GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  The activists wanted to know why opinion was not sought from the attorney general when, in 2006, the then petroleum minister Mani Shankar Aiyar had ‘refused to give in’ to RIL’s demand to increase gas price from $2.34 per mBtu to $4.20 per mBtu. They jogged the memory of the journalists present that after Aiyar was removed that year, his successor Murli Deora had acted expeditiously and ‘cleared the files within one month’. ‘By allowing $8.8 billion expenditure, in effect, Deora allowed a future revenue of over Rs 1 lakh crore ($20 billion dollars) for RIL,’ they alleged.

  Kejriwal and Bhushan raised two other important points. What was RIL’s actual cost of production? They pointed out that at the rate of $2.34 per mBtu, RIL had signed ‘contracts with NTPC and RNRL’ for ‘17 years’, which would mean that they would have envisaged making ‘adequate profits’ at that rate. They also offered comparative figures: India was ‘getting gas at $0.9 per mBtu from Oman, gas rates were $1.74 per mBtu in Canada’. They also questioned RIL’s right to divest a ‘30 per cent stake in 21 (out) of 29 oil blocks to British Petroleum’, which in effect had meant selling off ownership rights of gas ‘belonging to the people of India’. So why was Mukesh Ambani so ‘restless’ that Jaipal Reddy had to be ‘transferred out’, they asked and went on to provide an answer: RIL would lose a lot of money if Jaipal Reddy’s order disallowing RIL’s capital expenditure was acted upon. Kejriwal and Bhushan argued, in the first instance, a notice for disallowance of $1 billion expenditure was sent to RIL. This would mean a loss of $2.2 billion (or Rs 11,000 crore) to RIL, if we consider (the) IM ratio. Next year, this disallowance could be $1.5 billion, which would mean a loss of $3.3 billion (Rs 16,500 crore) for RIL.

  They added that the ‘benefits provided to RIL in this case contributed to price rise in (the) power and fertiliser sectors’. The activists demanded that the contract be scrapped and new systems put in place to procure the cheapest possible gas from the same gas fields. They concluded their interaction with journalists with three questions:

  1. Who is running the government? It appears that telecom companies select their own nominee as telecom minister and RIL selects its own person as petroleum minister.

  2. So, is this government being run by powerful corporates?

  3. Is Dr Manmohan Singh succumbing to corporates under some compulsions or out of ignorance? What are the compulsions, if any?

  Predictably, RIL denied the allegations made by Kejriwal and Bhushan. In a terse press release, the company stated:

  The statements made by IAC (meaning India Against Corruption, the organisation with which Kejriwal and Bhushan were affiliated) in the press conference today (31 October 2012) are devoid of any truth or substance whatsoever and are denied. The deepwater exploration project in the KG-D6 basin has deployed the best technical resources... This project has added great economic value to the country.

  The drama was hardly over. Kejriwal and Bhushan convened another press conference a few days later on 9 November, once again attacking not just Mukesh Ambani but his younger brother Anil as well. It was claimed by them that in July 2011, the Indian government had received a list of some 700 people who were holding bank accounts in HSBC (or the Hongkong and Shanghai Banking Corporation) in Geneva, Switzerland, among whom were the Ambani siblings, Mukesh and Anil, besides Annu Tandon, Congress MP from Unnao, Uttar Pradesh, whose late husband Sandeep Tandon was among the officials of the Enforcement Directorate who had raided Tina (née Munim) before she married Anil and then went on to join the Reliance group.

  The following month, Mukesh Ambani, no stranger to litigation, engaged a firm of lawyers to send out a slew of defamation notices to different television channels that had broadcast live the media conference during which Kejriwal and Bhushan had alleged that Jaipa Reddy had been removed as petroleum minister at the behest of the Reliance group. In the seven-page legal notice sent in the middle of December 2012 to over a dozen companies running television channels, RIL’s lawyers demanded ‘a retraction and an unconditional apology in the form approved and acceptable to our clients’ within three days from the receipt of the notice. The tone of the letter was threatening, reminding the channels that ‘telecasting the aforesaid press conferences and repeating the false and defamatory material relating to our clients in the manner aforesaid, your TV channel is in complete violation of the...uplinking...and...downlinking guidelines (issued by the government’s ministry of information and broadcasting) as also in complete and material breach of the programme code prescribed under the Cable Television Network Rules’.

