However, there was also always the conditionality in NELP that the selling price would not be determined through cosy private or secret deals but transparently through a process of ‘price discovery’ in the market by buyers putting out global tenders and sellers bidding in competition with each other. Of course, government approval for pricing had to be secured – but only for government to satisfy itself that the price discovery process was transparent and not rigged. For the first seven rounds of NELP bidding, extending from 2000 to 2008, it was clear that government would not set the price or disallow any particular selling price – lower or higher than the valuation price – but base its approval essentially on the satisfaction that the selling price, whatever it was and however much at variance with the valuation price, had been arrived at openly, transparently and through the market.
This commitment to the market, not the government, determining the sale price of NELP gas was not only reiterated over and over again in Parliament – inter alia by me as Petroleum Minister – it was also reiterated in the terms of reference of the Committee set up in August 2006, a few months after I was removed from the Ministry to – quote -- ‘formulate transparent guidelines for approving gas price formula/basis’. Please note that the very title of the Committee precludes it from interfering in the market determination of the selling price of gas, which is the sine qua non of the NELP; its role was limited to preparing transparent guidelines for determining the valuation of gas. The terms of reference underlined that – and I quote again - ‘the contracts provide freedom to contractors for selling of gas in India’ and added that it is ‘for the purpose of valuation of natural gas for computing cost petroleum, profit petroleum and royalty’ – unquote -- that – I quote again -- ‘contracts require the approval of the government on gas price formula/basis’. For no other purpose than valuation, and certainly not for pricing, does the government come in.
The problem is that natural gas can only be transported by pipeline and obviously it is only those who have access to the pipeline who can become either suppliers or buyers. Necessarily, therefore, tendering for gas supplies, and, thus, for transparent price discovery, is limited to such buying and selling entities as are on the gas supply network; that global tenders become in effect, limited tenders – until such time at least as the gas market matures to comprise several sellers, several buyers and a truly national gas grid, a far cry from the present Indian reality. So, situations could arise in which - to once again quote the November 2006 report of the Gas Price Committee -- ‘(where) it was not feasible for the seller to follow open competitive bidding process or the government has reasons to believe that the bidding process followed by the seller is not transparent’ – unquote – that the Committee was required to suggest alternatives routes for determining prices fairly and transparently.
Moreover, it has always been known that the seller would be required to conform to (the) government’s Gas Utilisation Policy – although it must be quickly added that since the Gas Linkage Committee was dissolved in 2003 to emphasize the government’s commitment to dismantling the ‘licence-quota- permit raj’, it was generally assumed that the government’s Gas Utilisation Policy would not stand in the way of the NELP seller not only selling at the market price but also making his own determination as to who to sell to. A Gas Utilisation Policy, quite as stringent as the guidelines followed by the dissolved Gas Linkage Committee, was finally formulated in 2007, a full decade after NELP was announced and after seven rounds of NELP bidding had taken place without a restrictive Gas Utilisation Policy having been announced.
With that background briefing out of the way, let us come to the Anil- Mukesh dispute and the policy changes that have accompanied, coincidentally or otherwise, the unfolding of the dispute, leading, indeed, to (the) government becoming a party to the issues before the court. It is not for me to pronounce on the merits of the dispute, especially as the matter is subjudice and it will not be very long before the Supreme Court pronounces on the validity or otherwise of the Bombay High Court rulings. But facts are facts and should be brought to the attention of this distinguished group.
Just after Reliance struck gas in the Krishna-Godavari basin, the public sector National Thermal Power Corporation or NTPC floated a global tender in 2002 for 12 mmscmd and received a single bid for the supply at US $2.32 per Btu. It was not suggested by (the) government then or subsequently that this was not transparent price discovery by the market as constituted at the time. It is another matter that the Gas Sale & Purchase Agreement is still to be signed. That dispute is also in the courts. For our purpose, we need only note that the price discovery was incorporated in the MoU (memorandum of understanding) signed by the two parties. It formed the exact basis of the family agreement signed in 2005 between the two brothers with the blessings of their mother. While, therefore, the price agreed upon in the family agreement was patently not arrived at through a process of transparent price discovery, the price stated was a replication to the last cent of a price discovered by a navratna(nine jewels) public sector entity through a global tender in the open market.
Perhaps there would have been no rumpus if international crude prices (reflected in international gas prices) had not started moving upwards; at first, fairly slowly from about $25 a barrel in mid-2003 to something over $30 a barrel when I took over in mid-2004, and then boomed though 2006 and 2007 to breach $100 and go on to $150 before beginning to recede to the present level of $60 or so (in September 2009) after the economic downturn set in a year ago, still two to three times the prevailing price when Reliance put in its bid to NTPC. Clearly, it is not in the supplier’s interest to proceed with either the bid price or the replicated price, especially as both capital expenditure and the cost of rigs and other inputs have risen pari passu with the rise in output prices. Also, of course, the notional loss of selling at half the price, and that too almost all of the output for the life of the field, of what would be realised in present market conditions, and that too over the next seventeen years, as stipulated in the family agreement, would run into billions and billions of dollars – which not even the super-rich can afford to lose!
