contractor. In July 2002, Mukesh and Anil’s father Dhirubhai Ambani passed away and in October 2002, gas was discovered in the KG-D6 block.

  In March 2003, Reliance Gas Transportation Infrastructure Limited (RGTIL) was created as a 100 per cent subsidiary of RIL for transportation of gas extracted from the KG-D6 block. In August 2004, RGTIL was granted approval by the MoPNG to transport 80 mscmd (million standard cubic metres a day) of gas from Kakinada in Andhra Pradesh to Bharuch in Gujarat passing through four states, including Karnataka and Maharashtra.

  In June 2004, the then undivided RIL entered into an agreement with the Uttar Pradesh government to set up the ‘world’s largest gas-based power plant’ with a capacity to generate 3,500 megawatt of electricity at Dadri, near Delhi, based on KG gas. Between November 2004 and June 2005, the Ambani brothers fought a bitter battle in public over control of the assets of the family businesses. In June 2005, the feuding brothers arrived at a settlement supervised by their mother Kokilaben Ambani and started dividing up the Reliance business empire: the Mukesh group got the gas exploration and extraction business while the Anil group acquired control over the power generation business. In 2006, RIL and RNRL started squabbling over a gas supply agreement between the two. RIL applied to the MoPNG for approval of a gas price of $2.34 (or around Rs 114) per mBtu (million British thermal units) for sale of 28 mscmd to RNRL for a period of 17 years. The MoPNG refused to approve the price and a legal battle broke out….

  Meanwhile, on April 21, 2006, an unusual development took place: RGTIL was taken out of the ambit of RIL and converted into an independent company controlled entirely by Mukesh Ambani for a relatively small sum of Rs 5 lakh. To understand, how this happened one has to look at the current shareholding structure of RGTIL. There are three tiers in the control structure of this company.

  In the first tier are eight companies. Of these, three companies, namely, Vayudoot Finance & Leasing Pvt. Ltd., Vicraze Investment & Trading Co. Pvt. Ltd., and Yashasvi Holding Pvt. Ltd. all have the same registered office address (84A Mittal Court, Nariman Point, Mumbai 400 021) and the same directors (Tushar Mehta and V.R. Sasikumar). Two more companies, Proline Investment Pvt. Ltd. and Jigna Fiscal Services Pvt. Ltd., have the same address but Mukesh Jobalia replaces Tushar Mehta as a director. The sixth company, Lordwest Investment & Trading Co. Pvt. Ltd., has the same address but two different directors, Haresh Mishra and Navin Kalawadia. The seventh company, Shangrila Investment & Trading Co. Pvt. Ltd., has the same set of directors as the first six companies (Tushar Mehta and V.R. Sasikumar) but a different registered office address, that is, 505 Dalamal House, Nariman Point. The eighth company, Anumati Mercantile Pvt. Ltd. is based out of 147 Atlanta, Nariman Point and has Sandeep Tandon and Satish Parikh as its directors.

  The above eight companies together own all the shares of a company in the second tier, Reliance Utilities Pvt. Ltd. This company is based out of Motikhavdi Post Office, Digvijay Gram, Jamnagar district, Gujarat 361 140. One of the company’s five directors is a director in a company in the first tier: Sandeep Tandon. The four other directors are K.R. Raja, V.K. Gandhi, Sandeep Junnarkar, and Kirit Brahmabhatt.

  Reliance Utilities is the 100 per cent owner of RTGIL that has its registered office in 101 Shivam Apartments, 9 Patel Colony, Bedi Bunder Road, Jamnagar, Gujarat 361 008. RTGIL has five directors, two of whom are also directors of Reliance Utilities: they are Sandeep Tandon and K.R. Raja. RGTIL has four other directors, Mahesh Kamdar, Rajinder Kumar Dhadda, Raj Pal Sharma, and Madhusudan Panda. It is claimed by sources close to Anil Ambani that the above-named persons are all associated with his elder brother, Mukesh Ambani, and help the latter control RTGIL.