  Kejriwal shot off his own letter to Mukesh Ambani on 22 January 2013 and said that he was ‘perplexed’ by his lawyers’ actions. He said:

  We (meaning Kejriwal and Bhushan) are the real culprits and, if you had to send a defamation notice, it should have been to us. The TV channels merely broadcast what we said. Despite this, instead of sending us the defamation notice, you have sent it to the TV channels. It is evident that your sole purpose of sending this notice was to steamroll the TV channels into subservience.

  Kejriwal went on to state sarcastically that the government of India was intimidated by Mukesh Ambani, since the Congress was in his ‘pocket’, that the party was his dukaan (shop), and had always bowed before Ambani’s ‘bullying’ tactics. He added:

  The Congress kept increasing the price of gas under your pressure and the nation kept wailing. Because of you, the prices of electricity, fertilizer and cooking gas kept rising. ... Because of you many things have become increasingly expensive in India and the people are groaning under the load of these high prices. Do these shenanigans suit you? Do such acts not defame you?

  The hue and cry over the pricing of domestically produced natural gas and about Reliance and Mukesh Ambani making personal gains from a valuable natural resource that is supposed to be owned by the people of India, was not about to die down in a hurry. As this book was being completed in March 2014, this set of issues again attracted considerable media attention and engaged politicians from opposition parties and groups who questioned the decision of the Cabinet Committee on Economic Affairs to effectively double the government administered price of natural gas from $4.2 per mBtu to $8.4 per mBtu.

  On 24 May 2013, CPI MP Dasgupta convened a media conference during which he circulated excerpts from a note dated 14 May prepared for the Cabinet together with a letter he had written to the prime minister. In it he alleged that the ministries of finance, petroleum and natural gas and the Planning Commission were ‘colluding’ to push the price of natural gas from the D6 wells in the Krishna-Godavari basin (that were being operated by RIL) way above what had been recommended by the committee headed by Dr Chakravarthi Rangarajan, chairman of the Prime Minister’s Economic Advisory Council.

  The Rangarajan committee had been constituted in May 2012 when Jaipal Reddy was the petroleum minister. When the panel presented its report in December 2012, Moily had taken charge of the ministry. The committee suggested a near-doubling of gas prices to around $8 per mBtu from the then prevailing level of $4.2 per mBtu as per the terms of the PSC between RIL and the government. According to the note for the Cabinet leaked by Dasgupta, the MoPNG had recommended that the price of gas be increased to around $6.775 per mBtu, well short of the figure of $14 per mBtu demanded by RIL which was the landed price of imported liquefied natural gas (LNG). RIL and its partner, British Petroleum (which had in 2011 bought a 30 per cent stake in 23 oil and gas blocks operated by RIL) had considered the Rangarajan committee’s estimate ‘inadequate’. In April 2013, British Petroleum had held its board meeting in India and on 14 April, BP’s Bob Dudley and Mukesh Ambani had met prime minister Manmohan Singh and Planning Commission deputy chairman Ahluwalia. According to the Indian Express (15 April 2013) the two were in a ‘quest to seek a clear road-map for market-driven gas pricing’ and ‘maintained that the recommendation by the Rangarajan Committee to double the price of natural gas to $8-8.5 per mBtu would be inadequate to bring high-risk deep-sea production’.
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  According to Dasgupta, Moily was going beyond the Rangarajan committee’s recommendations while ‘facilitating’ RIL’s ‘loot of the country’s natural resources’. He claimed that the minister had suggested that the ‘gas price be $8 per mBtu, $10 per mBtu and $12 per mBtu in the last three years of the Twelfth Five Year Plan (2014-15 to 2016-17) and $14 per mBtu in the first two years of the 13th Plan (that is, 2018-19 and 2019-20)’. He added that if Moily’s formula for gas pricing was accepted the government’s ‘subsidy burden would increase in the five-year period by Rs 76,000 crore with RIL’s profits going up by Rs 68,400 crore’.

