GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  Prasad said the formation of the EGoM had cleared the way for the government to take decisions and that before this took place, RIL ‘did not get any approval’ from minister Deora. He summarised the situation:

  Price approval, utilisation and allocation came from EGoM. The development plan is approved by a management committee that has representatives of operators and government, and both government representatives have to sign on before we can get the green signal. The assets and resources belong to the government, the risks are of the contractor.

  In other words, what RIL was claiming was that it played strictly by the rules. It is, of course, a separate matter altogether that the rules themselves were tweaked to favour the company.

  Prasad discreetly touched on the spat between the Ambani brothers. After the Supreme Court judgement, RIL, headed by Mukesh, kept emphasising that ‘gas is a sovereign property’ and that the company did not ‘own’ the gas. This argument had helped Mukesh immensely in the Supreme Court. It suited the company to contend that it was not at fault for not being able to provide gas to Anil’s Dadri power project. When the BS journalists asked Prasad if Mukesh was not aware of the nature of ownership of the gas, a national resource, at the time of signing the family MoU, he observed:

  We signed the family MoU, thinking government approval will come later. We did not know the process and the utilisation policy. The PSC did cover issues but what the contours would be, we did not know. The MoU says both the groups will try to get government approval. When you do not know you try to take risks but you hedge it.

  Prasad was asked to respond to the charge that the government administered gas price of $4.20 per mBtu was high since gas prices (in September 2009) were at a seven-year low. He defended this figure at which RIL was willing to sell gas to Anil’s project as ‘competitive’. He put forth an argument that has consistently been used by RIL to justify higher administered prices of gas, that there is ‘always a difference between contract and spot prices’. He spoke of how at a time when ‘contract prices were in $6–7 (per mBtu) range’, spot prices had gone ‘through the roof’. Prasad pointed out that spot prices of imported LNG (liquefied natural gas) were in $22–25 per mBtu range and some spot deals had been struck at $27. He said that certain contracts linked gas prices to the price of oil, but ‘the indexation is not 100 per cent’. He said that when the EGoM approved the price of $4.20 per mBtu, spot prices of gas were much higher at $6–8 per mBtu. Prasad reiterated: ‘I don’t think these comparisons (with spot prices) are fair. I genuinely believe the $4.20 price, compared to other gas prices in India on spot or contract LNG price coming to India, is very competitive.

  Interestingly, as events subsequently unfolded, RIL and its supporters would use the argument that domestic gas prices should be benchmarked to international prices of gas to lobby for a higher price of gas in the run-up to the renewal of the company’s contract with the MoPNG which ended on 31 March 2014. Another argument that was put forth by various sections was that high gas prices were needed to provide a greater incentive to private companies to explore and extract more gas.

  When RIL’s president and COO (business operations) B.K. Ganguly spoke to this book’s lead author, he sardonically wondered if India could import gas from ‘Arab sheikhs’ at $13 per mBtu without subsidies becoming an issue, why should a hue and cry be raised about increasing domestic gas prices which would result in higher prices of fertilisers and electricity (and government subsidies on the prices paid for these by consumers). He pointed out that the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline would bring gas to India at $13.5 per mBtu. Despite what Ganguly and other RIL spokespersons contend, the pricing of gas is a far more complex topic. The slew of issues relating to the pricing of gas has been, and continues to remain, the subject of considerable controversy and contention. This topic was periodically hitting the headlines of newspapers even as this edition of the book was being completed in March 2014 and will be dealt with in some detail in later chapters.

  The CAG report found that RIL had signed major equipment procurement contracts during 2006–7 and 2007–8 that were on the basis of single financial bids. The government auditor could not, thus, ascertain the ‘reasonableness of costs incurred, primarily due to lack of adequate competition’. In addition, there were significant revisions made in the ‘scope/quantities/specifications’ of the contracts after price bids had been opened. This had ‘adverse implications for cost recovery’ and what the government would earn. In the case of the MA oil field, the auditor ‘found that well before submission, let alone approval, of the Field Development Plan (FDP) and Mining Lease (ML) application, the operator had placed orders for various critical items required for development activities/ production facilities from 2006 itself’. The CAG report added: ‘We also found serious deficiencies in the award, on a single financial bid, of a ten year hiring contract for $1.1 billion for a Floating Production, Storage and Offloading (FPSO) vessel from Aker Floating Production (AFP).’

