Three days later, on 11 June 2010, Mukesh decided to jump into telecom, which had been his dream project before Anil snatched it away from him after the split. RIL unfolded a mega-plan to enter the broadband services business. The company’s release stated that it would invest Rs 4,800 crore to buy a 95 per cent stake in Infotel Broadband Services, a successful bidder in all the 22 telecom ‘circles’ (or areas) after the government concluded its public auction of broadband spectrum.
A couple of days after this news, there were reports that both the Ambani brothers, along with their wives and children, had spent almost three days together (between 8 June and 10 June), at the Kruger National Park in South Africa, a venue where the entire family had vacationed in 2000 when their father Dhirubhai was still alive. The Kolkata-based newspaper, the Telegraph (14 June 2010) wrote: ‘Amid the flora and fauna, the two brothers reportedly worked on redefining the contours of their new business relationship, having reached a much-publicized truce just three weeks ago….’
However, the millions of Reliance group shareholders, who had invested in companies controlled by both the brothers, were waiting with expectancy for the big day. This was the day of the annual general meeting (AGM) of the Mukesh-headed RIL on 18 June 2010, exactly five years after the Ambani siblings decided to part ways. ‘With the legal dispute [over gas] behind us, we look forward to [a] harmonious and constructive relationship with [the] Anil Dhirubhai Ambani Group,’ Mukesh reiterated at the AGM. He added that his company was drawing up ‘specific plans for mega-investments’ in the power sector, including renewable energy, such as clean oil, solar and nuclear. The message was clear: Mukesh was telling the world and his brother (literally), as well as the government that he would now enter into two areas hitherto reserved for Anil under the old non-compete agreement, namely, telecom and power. Finally, the companies headed by the brothers had to adhere to the specific directions of the Supreme Court: Mukesh’s RIL and Anil’s RNRL had to ink a new gas sale master agreement in accordance with extant government guidelines within six weeks.
Had the wheel turned full circle? Not really. As is commonly perceived about the Ambanis, the victor had forced the loser to patch up, join hands, and beg for survival. However, as the two opponents in this case were members of the Ambani family, both sides claimed that they had won the war, and had forced the other brother to fall in line and publicly declare peace. First, the Mukesh camp explained that it had ensured a complete, and clear, victory on the gas issue. Apart from the Supreme Court judgement in favour of RIL and the government, on 19 May 2010, the Union cabinet had more than doubled the administered prices of natural gas to $4.20 per mBtu, against an earlier price of $1.82 per mBtu. As is explained, the government’s logic was that state-owned companies like the ONGC and OIL, which were forced to sell gas at the lower prices, were incurring huge losses on their sales of gas and therefore the higher price was crucial to ensure their commercial viability. Government officials added that this was a huge step towards ‘reforms’ in the oil and gas industry in the country as the decision pegged domestic gas prices of all producers, public and private, to the global open market. It was argued that the revision in gas prices would create a level playing field: public sector undertakings (PSUs) like ONGC would be able to compete on an equal footing not just with Mukesh’s RIL (which had already been allowed to sell at the higher price of $4.20 per mBtu) but also giant multinational oil corporations such as Cairn and Exxon.
What cannot, however, be denied is the simple fact that the move to hike administered prices of natural gas eminently suited the interests of RIL, even if the decision translated into higher power tariffs and fertiliser prices. The then power minister, Sushilkumar Shinde, acknowledged that the price of gas-based power could now rise by around Rs 1.20 per kilowatt hour. The price of compressed natural gas (CNG) sold to automobiles in Delhi and Mumbai rose by roughly Rs 6 per kilogramme, while piped gas for households rose by around Rs 4 per cubic metre. On 21 May, the politburo of the Communist Party of India (Marxist) opposed the decision to increase gas prices at a time when inflation was running high. The party’s statement alleged this had been done to bring the price of gas produced by ONGC ‘in line with the price approved by the government for the gas produced by RIL’. In effect, what the CPI(M) claimed was that the government’s decision made it that much easier for RIL to find buyers for its gas at $4.20 per mBtu as it would no longer have to compete against PSUs like ONGC, which were supplying gas at lower prices. This point was important because throughout the legal battle between the Ambani brothers, Anil had claimed that there was surplus gas in India, and that Mukesh’s RIL would find it difficult to find buyers for its gas from the KG basin at the higher price.