  The Union Budget for 2009 -10, announced by Finance Minister Pranab Mukherjee on 6 July, has inserted a new section 35AD in the Income Tax Act of 1961 which allows 100 per cent of the capital expenditure incurred on setting up and operating a natural gas or a crude oil pipeline as a tax deduction in the very first year of operation. This is the only business of its kind in India in which the entire capital expenditure incurred is treated as revenue expenditure in the first year of operation. What sources close to Anil Ambani claim is that this new provision in the Income tax Act would benefit only one company and this is RTGIL. Further, the sources allege that the total quantum of financial benefit that would accrue to the Mukesh Ambani- controlled company could be as much as Rs 20,000 crore.

  This is hardly the first time government policy has helped RIL. There are many such instances but a few are worth recounting simply because these pertain to gas pipelines and the Petroleum & Natural Gas Regulatory Board. On the last day of March 2006, Parliament enacted the Petroleum & Natural Gas Regulatory Board Act and on 3 April that year, the Act was published in the Gazette of India. The next step for the government was to notify the Act, but that did not happen for a while.

  On 20 December 2006, the government announced its policy for ‘development of natural gas pipelines and city/local natural gas distribution networks’. The Act says the Board is supposed to regulate the distribution of natural gas through city/local networks, authorize entities to lay, build, operate, and expand a common carrier or contract carrier, trunk pipelines as well as city/local networks and regulate transportation tariffs.

  On 25 June 2007, the government notified the formation of the Board. Now comes the unusual part of the story. Whereas the government notified the constitution of the Board, it did not notify the Act itself. Yet Section 3 of the Act clearly states that the Board can be set up only under the provisions of the Act. It was a classic ‘Catch 22’ situation, straight out of Joseph Heller’s novel. The Board was operational but it could not do anything because the Act itself had not been notified. Was the omission an oversight? There is reason to surmise that the omission was deliberate.

  Nothing happened for roughly three months. Eventually, on 1 October 2007, the Ministry rescinded the June notification and issued a fresh one notifying the Board as well as the Act. But once again, there was a catch. The entire Act was notified with the exception of one substantive portion -- Section 16 – that empowered the Board to authorize the construction of natural gas trunk pipelines and city/local distribution networks. Why was this done?

  Between 25 June and 1 October 2007, the MoPNG went ahead and authorized the construction of five major natural gas pipelines by GAIL (formerly Gas Authority of India Ltd.) and four by Reliance Industries Limited involving an investment of – hold it! – not less than Rs 50,000 crore! In effect, the government left nothing for the Board to do since all the major trunk pipelines required for the country in the near-term had already been authorized. Significantly, all the nine gas pipelines were authorized without a process of competitive bidding. Yet section 4.1 of the natural gas distribution policy provides detailed guidelines for selecting the entity that would build a pipeline through a transparent process of bidding.

  Why did the government go through the charade of creating a body called the Petroleum & Natural Gas Regulatory Board when Minister Murli Deora and his officials apparently did not want the body to function effectively?

  Over the past week or so, the ‘Letters to the Editor’ section of BusinessStandard newspaper has given considerable space to a public spat between Tony Jesudasan, Group President – Corporate Communications of the Reliance ADAG (Anil Dhirubhai Ambani Group) and Pradip Baijal, former chairman of the Telecom Regulatory Authority of India and former officer of the Indian Administrative Service, who had written an article in the newspaper on the ongoing dispute over pricing and allocation of gas from the KG basin between companies controlled by the two Ambani brothers (RIL and RNRL) that is being heard by the Supreme Court.

  Jesudasan alleged that there was a conflict of interest in Baijal be
ing appointed chairman of the Pipeline Advisory Committee of the P&NG Regulatory Board since he is director of a management consultancy firm (Noesis Strategic Consulting Services) in which Niira Radia is also a director and that Radia controls three public relations consultancies (including Vaishnavi Communications and Neucom) that count RIL as a client, among many. Baijal wrote back saying he had resigned from the Pipeline Advisory Committee after attending only its first meeting and that he did not have anything to do with Radia’s other businesses. Jesudasan wrote another letter to the newspaper pointing out that Radia’s firms (Noesis and Neucom) operated out of the same building in New Delhi’s Gopal Das Towers, Connaught Circus, in which RIL’s corporate office is located a floor below, hinting that this was perhaps not a coincidence….

