GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  Joshi argued that both Sethi and domestic gas producers advocate an administered pricing mechanism. According to him, Sethi is calling for a return to a government administered pricing system under which state-owned oil companies get a ‘fixed rate of return’ on their costs of producing oil and gas. This system and approach, Joshi claimed, was rejected because of its inefficiencies. As for gas producers, using the highest price of LNG as a benchmark would be fallacious since these producers should not ‘presume that all gas available will be absorbed at the highest marginal price’. Joshi faulted the government for taking recourse to the terms of the PSC in determining gas prices. Does the PSC allow for administered or market prices, he asked, rhetorically. He says that the PSCs under the NELP which apply to both public sector and privately owned hydrocarbon firms ‘mandate arm’s length market prices’ and ‘not prices linked to the cost of production’. These contracts were structured on the ‘principle of revenue maximisation’, and incorporate ‘clauses of approval to any pricing formula to ensure that contractors do not “under-price” gas to related parties and siphon away revenues that are part of the contract’.

  Thus, Joshi contended, the PSC is not an instrument through which the government can use gas prices to ‘contain its subsidy burden’ on petroleum products such as kerosene, LPG (liquefied petroleum gas used mainly for cooking) and diesel. He argued that the government should consider international prices for all crude oil being produced under these contracts but should not control gas prices to contain subsidies. Beyond the four walls of the contract, he claimed, the government has every right to fix its priorities. It is free also to abandon the ‘God of markets’. He added that should the government decide that low gas prices are a priority, then all bidding for future oil and gas blocks must be on the basis of lowest prices rather than highest profit share. What it cannot do is to invite bids for revenue maximisation under ‘ring-fenced’ contracts and then seek to implement, through ‘stealth’, the exact opposite. The buzzword in contract administration is transparency and not stealth, Joshi claimed, as the latter can only lead to a few subsidy scams being unearthed by the CAG. Joshi blamed the government’s Gas Utilisation Policy, which prioritises allocation of gas to sectors like fertilisers and power at an affordable and controlled rate, for having fragmented the market for gas into a hierarchy of the ‘more favoured, the less favoured, and the discards’. A ‘rationing of gas makes the development of a unified gas market impossible’, since different price levels confuse ‘buyers and sellers, and investors on both sides’. The results, claimed Joshi was poorly developed gas infrastructure—LNG terminals, transnational and domestic pipelines.

  The ORF executive head then asked: Could a government appointed committee decide on a market price? He says that this is a ‘paradox’ and thus, the ‘the good economist, Dr Rangarajan’, had no option but to take the weighted average of prices across functioning gas markets in the world, recommending that the result be applied to India. Joshi added that the Rangarajan committee ultimately suggested that the country move towards ‘gas-on-gas competition within the next five years’, a pure market situation, though the committee ‘fails’ to suggest a path for that. Ultimately, Joshi concluded that the ‘market can never be second-guessed’ and should be the final arbiter of the debate. Joshi’s comments clearly indicated what the votaries of a higher gas price eventually wanted: complete de-control of the pricing of natural gas and, presumably, other petroleum products as well. With an envisaged flexible pricing regime, natural gas prices are expected to be revised every four months, like those of petrol and diesel. This is clearly mentioned in the 14 May document prepared for the Cabinet: ‘Gas prices would be notified in advance on a quarterly basis using the data for four quarters, with a lag of one quarter… these policy guidelines shall be applicable during the 12th Plan period (from 2012-13 till 2016-17).’ As in the case of prices of petrol and diesel, consumers can expect frequent increases in household bills, including the cost of gas-based power and prices paid for piped gas coming into kitchens as well as compressed natural gas (CNG) used for transportation. This, in turn, would inevitably lead to higher across-the-board inflation, including higher prices of urea fertilisers. The note for the CCEA added:

  Over the Twelfth Five-Year Plan period, a major proportion of growth in demand for gas is likely to come from the power and fertiliser sectors. Power sector consumption, currently at 61 million metric standard cubic metre per day (mscmd) will translate into a demand of 207 mscmd by 2016-17, while the current fertiliser consumption of 37 mscmd will result in a demand of 106 mscmd by 2014-15. Other sectors, which currently consume 68 mscmd of gas, will generate a demand of 153 mscmd by 2016-17. The total demand for natural gas in the country is likely to grow from the current 166 mscmd to 466 mscmd in 2016-17.

  In fact, the Cabinet note, in its concluding remarks on ‘financial implications’ confirmed the pricing pressures on fertilisers and power, since in India natural gas is currently being used primarily to generate electricity and produce urea sectors. It stated:

  There will be a substantial outgo from (the) Fertilizer Ministry for subsidization of urea. (The) power sector will also be impacted. (The) overall impact of (the) increase in gas price by $1 per mBtu will be Rs 3,155 crore per annum from 2013-14 onwards for 23 MMT (million metric tonne) urea production. This will increase to Rs 4,144 crore per annum per $1 per mBtu increase of gas price, for 33 MMT urea production from 2017-18 onwards. The impact of every US dollar increase in gas price would be Rs 10,040 crore annum on the power sector, ... (assuming) 70 per cent plant load factor (PLF) for 28,000 MW capacity.