The government too is entitled to rethink its policies in the light of (a) India moving from being woefully gas-deficient to being on the brink of gas self-sufficiency and, possibly, even becoming gas-surplus in the immediate foreseeable future; and (b) international petroleum prices soaring to undreamt of levels when NELP was announced in 1997 and international crude prices were ruling at $10 a barrel.
And the government has indeed dramatically altered the NELP Policy framework, partly by implementing long-pending measures (but in a manner that runs in stark contrast to what was once expected of the direction of economic reforms) and partly by introducing new elements, or significantly amending old ones, in NELP contracting provisions.
I think it might be useful at this stage to sum up – alas, all too briefly – the major changes made between the earliest NELP Product Sharing Contracts signed in 2000 (including the PSC relating to the NELP-Niko bid for KG D6) and the Model PSC now circulated for NELP VIII and subsequent rounds:
No minimum selling price was earlier stipulated; on 12 September, the Empowered Group of Ministers determined a minimum selling price of $4.20 (that is emphatically not a pun on the nature of the decision!): that price applies retroactively to PSCs entered into since 2000. It is almost double the NTPC/RIL price discovery of 2002. It would appear that the $4.20 stipulation relates both to valuation and selling price (or at least, minimum selling price) This minimum selling price provision is backed up by a list of priorities which places fertiliser ahead of power (and is, therefore, detrimental to Anil’s interests, especially as the gas allocations pre-empt all of present gas production for consumers already in operation and privilege the public sector,
including, as per a recent clarification, NTPC)
The PSCs under NELP I-VII provided in Article 21.3 that the contractor ‘shall have the freedom to mark
et gas’; now that freedom is conditioned by the phrase ‘and sell its entitlement as per the government policy for utilization of gas among different sectors’. While earlier too, reference was made to (the) government’s Gas Utilisation Policy, the fact is that no such Policy was enunciated in detail till seven years had lapsed since the first PSC was concluded. The law, of course, should not be retroactively applied. Does that apply too to policy?
The earlier PSCs, such as the one concluded with RIL, provided in Article 21.6.3 that in granting approval for sale – quote – the ‘government shall take into account the prevailing policy, if any [emphasis added], on pricing of natural gas’ – unquote. Without prejudice to the court’s judgment on this matter, we need to note that no such policy was in place at the time the Reliance PSC was signed or the NTPC bid floated or when the Ambani family agreement was reached. Can the provision be retroactively applied on the ground that the relevant Article has now been prospectively amended to read that government approval shall be obtained ‘prior to invitation of price discovery steps by the contractor’?
The earlier PSCs also provided that the government reserved to itself the right to refer pricing issues to the proposed Petroleum and Natural Gas Regulatory Board. That was when no such Board existed. Now that such a Board has been constituted, the new PSC drops all reference to the Board and essentially reserves to the government the right to unilaterally decide all matters pertaining to pricing. Does this constitute a reversal of reforms? More to the point, will this discourage future private sector investors from entering the Indian petroleum exploration and development market? Worse, will it discourage investment decisions by private power producers and others in need of gas by making five-year determinations for the price of gas when investment decisions, involving a six- to seven-year gestation period and another ten years to recoup initial investment, call for stable, long-term contracts for essential inputs? Also, should government interventions be aimed at raising prices for sellers or at keeping prices down for consumers? This appears to be the first case of a government fiat resulting in consumers being asked to pay more for an essential commodity than might have been available from price indications in the marketplace.
Whereas the new PSCs still talk of the ‘arms length’ determination in the market of gas prices, the amended clause 2.7 says the price set ‘shall be applicable uniformly to all the consuming sectors.’ – unquote. That price cannot be lower than the price set by the government but if it is higher – ‘then the higher price would be reckoned for the purposes of government take.’ This provision too would have the effect of government intervention augmenting rather than lowering the price of an essential input.
These large policy issues relate not just to a commercial dispute between two brothers torn by sibling rivalry but fall in the domain of governance and, as in any democracy, are amenable to public discussion over whether the decisions taken constitute good governance or bad governance. The fact that simultaneously two major business houses are going to be affected to the tune of several tens of billions of dollars by the decisions taken does, of course, muddy the waters, but one hopes the Supreme Court will shortly clear the air. Whether the decisions taken and endorsed by the Supreme Court are in the larger national interest will really only be known ex-post facto, but one dearly hopes that recent policy changes will not hamper the emergence of an India secure, self-reliant and self-sufficient in energy.
Thank you.’