  The CPI MP then made a serious allegation. Dasgupta claimed that petroleum minister Moily was acting against the advice of his own bureaucrats. He alleged that the secretary (or the seniormost civil servant) in the ministry—Vivek Rae, the bureaucrat in the post was not specifically named—had expressed reservations about the manner in which the officially administered price of gas was going to be increased, not once but three times, but each time the file was ‘returned’. Dasgupta accused Moily of merely ‘copying and pasting’ the suggestions of RIL. He claimed that if the price of gas was increased from $4.2 per mBtu to $14 per mBtu, over a five-year period, the public exchequer would have to bear an additional subsidy outgo of Rs 180,000 crore (around $30 billion assuming an exchange rate of Rs 60 to one US dollar) while RIL would earn an additional profit of Rs 162,000 crore (over $25 billion).

  It was apparent that the petroleum minister had more than a few supporters within the Cabinet. In the copy of the Cabinet note handed out by Dasgupta, the finance ministry was also found to be quite generous in its assessment of what the price of gas should be. The finance ministry headed by Chidambaram had suggested a price of $13.3 per mBtu for 2014-15 and $14 per mBtu for the next two financial years (2015-16 and 2016-17) using the price of liquefied natural gas imported from Qatar through long-term contracts as a benchmark. After deducting costs associated with transporting the LNG to India the ‘net back’ (or comparable) price of gas would work out to $10 per mBtu in 2014-15 and $11 per mBtu in subsequent years. At this rate, it was calculated that the government would end up subsidising the oil companies an amount of Rs 52,500 crore over a period of five years, and that would be over and above the subsidy that would be incurred if the formula suggested in the report of the Rangarajan committee formula was to come into effect, implying an increase in RIL’s profit to the tune of Rs 47,250 crore.

  In fact, Dasgupta pointed out, it was the Planning Commission headed by Ahluwalia that had recommended the switch to an ‘international pricing formula’ for the 13th Plan period as demanded by RIL’. That was not all. There were more ‘sops’ proposed. Dasgupta added that in the interim, the Planning Commission would be comfortable if RIL marketed 10 per cent of its gas output at a ‘market price’ in 2014, with this proportion progressively increasing to 15 per cent in 2015-16 and 20 per cent in 2016-17.1

  So what were these gas pricing formulae all about that had aroused such a great deal of controversy? The Rangarajan panel used an average of two pricing methods to arrive at what is called the ‘wellhead’ (or the price at the head of the well from where gas is extracted) price of indigenous natural gas. Energy expert Surya Sethi—who participated in the writing of the government’s ‘integrated energy policy of India’ in 2006 as the then principal advisor (power and energy) and core climate change negotiator in the Planning Commission between 2001 and 2009—provided a detailed critique of the methodology used by the Rangarajan committee to estimate the price of domestic gas by ‘averaging some numbers from some foreign gas markets’ in an editorial page article published in the Hindu (18 January 2013), a few weeks after the panel had released its findings.

  Here is the technical explanation which is explained in simpler language in the portions in parentheses. An ‘average producer “net back” for Indian imports’ is calculated per month using an assumed value, say $34 per mBtu, representing current cost estimates of liquefaction (or converting natural gas into liquefied natural gas), transportation and ‘sweetening’ (or removal of impurities) of natural gas for a ‘trailing’ (or previous) period of 12 months. This figure is then subtracted from the freight-on-board (or FoB) prices paid by India for import of LNG from ‘different sources over the same period’. Both spot prices and long-term contracts are to be included, as per the panel’s formula. This number, Sethi says ‘is not the average wellhead price of conventional natural gas in the countries exporting LNG to India; nor is it relevant for determining fair wellhead prices for Indian producers of conventional natural gas’. Hence, Sethi asks, does the figure arrived at using this estimate actually represent anything at all?

  The second method used by the Rangarajan committee is also misleading, Sethi argues. Using this method, an estimate is arrived at by weighing spot prices in various international markets. This, Sethi contends, is not appropriate to formulate the price of domestically produced gas that is meant for domestic consumption. The ‘weighted average price to producers in the global markets’ as it has been termed, is to be estimated each month using figures of the previous 12 months. To calculate this number, the Rangarajan panel relies on gas prices prevailing in regional trading ‘hubs’, such as the Henry Hub spot index as the price for all US gas sales, the UK’s National Balancing Point (NBP) spot index for all gas sales in every country comprising Europe and countries that were once part of the former Soviet Union and the ‘average producer net back’ for all Japanese LNG imports (computed on the same basis as recommended above for India) over the same period.2 Here too, the total volume of all gas contracts in the respective jurisdictions are to be included. Sethi questions the relevance of this methodology for pricing Indian gas.