  It was hardly surprising that both the fertiliser and the power ministries were rather apprehensive about the gas pricing formula suggested by the Rangarajan committee and strongly opposed its recommendations.

  While briefing journalists on 24 May 2013, CPI MP Dasgupta said the power ministry had protested that a price above $5 per mBtu was simply untenable since at a price of $8 per mBtu, the cost of gas-based generation would be Rs 6.40 a unit (or kilowatt hour) which would be clearly unviable. This would hamper the productivity of the existing gas-based power generation units, and newer gas plants would become commercially unviable. Apparently, the power ministry had suggested that gas should be priced in rupee terms. During inter-ministerial consultations, according to Annexure IV of the CCEA note, the power ministry pointed out that ‘while (the) Rangarajan Committee report was under finalisation, (the) Ministry of Power was not consulted though (the) Power Sector is the major anchor consumer of domestic gas’.

  The department of fertilisers (DoF) too had suggested that if a weighted average of Indian LNG (liquefied natural gas) imports and world prices were taken into consideration, the price would fall by almost $2 per mBtu. The department (in the ministry of chemicals and fertilisers) suggested a gas price of ‘around $6 per mBtu’. The DoF also stated in inter-ministerial consultations that in order to get a better picture for price formulation ‘the actual cost of production of natural gas should be arrived at by obtaining data already available in the country, at least with the PSUs like ONGC, OIL etc’. The department warned that at 2013 levels of urea production, the government was looking at an additional annual subsidy of Rs 17,000 crore by the end of the 12th Plan.

  Incidentally, the petroleum ministry in its observations on the DoF’s stand agreed that it was not possible to arrive at a ‘competitively determined global gas price’ since there were ‘several regional markets in operation, all of which were constrained by geographic, infrastructural, tariff and policy barriers’. The petroleum ministry was aware of the sensitivities around determining prices based on global LNG costs. Commenting on the Planning Commission’s suggestions, the ministry noted: ‘Domestic gas is seldom sold at import parity price anywhere in the world. It is sold at regulated prices in most countries.’

  The day after Dasgupta’s media conference, on 24 May 2013, there was a strong reaction from the petroleum minister to the
CPI MP’s allegations. The rebuttal by the petroleum ministry sought to set the ‘record straight’ about the ‘malicious’ and ‘distorted’ allegations made. Petroleum minister Moily claimed that the public sector units which produce ‘two-thirds of the gas’ in the country would benefit by the new pricing which would apply ‘equally to them’. He extended the argument that price revision was essential to spur investment in oil and gas exploration and production so that ‘production in India reaches optimum levels and all explorable reserves are put to production expeditiously’. The Hindu (25 May 2013) quoted Moily the following day: ‘Mr Dasgupta talks of fertiliser subsidy rising due to gas price increase but what he does not realise is that if domestic production does not increase, we have to import gas.’

  The petroleum ministry statement provided statistics of the import bill for gas, thereby, curiously, actually confirming some of the apprehensions that had been voiced. The statement pointed out that in 2012-13, the average natural gas production was about 111 mscmd against a requirement of approximately 286 mscmd. The gap between the demand and supply was likely to widen further during the 12th Plan, if ‘effective steps’ were not taken expeditiously to enhance domestic gas production. The annual import bill for import of oil and gas in 2012-13 stood at approximately $160 billion (more than Rs 7 lakh crore). The estimated financial outgo on account of import of natural gas was likely to increase to $17.82 billion in 2016-17 from $8.79 billion in 2012-13. Apart from the impact of such high imports on the country’s balance of payments, the government’s fiscal position would worsen on account of a higher outgo on subsidies for power and fertilisers.

  The petroleum ministry’s press note highlighted the fact that natural gas imported by India in the form of LNG had a landed price of between $14 and $15 per mBtu which was more than double the proposed revision in the gas price. The outgo on subsidies would double or treble if the power and fertiliser industries in the country were dependent on imported LNG as feedstock (raw material). In addition, there were huge installed power generating capacities that were lying idle for want of gas, the note stated. There was also a second, short, almost innocuous press release from the petroleum ministry the same evening (24 May) announcing new gas finds by RIL. The release said:

  (The) ministry of petroleum and natural gas is happy to note that as a result of the permission granted by the Ministry for exploration in the existing Mining Lease Area, the contractor Reliance Industries Ltd. has notified a new discovery of Hydrocarbon (Dhirubhai-55) in Block KG-DWN-98/3 (KG D6-MJ1). The commercial potential of the said discovery is yet to be established.

  Concurrently RIL announced a ‘significant’ discovery of gas and natural-gas condensate in the KG basin, which was expected to add to gas output at a time when the availability of gas from the basin had come down to 15 mscmd, the lowest level since the D1 and D3 blocks had started production in April 2009. The following day Business Standard quoted Mike Daly, executive vice-president exploration of British Petroleum, holding 30 per cent stake in RIL’s gas venture, as saying: ‘The discovery follows an 18-month drilling time-out and detailed geosciences work that has re-focused our India exploration programme and delivered this early success.’