The most important aspect of the hike in administered prices of gas was that a not-so-subtle message had gone out to all in industry (whether private or state-owned): it was made amply clear (if it was not already) that, henceforth, RIL could play a major role in influencing the price of gas.4
Days after the 7 May 2010 Supreme Court judgement, P.M.S. Prasad, head of RIL’s exploration activities, said that the company had discovered smaller gas reserves in the KG basin, apart from D6. He, however, added that it would be unviable to exploit them unless gas prices were raised to $6–7 per mBtu. By early-2013, RIL was demanding that the new administered price of gas be hiked to as high as $14 per mBtu after its contract expires at end of March 2014. An RIL source told us that the government of India had accepted that in view of increases in various costs, like the cost of leasing rigs, the price of natural gas in India would exceed $6 per mBtu in the near future. This implied that as and when Anil’s Dadri power plant is ready to receive gas from RIL, and the government allocates gas supplies for the project (which may or may not happen), he may have to pay an even higher price for the fuel than $4.20 per mBtu. Clearly, Anil’s two-pronged strategy was either to buy gas cheap from Mukesh and sell it at a higher price to his own and/or other power plants to make a killing or to become one of the cheapest power producers in the country. However, both parts of the strategy failed.
More importantly, after the Supreme Court order, a huge question mark hung over the establishment of the largest gas-fired power plant (in India and Asia) at Dadri. The court had now empowered the government to fix gas prices and there was just no way Anil could have persuaded his older brother’s company to sell gas at $2.34 per mBtu as had been specified in the 2005 family MoU. The only solution available to Anil was to ensure that his brother seriously acts on the Supreme Court’s direction to them and ensure that the new GSMA be in the interest of shareholders of both RIL and RNRL, numbering three million. If Anil was to transform the legal setback into an opportunity, he needed to stop sparring with Mukesh, and sit across the table with him. He had to arrive at a new agreement on the utilisation and pricing of natural gas in consultation with the government. This was one of the reasons that forced Anil to make the first moves to mend fences with his elder brother.
In addition, Anil had to act quickly on implementing the other power projects (coal-based and hydroelectric, with a total envisaged installed capacity of 23,000 megawatts) that were in his bag, including three ultra mega-power projects. This was critical for Anil to prove his mettle as a builder of mega-projects as he had a long way to go, having achieved at that time financial closures for only 17 per cent of the proposed power generation capacities that he intended to set up. It was time for Anil to implement these ambitious power projects rather than expend time, money and organisational energy sparring with his elder brother. Now the new non-compete deal with his brother could help him move in this direction.
Ever since the nixed merger with MTN of South Africa, Anil’s telecom venture has faced a great deal of ‘competitive’ heat. With Mukesh entering the broadband wireless space, he needed the readymade infrastructure, in terms of wireless towers or an optic fibre network, to roll out services quickly. The two decided to bury the hatchet and strike a deal to share infrastructur
al facilities which was formally announced in June 2013. Anil’s financial constraints and the strategic compulsions to restructure the operations of Reliance Communications Ltd, was an important reason that forced him to come to the table for peace talks after the Supreme Court judgement on the gas issue, claim sources close to Mukesh. It is indeed true that the brothers patched up because the telecom infrastructure sharing deal made good business sense to both. But to also interpret the move as signifying the end of the bitter internecine fratricidal battle would not be correct. Many differences continued to simmer beneath the surface, the most significant one being Anil’s inability to make significant progress in setting up gas- based power projects.
Anil’s side obviously had a different spin on the sequence of events. According to this version, touted in several television shows by journalists and experts close to Anil, the removal of the old non- compete clauses was more beneficial to Mukesh. To begin with, Mukesh’s RIL had, for decades, thrived on backward integration in the oil and gas, petrochemicals and textiles sectors that enabled it to become self-sufficient in acquiring inputs and raw materials. This, in turn, led to a lowering of production costs, thereby throttling its competitors. RIL’s strategy was also anchored by the establishment of mega-sized projects in order to achieve market domination through monopoly power.