  The auditor came across instances, where multiple vendors were pre-qualified but when technical bids were received, ‘all vendors (except one) were rejected, and the contract was finally awarded on a single financial bid’. Such disqualification of vendors, the CAG felt, restricted competition ‘which is not in accordance with the spirit of the procurement procedure given in the PSC’. The government auditor went on to suggest changes in the procurement procedure for high value contracts (see Appendix 6).

  Ganguly argued that the CAG should not have been critical of the procurement processes followed by RIL, nor sought an in-depth review of 10 contracts, eight of which were awarded to the Aker group on a single-bid basis. Ganguly claimed his company had no choice as ‘only one party (in this case, Aker) was technically qualified’. He was at pains to record that ‘not a single violation of the PSC was pointed out by CAG’. As already stated, it was a separate matter altogether that the PSC was itself inadequate and flawed, as the CAG explained in great detail.

  The CAG had also looked at the role played by the regulatory authority, the DGH, and pointed out instances where there were clear conflicts of interest. The DGH had both an upstream regulatory function as well as a function of rendering technical advice to the government. The CAG recommended that ‘the functions currently discharged by the DGH be clearly demarcated’, further suggesting: ‘The technical advisory and related functions should be discharged by a body completely subordinate in all respects to MoPNG. Functions of a regulatory nature should be discharged by an autonomous body, with an arm’s length relationship with GoI.’

  The CAG report looked extensively at the issue of non- relinquishment of the areas. It examined the issue chronologically over 20 pages and pointed out violations of the PSC. The CAG did not find the response of the ministry to the draft report to be tenable, and dismissed it as merely repeating the ‘opinions of the contractor’. Even though it did not say it in so many words, the report of the government auditor clearly pointed out that officials of the DGH and the MoPNG seemed to be hand-in-glove with RIL.

  When RIL’s Ganguly spoke to this book’s lead author about the CAG’s allegations, he pointed out that the DGH had not initially accepted RIL’s view that similar geological structures existed in areas in which the company had not drilled wells. According to the PSC, after each phase of exploration, the contractor is supposed to ‘relinquish’ the areas where there have been no discoveries and give these areas back to the government. Ganguly added that the PSC made two exceptions whereby the contractor (RIL) could retain (1) the discovery area and (2) the development area. On allegations of ‘land grab’—that is, the company’s alleged refusal to relinquish development areas—Ganguly took recourse to the argument that RIL was taking risks and investing billions of dollars by exploring for hydrocarbons in the area. He further said that RIL had drilled two wells—D6-BA1 and D6-BA2—as part of the R-Cluster development in the KG-D6 field, and there were two other wells which were not inclu
ded in the original development plan. The dispute arose as to whether the latter two wells should be considered to be part of the ‘development area’ proposed by RIL. He said: ‘There were cost implications for (drilling) these (two wells).’

  After this conversation with Ganguly, the situation got even more contentious. The Press Trust of India, the country’s leading news agency, reported on 19 May 2013 that ‘under pressure’ from the DGH, RIL had agreed to conduct separate tests to confirm three natural gas finds in the KG-D6 block but that the regulator was ‘not impressed’ and wanted ‘the discoveries to be taken away from the company’. The technical regulator had since February 2010, not recognised the wells drilled in the D29, D30 and D31 areas as ‘discoveries’ as RIL had reportedly ‘not performed its prescribed separate tests to confirm the finds’. On 2 May, RIL agreed to conduct three separate ‘drill-stem tests’ instead of a single test that it had proposed the year before and sought approval for a spending of $93 million during the fiscal year that would end on 31 March 2014.