APPENDIX 9
‘Review Decision to Increase Gas Price’
Here are excerpts from the report of the Standing Committee on Finance (2012-13), Fifteenth Lok Sabha, Ministry of Finance (Department of Revenue) on ‘Economic Impact of Revision of Natural Gas Price’, Seventy Fourth Report, Lok Sabha Secretariat, New Delhi, August 2013, presented to the Lok Sabha and the Rajya Sabha on 7 August 2013.
Observations/Recommendations
1. The Committee believe that natural gas is a national resource and a public asset; and therefore any discourse on its pricing policy should reflect this principle so that it is used for the larger national good and not for profiteering. In the present economic situation with rampant inflation and a slowdown of the economy, any increase in gas prices will have a derailing effect on the economy generally and the downstream core sectors of fertilizer, power and steel, in particular. The Committee note that with gas production from the KG basin fields falling drastically in the last couple of years due to what the contractor claimed were ‘technical problem’, the core sector of the economy dependent on gas as fuel was forced to either use expensive imported gas or operate their plants at sub-optimal capacities. As production from KG-D6 gas basin continued to decline since April 2010, pro-rata cuts were imposed by Government across all sectors between July 2010 and March 2011; in October 2011, supply to City Gas Distribution (CGD) from this basin became zero and by March 2013, the supply to power sector also became zero. However, fertilizer sector was getting its supplies as per priority fixed by Government. The reduction in gas supplies resulted in several gas-based power plants in the Country getting stranded and becoming NPA. The shortfall in production also resulted in zero supply for the steel sector. As regards the impact of gas price increase on priority sectors, the Ministry have admitted that there would be a direct impact on the prices of fertilizers, as increase in the price of gas by $1 per MMBTU results in the increase in cost of production of urea by a huge Rs. 1384 per MT. It is thus evident that gas pricing has serious repercussions for the economy as a whole, which warrants careful deliberations and prudent decisions.
2. The Committee would thus like to bring into focus the following critical issues and areas of concern arising out of the government’s decision to revise sharply the natural gas price.
i. Deploying the single instrument of price to achieve the multiple objectives of incentivizing domestic gas exploration and production on the supply side and meeting the huge unmet demand for gas at reasonable cost. In this regard, doubts have been raised as to whether a large rise in gas price would at all attract additional investment from home or abroad and relax the supply side constraint. Despite raising the domestic well-head price by almost 300% during the period beginning 2005 till date (from as low as $1.79/MMBTU to $4.20/MMBTU), private investments in the sector and the country’s gas output have actually dropped.
ii. To meet serious challenges that have arisen due to the tendency of contractors to manipulate the investment multiple parameter and controlling production, which adversely affected supply.
iii. To frame a long-term vision based on geo-political developments in the energy sector.
iv. To conduct a scientific cost study in the gas basins warranting/ justifying a higher price. It cannot be a mechanism only leading to windfall / super-normal profits to entities, thereby putting the cost of private profit on society.
v. The rationale for dollar-denominated gas pricing when the revenues are all in rupee and the country has a chronic adverse exchange rate.
vi. Any fixing of input price at a lower level than output price will mean a bloating of subsidies; is the government prepared for a disproportionately higher subsidy outgo in successive budgets for the fertilizer and power sectors and whether this has been factored in the 12th Plan. The extent of its inflationary impact needs to be considered.
vii. The need for consultations with the State governments in this process, as they may have to significantly increase power tariffs to cover the higher costs or drastically raise their subsidy expenditure. The impact on state budgets should be key determinant as well.
vii. The need to consider views of concerned Ministries, Planning Commission, Industry and experts before arriving at the decision.
ix. The counter-productive effect of such large increases in price by forcing consumers of gas to divert to less cleaner fuels, thereby stultifying the gas pricing policy itself.
3. The Committee are constrained to note that no due diligence was done before arriving at the decision to rev
ise gas price. Neither was any cost or impact study done in this regard. in this context, the Committee would recommend that the following aspects should be taken into account as an integral part of any gas pricing mechanism, which has huge impact on various sectors of the economy:
i. At this juncture of our economic development, transitioning from a regulated to a fully market-based system should be staggered.
ii. The Government needs to rethink certain elements in the pricing formula suggested by the Rangarajan panel, which only serves to push the Indian gas price higher than it ought to be. A more realistic price formulation better suited to our current priorities may be evolved.
iii. Secondly, there should be a cap on the suggested price under the formula and for this purpose, there should be a ceiling price. It cannot be the case that gas producers will be allowed to reap unlimited gains in the event of upswing in global prices at the expense of core sectors of the economy.
iv. The Government should also subject gas producers to closer regulation, especially on aspects of cost recovery and technical parameters related to production. A comprehensive technical study on cost estimates of gas production should be conducted for this purpose.
GAS WARS: CRONY CAPITALISM AND THE AMBANIS Page 55