If all the important policy decisions relating to the hydrocarbons sector were to be taken by politicians in power and their loyal and pliant bureaucrats, as the Supreme Court order stated, a loss of control in backward linkages (in pricing and allocation of gas) could make it that much more difficult for a company like RIL to continually lower input costs along the entire production chain. In other words, RIL would obviously have preferred a situation in which it had control over gas prices with minimal or no government intervention. But Mukesh realised that it was quite unrealistic to expect such an ‘ideal’ situation. He, thus, had no choice but to continue to lobby with the government and make sure that friendly ministers and bureaucrats were in position to ensure that official policy—on pricing and allocation—never turned hostile against his company’s interests.5
The question was whether Mukesh had gone too far in putting his brother in place, so far as to make his own position vulnerable. He ensured that Anil did not get gas from the KG basin for his Dadri project but in the process also brought about greater government control over this sector. This issue was pertinent because Mukesh had envisaged that he would use gas from the KG basin to fuel his various captive units (refineries and gas-cracking petrochemical plants), but now it was difficult for him to pursue this strategy, which would have enabled total backward integration (to be in control of the entire manufacturing chain from gas to polyester and plastics). Now the last link in the chain (natural gas) remained incomplete.
Besides, the rivalry has taken a financial toll on both brothers. It is estimated that each brother spent around Rs 50 lakh a day (including fees for high-profile lawyers like Ram Jethmalani, Harish Salve and Abhishek Manu Singhvi) during the 26 days of hearings that took place between October and December 2009; this does not of course account for from the sheer time and effort expended on the legal battle. Although the May 2010 Supreme Court judgement was in favour of Mukesh, he soon started facing a different set of problems. RIL’s diversification into retail was making tardy progress and the special economic zones (SEZs) he had hoped to establish in Haryana and Maharashtra had had to be abandoned. The global financial crisis had ensured that he would have to go slow in implementing his plans to get into new areas such as healthcare and pharmaceuticals. In other words, apart from expansion in his core areas, petrochemicals and gas, the elder Ambani was finding it tough to expand his business footprint.
When RIL held its AGM on 18 June 2010, it had an investible surplus of Rs 20,000 crore and this figure would rapidly increase as the company now had government permission to sell gas at a higher price, thereby hiking its overall profits. Analysts estimated that over the next 10 years, RIL’s gas business would earn more profits than all the other businesses put together. A few weeks earlier, on 23 May 2010, it had been formally announced that the siblings had decided to patch up, resulting in rise in prices of shares of most of the companies controlled by both the brothers.
Leading politicians and government officials let it be known to the Ambani brothers that their fight had not only hurt their own image, but that of the government as well. As already mentioned, their skirmish had resulted in at least one top bureaucrat, V. K. Sibal, former head of the directorate general of hydrocarbons, losing his job. Another former bureaucrat, Pradip Baijal, who had acted as head of the Telecom Regulatory Authority of India (TRAI) and reportedly almost become the chairman of the Petroleum and Natural Gas Regulatory Board, had to go on the defensive. The sibling rivalry also rocked the chairs of at least two cabinet ministers in the Manmohan Singh government, petroleum minister Murli Deora and Union minister for communications and information technology Andimuthu Raja on account of the leak of the infamous Nira Radia recordings to the media. Nira Radia was a high-profile lobbyist, whose public relations firms handled corporate communications and government liaison for two of the most powerful corporate groups in India, those headed by Ratan Tata and Mukesh Ambani. The recordings which were leaked were of conversations involving Radia and Minister Raja over the allocation of spectrum and his reappointment in the second UPA government in May 2009.
The tapes appeared to provide prima facie evidence that Radia, acting on behalf of the Tatas, had tried to influence Raja. The Tata group was forced to issue a clarification that although Radia handled lobbying work for the group, there was no illegal exchange of money involved in her activities and that their objective was to ensure a level- playing field for all operators in the telecom sector. It was suggested by some that the leak of the recordings of the Radia conversations was the handiwork of the rivalry between the Ambani brothers.