  On 10 May, responding to RIL, the DG, DGH, R. N. Choubey wrote to the seniormost bureaucrat in the ministry Vivek Rae stating that the ‘the time period for submission of DoC (Declaration of Commerciality) for the three gas discoveries i.e. D-29, 30 & 31 has already expired’. Choubey added: ‘There is no provision in the production sharing contract to allow (for) additional appraisal time beyond the stipulated appraisal period. Additionally, the exploration period of the block is already over.’

  The DG, DGH, reminded petroleum secretary Rae that the DGH had recommended that RIL relinquish 6,601 square kilometres or 86 per cent of the total 7,645 sq km area in the KG-D6 block, as the company had exceeded the time that had been allotted to it for developing the area. The area the DGH wanted RIL to give up included the three new finds as well as five other discoveries with at least 1.15 tcf of ‘known recoverable gas reserves’ that were valued at $4.83 billion. ‘The proposed cost of carrying out DST (drill-stem tests) in the three wells ($93 million) is also a matter of concern as this expenditure could have been avoided had the testing in the wells been carried out at the time of discovery itself as per (the) PSC requirement,’ DG, DGH Choubey categorically stated, advising the petroleum ministry to take a ‘suitable decision’ on RIL’s proposal to undertake DST in three wells ‘which will amount to extension of appraisal period for which there is no provision, and which will have a bearing on relinquishment of (the) balance area’.

  RIL claims that the D29, D30 and D31 blocks together with another find in the R-Series cluster, D34, together holds ‘in-place’ reserves of 2.21 tcf of gas and the four could together produce up to 20 mscmd. A ‘block oversight committee’ headed by DGH had, however, segregated D29, D30 and D31 and approved only D34 with 1.267 tcf of reserves that can produce 14.68 mscmd of gas from 11 wells for eight years on an investment of under $2.4 billion.

  Many observers argued that the report of the CAG that was critical of the contract signed by the government with RIL had a major ‘flaw’. Unlike the government auditor’s reports on the manner in which 2G telecommunications spectrum had been priced and allotted or the way in which coal acreages were given to various companies (the so-called Coalgate scandal), the CAG’s report had not quantified the losses to the exchequer. These observers stated that by refusing on this occasion to quantify the losses to the exchequer, the CAG had inadvertently played into the hands of the government. At a time when scams were surfacing at a disturbing rate, this was one scandal which did not come with a huge number attached to it. (The CAG had claimed in its November 2010 report that the presumptive or notional losses in the 2G scam could be as high as Rs 1,72,000 crore or around $30 billion at the then prevailing exchange rates, while the corresponding figure in the Coalgate scandal had been calculated at Rs 1,86,000 crore or approximately $33 billion in the CAG’s report presented in Parliament in August 2012.) It was thus difficult for the government’s detractors to attach an appropriate amount as losses to the exchequer in the case of the KG gas controversy. The CAG report was, after all, essentially a long roster of irregularities. The numbers would, of course, be added up, but that was to happen later.

  Even in September 2011 when the CAG report was tabled in Parliament, most political parties in the opposition remained silent on the issue. The exception was the CPI(M) whose MP Tapan Sen had been following the issue from the beginning. Besides him, no other lawmaker raised even a murmur at that juncture. The CPI(M) issued a statement that was virtually ignored by large sections of the media. The party demanded the following on the basis of the CAG’s findings:

  Taking back 95 per cent of the exploration area illegally retained by the RIL in gross violation of the PSC.

  Imposing penalties on RIL for gold-plating contracts and cornering almost the entire share of the profit petroleum.

  Immediate prosecution of the former DGH and other involved officials.

  Investigation into the role played by the petroleum ministry.

  Bringing major modifications in the hydrocarbon PSCs to prevent such misuse.

  Review of NELP.