  After the two numbers have been arrived at, the average of these two numbers is then taken as the price. Sethi lists various reasons why this approach is deeply flawed. First, natural gas varies widely in its characteristics across different regions, countries and sources and the three regions covered have distinctly different pricing mechanisms for gas. Second, the ownership structures of the gas-producing industry make it difficult to fathom at what point in the value chain, profits are being booked and to what extent. The third point to note is that gas supply contracts vary widely from spot purchases to long-term sales and consequently, the criteria used to arrive at a price vary widely from contract to contract. Fourth, the structures of different regional gas markets and related infrastructure (including pipelines for distributing gas) are quite different across jurisdictions and impact gas prices significantly. Finally, Sethi points out that non-price elements that are not transparent, geo-political considerations and security of supply concerns, all play an important role in the final pricing of gas. He analyses the different indices used by the Rangarajan committee and points out that the Henry Hub benchmark index is available for ‘next day’ delivery and up to 108 months in the future. Similarly, the more recent NBP benchmark index permits trading of gas as a commodity on spot as well as on a long-term basis. However, importantly, he states that the physical trade that actually occurs at the typically quoted Henry Hub or NBP price is minuscule compared to the overall global trade in gas.

  E.A.S. Sarma, who in 2000 retired as secretary, department of economic affairs, ministry of finance, and has since then worked as a dedicated activist, writing in the same newspaper (The Hindu, 4 June 2013) explains that the ‘gas market is opaque and fragmented’ because of the high costs of storage, liquefaction, regassification and pipeline transportation. He says that the gas market is very sensitive to ‘local trends in the availability of substitutes such as coal, oil, and shale gas in different sectors’. Thus, Sethi adds, in the absence of a ‘fungible’ market—or a market where natural gas is easily interchangeable with other energy sources and commodities—there is disequilibrium. He illustrates this contention with an example from 2011 when the reported average dry gas price per mBtu at Henry Hub was $4.01 while at NBP it was $9.03 and the Japanese LN
G imports averaged $14.73 CIF(cost-insurance-freight included or the landed price)—which, based on the Rangarajan Committee’s definition, would yield an ‘average producer net back’ between $10.50 and $11.50 per mBtu for Japanese imports.

  On the issue of sensitivity of gas prices to demand, Sethi has another point to make. He says that though the Rangarajan committee report ‘recognises the price sensitivity of gas demand in India’, it fails to clarify whether the wellhead domestic gas priced between $4.2 and $5.25 per mBtu ‘is the price for dry or wet gas’. Wet natural gas liquids have higher condensates and higher economic value. Indian gas is dry and Sethi finds it incredulous that the domestic natural gas producers were guaranteed a ‘high wellhead price for dry natural gas year after year on an arm’s-length basis’.

  As in many debates relating to this subject, a counterview to that provided by Sethi and Sarma was published in the Hindu on 7 February 2013: an article entitled ‘A committee to “administer” a “market price” of gas’ written by Sunjoy Joshi, director of the Observer Research Foundation, and a former joint secretary at the MoPNG who had served on the boards of directors of public sector undertakings such as the ONGC, OVL, OIL and Mangalore Refineries & Petroleum Limited. Incidentally, the Observer Research Foundation was set up by—and continues to be supported by—the Reliance group. In what may be described as a display of deft semantics, Joshi argued that domestic oil producers would agree with Sethi’s contention that ‘the formula suggested by the Rangarajan Committee does not reflect the market price in India but rather the price in foreign markets’. After all, says Joshi, market prices are determined at the ‘intersection’ of buyers (constituting demand) and sellers (constituting supply). What Rangarajan offers is a ‘fixed’ and hence ‘administered’ price. Thus, Joshi suggests, producers could benchmark the ‘marginal price’ (or the cost of producing the last unit) of the most expensive gas currently available and/or used in the Indian market, which is none other than the ‘spot LNG bought and sold between willing buyers and sellers at over $15 per mbtu’.