  APPENDIX 5

  The Great Indian Oil Robbery: Panna-Mukta and Tapti

  By Paranjoy Guha Thakurta

  The Week, a weekly English news magazine, carried a cover story in its issue dated 29 June 1997 on how a clutch of privately owned companies in connivance with officials in the Ministry of Petroleum & Natural Gas and the Oil and Natural Gas Corporation (ONGC), duped the nation of huge sums of money. These firms were awarded lucrative contracts by flouting tender procedures but also by manipulating figures of oil reserves and investments that were made by ONGC. This story, broken by Rajesh Ramachandran, pointed out how facts were deliberately manipulated to enable private corporate entities to win contracts to extract crude oil for profitable fields at the expense of the national exchequer.

  The Indian government allowed private companies (both foreign and Indian) to enter the area of oil exploration and production of crude oil and natural gas in July 1991 reportedly under pressure from the World Bank. The ONGC had applied for a loan of $450 million to the World Bank for a project to reduce gas flaring in the Bombay High oilfields off the west coast of India. The World Bank agreed to disburse the loan under a condition that India should open up the oil sector and allow private companies – domestic as well as foreign – to enter into joint ventures with two public sector companies, ONGC and Oil India Limited (OIL). The government of India agreed to this proposal in return for the loan and the Ministry of Petroleum & Natural Gas invited tenders in August 1992 to develop 43 medium and small-sized oil and gas fields that were then controlled by ONGC and OIL. The government also leased out certain fields that had already been developed by ONGC and OIL. These two public sector companies had not just invested large sums on first, exploring and then, developing these fields but had also started extracting crude oil and gas from these fields.

  According to the terms laid down by the World Bank, the government invited bids for 12 medium-sized oilfields, six each of which were under 20-year leases with ONGC and OIL. Contracts were signed for five of these oilfields in 1994 when Captain Satish Sharma was the Union Minister in charge of the Ministry of Petroleum & Natural Gas. A consortium formed by Reliance Industries Limited (RIL) with the controversial American multinational Enron won two of these contracts. These contracts mandated Reliance-Enron to share production with ONGC at the Panna-Mukta oilfields and the Mid and South Tapti gas fields. It was claimed that the leasing of the Panna-Mukta oilfields off the coast of Gujarat to the Reliance-Enron consortium resulted in a loss to exchequer of an amount in the region of Rs 5,000 crore (close to $1 billion at the exchange rates that were prevailing in 2009).

  Another contract to share production with ONGC for the Ravva oilfield in the Krishna-Godavari basin was won by Videocon Petroleum along with its Australian and Singaporean partners. Similarly, the contract for OIL’s Kharsang oilfields in Arunachal Pradesh was won by Enpro India, Geo Enpro and their partner from Panama. As per the production sharing contracts entered into by the two public sector oil companies with the private firms, 40 per cent of the oil produced in these fields would go to ONGC and OIL while the remaining 60 per cent would go to the partners in the respective consortia. The government would also have the option to buy all the oil produced. Though all the contracts were for lease periods lasting 25 years, no medium-sized oilfield normally remains in production after 15 years of exploitation. Therefore, in effect, what was done was to virtually sell (and not just ‘lease’) the oil and gas fields to the private firms.

  Though ONGC had spent large sums of money in the exploration and production of these oilfields, it was never compensated for the same when the fields were leased out. The office of the Comptroller and Auditor General (CAG) of India which examined the deals in detail found to its great astonishment that the Ministry of Petroleum had been rather magnanimous in writing off a sum of Rs 676.52 crore which the Reliance consortium had to pay for the fields.