  Tapan Sen, a Rajya Sabha member and trade union leader, had been following developments relating to the KG gas deal from the beginning. He had followed every twist in the tale. The CAG report only confirmed the lacunae he had been pointing out. Having been on the Parliament’s Standing Committee on Petroleum and Natural Gas, in an interview with Rediff.com shortly after the CAG report release, he stated:

  Through competitive bidding in the National Exploration Licensing Policy, the major part of the Krishna Godavari Basin had gone to Reliance Industries and its partner Niko Resources Ltd. They discovered gas in the KG Basin. I was keeping a close watch on the time given to them, how the explorers were working, how gas was found and how the government would ensure that, finally, gas reaches consumers at an affordable price.

  I kept a close watch on the whole chain of development. The entire scam of KG Basin came to light through a Parliamentary question first asked on December 12, 2006 by me and my colleague, the late Chittabrata Majumdar. It was a joint question.

  We had got the information that in the KG Basin case, Reliance had placed a field development plan to produce 40 million standard cubic metres per day (mscmd) of gas. They placed the expenditure of $2.47 billion.

  After some time they submitted a renewed field development plan claiming that now they will produce 80 mscmd at an expense of $8.84 billion. So production capacity doubled, but expenditure was inflated almost four times.

  Sen had his take on why this had happened. He further stated:

  Mukesh Ambani’s RIL backed out of the NTPC agreement. Different games were played at different times. Initially, when both (Ambani) brothers were together RIL had quoted a certain price, but when they fell out, the equations changed. Anil Ambani said he should be given gas at the price agreed with NTPC. So RIL backed out from NTPC, too. RIL didn’t bother about NTPC, which is generating power for the nation.

  The CPI (M) MP did not, however, lay the blame squarely on RIL. Sen added instead:

  I don’t blame Reliance. If I get the opportunity to steal, am I going to leave it? It is the duty of the government to see that nobody takes people for a ride. There can be some defaults or mistakes in deals. This is not such a case. All the facts were before the government . . . there were whistleblowers within the system, but the government turned a blind eye to them and took the decision to favour Reliance.

  Suddenly, it seemed as if the events of the winter of 2010 were revisiting RIL. The output at the KG-D6 fields dipped in the third week of September 2011. RIL produced 44.5 mscmd of natural gas during the week ending on 5 September as against 44.8 mscmd produced a month earlier. The slanging match continued too. Minister of state for petroleum & natural gas R.P.N. Singh had stated in Parliament the previous month, that output from KG-D6 was now short of the 70.39 mscmd envisaged as per the field development plan approved in 2006. ‘The contractor (Reliance) was advised by (oil regulat
or) DGH to expeditiously drill more development wells in D1 and D3 fields as per FDP in order to enhance gas production in KG-DWN-98/3 block,’ he stated.

  The question then arose as to whether the government would take RIL to task. In mid-November came news reports that the MoPNG was planning to link recovery of costs to capacity utilisation at the D6 block. The move was probably aimed at protecting the exchequer’s share of future revenue from the sale of gas from the block. The Mint reported on 21 November 2011 that the petroleum minister S. Jaipal Reddy had accepted the solicitor-general Rohinton F. Nariman’s opinion on the issue. Law minister Salman Khurshid was said to be ‘on the same page’ on the issue. Yet, the government seemed to want to play the game outside the rules that existed. Khurshid told the newspaper in a text message: ‘We feel ambiguities are best cleared by arbitration.’ At that stage, RIL seemed delightfully oblivious of the whole matter.

  A notice was served on RIL in November 2011 by the MoPNG to restrict ‘cost recovery’ from KG-D6 based on the lower-than-expected gas output. The catch was that if recovery of costs was linked to capacity utilisation, as much as $1.85 billion—out of the $5.69 billion investment already made—would be disallowed and arbitration initiated to recover it from RIL, the Press Trust of India reported the same day, quoting people close to the development. The news agency did not mention names, but that this information was trickling out from the tickers of a reputed news agency (which usually does not quote unnamed sources unless the sources are trustworthy) was telling.