Besides the telecom sector, the business interests of Mukesh and Anil clashed in the area of energy. Whereas Anil has confined his interests to coal-based energy (since his gas-based power plants did not take off), like Mukesh, he is reportedly serious about getting into nuclear power when the Indian government opens this sector to private entrepreneurs. Sources close to Mukesh claimed that nuclear power, apart from being a lucrative business, indirectly allows private corporate groups to participate in, and influence, security and diplomatic issues. Even while Dhirubhai was alive, he had actively supported efforts at ‘Track II’ diplomacy between India and Pakistan: RIL’s giant petroleum refinery is located at the port town of Jamnagar, not far from the international border. Some of this was conducted through the Observer Research Foundation, currently headed by a former bureaucrat, Sunjoy Joshi, who, significantly, had worked in the petroleum ministry when the KG gas deal was being worked out.6
The unfolding murky saga was clearly far from over.
5
A STORM OVER THE KG BASIN
As 2010 started drawing to a close, few had any inkling that the waters of the KG-D6 reservoir in the Krishna-Godavari basin in the Bay of Bengal would get murkier and the ocean stormier. Towards the end of November, there were reports that natural gas production had dropped by 15 per cent to 45–46 million standard cubic metres per day (mscmd) from 53–54 mscmd four months earlier. The production from the D1 and D3 gas fields—two of the 18 discoveries in KG-D6 block—had apparently dropped due to ‘reservoir complexities’. Reliance Industries Limited (RIL) stated on 30 November: ‘For the last 3–4 months, there has been a gradual decline in output. This is due to reservoir complexities. It was not there in the model we had and is something unexpected.’
In less than a month, on the sidelines of a seminar organised by the apex industry association, the Confederation of Indian Industry (CII) in Kolkata, Atul Chandra, president (operations), RIL, asserted that his company wanted a further hike in the prices of deepwater gas from the current $4.20 per million British thermal units (mBtu). He told Business
Standard (23 December 2010):
Considering the current oil and gas prices and the kind of investment risk involved in exploration of deepwater gas, the price should be higher. I would not like to comment on what should be the price, but it has to be much higher. About five years ago, the drilling of a well would have cost us around $30 million. It has increased to $100-125 million. Current prices certainly hurt, and affects more aggressive expansion plans.
The squabbling over the price of gas was just beginning—all over again. Every few weeks, contradictory reports were put out. On 11 January 2011, the director general of the directorate general of hydrocarbons (DGH) S. K. Srivastava insisted to journalists that RIL would be able to produce 60 mscmd of natural gas from the KG-D6 fields by April. ‘They (Reliance) are producing natural gas from 18 wells currently. Two more wells have been drilled (but not put on production) and another two are expected to be finished by March. Once all 22 wells come on stream sometime in April 2011, gas output will again touch 60 mscmd’ (Press Trust of India, 11 January 2011).
On 22 January 2011, RIL posted its highest quarterly profit in three years. The net profit of the conglomerate met the expectations of stock market analysts and was up by 28.14 per cent at Rs 5,136 crore against Rs 4,008 crore during the corresponding quarter in 2009–10. But the company’s results came with a bit of bad news tucked away somewhere in the fine print—natural gas production from KG-D6 fell 12 per cent over the corresponding quarter in the previous year to about 53 mscmd. The bad news turned worse when Niko Resources Limited, the Canadian partner of RIL in the KG project, revealed on its website that the low gas production would continue for at least one more year. Niko made the statement on its website. On 17 February, Niko’s chief financial officer Murray Hesje, based in Calgary, Canada, was quoted in media reports saying that the company was not aware of its partner RIL’s plans for the KG-D6 block and also the reasons for the budgeting delays. As rumours started doing the rounds, RIL informed the stock exchanges on 19 April:
GAS WARS: CRONY CAPITALISM AND THE AMBANIS Page 13