  Moreover, the Ministry had grossly underestimated the quantity of oil in the Panna-Mukta oilfields when it invited bids for the fields. As per data available with the ONGC, on January 1, 1992, Panna had 32.13 million tonne of oil and oil equivalent of gas while Mukta had 22.12 million tonne. However, in the initial information docket supplied to the bidders, the Petroleum Ministry had put Panna’s reserves at 16.41 million tonne of oil while the reserves of Mukta were placed at 14.94 million tonne which put together amounted to 31.35 million tonne. Moreover, it was not clear whether the oil equivalent of gas in these two oilfields were taken into account while preparing the information docket. Later, in the final documents supplied to the bidders, 17.35 million tonne out of the 31.35 million tonne of oil in the two fields mysteriously evaporated. The final oil reserve figure given to the bidders was just 14 million tonne – 9.5 million tonne in Panna and 4.5 million tonne in Mukta – which was ridiculously low given the fact that even Reliance-Enron in their bid had estimated the oil reserve in the two fields at 20 million tonne.

  The CAG report stated that ‘estimates of the oil reserves underlying the whole exercise of awarding these contracts were not properly assessed and kept varying at different stages of the process’. The report added that ‘the bid evaluation was based on the lowest of these estimates and not on those given in the tender documents’.

  While handing over the Panna-Mukta oil and gas fields to private players, ONGC incurred large losses in more ways than one. Even after the contract with Reliance-Enron was finalised, ONGC had spent around Rs 240 crore on erecting main decks, pipelines, jackets and other infrastructure facilities, an investment that was never recovered. The CAG in its report was critical of the fact that ‘this investment was not taken into account while awarding the contract and was an unintended benefit to the successful bidder (Reliance- Enron)’.

  According to the terms and conditions of the contract, ONGC had to complete these facilities at its own cost which would not be recovered from the joint venture. At the same time, the private companies were reimbursed all the money that they had spent on developing the fields before they were awarded the contract. The Reliance-Enron consortium was allowed to recover from the project revenues their expenses up to the date of the signing of contract which amounted to $7,50,000 but similar expenses amounting to Rs 7.58 crore incurred by ONGC in the Mukta field after the award of the contract were not made reimbursable under the contract. ONGC had mining leases and petroleum exploration licences for Ravva, Panna and Mukta up to the year 2012, 2006 and 2010, respectively. Its licences for the Mid and South Tapti gas fields were renewable every year. It was mandatory for the new operators to pay a signature bonus to the mining lease holder. This bonus ought to have been negotiated relative to the licensee’s profit, which would have gone to ONGC but for the surrender of the licence.

  The CAG categorically stated that it found no evidence on record of such a procedure having been followed. This implied that the $24.6 million that Reliance-Enron paid for the Panna-Mukta and Mid and South Tapti oilfields was grossly inadequate. Even the CAG could not quantify the money lost by the government on account of the scam. Rough estimates put the loss in the Panna-Mukta deals alone at a staggering Rs 4,500 crore. The figure could have gone up if the losses incurred for developing the 24 oilfields were also
taken into account for which the private operators had no production sharing contracts with the government. As per the data with the ONGC, oil and gas reserves at Ravva as on January 1, 1992 were 23.34 million tonne. If the difference in the price of oil paid to the private companies is the same as in the case of Panna and Mukta, the loss in this deal could be pegged at around Rs 2,000 crore. A similar amount would have been lost in the case of the Mid and South Tapti gas fields, which had 30 million tonne of oil equivalent of gas.

  The Petroleum Ministry was even more magnanimous in disposing off the smaller oilfields. Though some of the oilfields were worth around Rs 18 crore each, the Ministry handed these over to private contractors for a mere Rs. 2.3 crore. Niranjan Pant, the then Director, Commercial Audit, wrote in the annual report (1995-96) of ONGC: ‘The difference has been treated as a loss to the company in the accounts. This fact has not been disclosed.’

  The Petroleum Ministry claimed that these were ‘insignificant’ fields and that the amount spent on them was too small to warrant a disclosure. This was stated despite the fact that the ONGC had been spending Rs 18 crore for drilling oil in these small offshore and onshore fields at that time – even as the public sector company’s office expenditure in New Delhi alone was in the region of Rs 20 crore. ONGC insiders have claimed that the private companies had nothing new to offer – they would just extract or lift the oil and gas from the wells sent it to ONGC for processing. As of May 1996, the government had been buying oil from ONGC at Rs 1741 per tonne but it started paying approximately Rs 4,545 per tonne (the international price for oil that was then prevailing) to the Reliance-Enron consortium.