  To those with not-so-short memories, the situation was uncannily similar to what had happened in 2010 when RIL had announced fresh gas reserves just after the 7 May Supreme Court judgement and the 19 May 2010 hike in the administered prices of gas from $2.34 per mBtu to $4.2 per mBtu, ostensibly to ensure that public sector companies (and not just RIL) remained commercially viable.

  Even as the war of words between minister Moily and MP Dasgupta had begun, the regulator of the oil and gas sector, the directorate general of hydrocarbons (DGH) was reporting declining gas output by RIL from the KG basin. On 1 June 2013, the Hindustan Times reported that the DGH had stated that natural gas production at the deepwater KG-D6 had ‘dropped to less than 15 mscmd, the lowest since starting output in 2009’. The contractor, RIL, produced a total of 14.83 mscmd from the D1 and D3 gas fields and the MA oil and gas field in the KG-DWN-98/3 or KG-D6 block in Bay of Bengal in the week that ended on 26 May 2013. By then, RIL had shut half of the 18 wells in the D1 and D3 fields due to ‘high water and sand ingress’ and two of the six wells in the MA field due to the same reason. The HT report added that the D1 and D3 fields produced 11.05 mscmd of gas while the rest came from the MA (or D26) oilfield, the only oil find in the KG-D6 prospecting area. Output at the D1 and D3 fields had dropped to 12.35 mscmd in March and 11.85 mscmd in April. The MA field produced an average of 5,709 barrels of oil in the week ending 26 May. RIL had drilled 22 wells in the D1 and D3 fields but only 18 of these wells were producing. Thereafter, seven more wells—or half of the total of 22 wells—were shut down.

  As May 2013 rolled into June, the verbal slanging match between Dasgupta and Moily intensified and became increasingly acrimonious. It seemed as if the petroleum minister had gathered new ammunition after having been at the receiving end of a lot of flak. Other ministries and departments had apparently started getting their act together. On 6 June 2013, the Hindu reported that the ‘Prime Minister’s Office (PMO) and the Cabinet Secretariat have returned to the petroleum As May 2013 rolled into June, the verbal slanging match between Dasgupta and Moily intensified and became increasingly acrimonious. It seemed as if the petroleum minister had gathered new ammunition after having been at the receiving end of a lot of flak. Other ministries and departments had apparently started getting their act together. On 6 June 2013, the Hindu reported that the ‘Prime Minister’s Office (PMO) and the Cabinet Secretariat have returned to the petroleum

  Three days earlier, on 3 June 2013 the Economic Times had reported that the Planning Commission was miffed with the petroleum ministry for keeping it in the dark, and referring ‘many proposals, directly for consideration of the Cabinet without any consultation at the level of ECoS (empowered committee of secretaries).’ These are inter-ministerial consultations which take place before crucial policy decisions. Sindhushree Khullar, secretary, Planning Commission wrote to her counterpart in the petroleum ministry, Vivek Rae, saying that oil and gas contracts ‘have technical, contractual and financial implications, which ought to be deliberated with related ministries before the Cabinet proposals are firmed up’. The ministry had ignored a request for ECoS consultations earlier in October 2012, which negotiated contracts with successful bidders of oil and gas blocks in the ninth round of the NELP, it was pointed out.

  Earlier, in March 2013, the ministry had moved a draft proposal for the consideration of the EGoM, now headed by defence minister A.K. Antony (who had by then replaced Pranab Mukherjee; the latter had become the President of India), for revising gas prices for both the public sector oil companies and RIL based on the Rangarajan Committee’s recommendations. The Cabinet Secretariat had returned the proposal saying that the new formula was not covered under the EGoM’s reference. According to the Indian Express edition of 15 May 2013, the Cabinet Secretariat had written to the petroleum ministry on 2 April stating:

  As the...EGoM is mandated to consider and decide (the) issue of commercial utilisation of gas...under (the) New Exploration Licensing Policy and other related matters, the present proposal [that is, gas pricing] will not be covered by the mandate of the EGoM.... In this light, this ministry may ... either forward a proposal for expanding the terms of reference of the EGoM or bring a note... for the consideration of the Cabinet Committee on Economic Affairs (CCEA).

  It was then that the petroleum ministry sent the same proposal, with some modifications, to the CCEA. The Prime Minister’s Office then sent back the note since it felt that the views of the concerned ministries needed to be sought on the changes proposed after the circulation of the note to the EGoM (Rediff.com, 13 June 2012). This led to inter-ministerial consultations and the preparation of a note for the Cabinet, portions of which were leaked by Dasgupta. The MP had more information up his sleeve for the newspersons. On 11 June 2013, the Pioneer reported that Da
sgupta had alleged that minister Moily—the fourth petroleum minister in a decade—had come up with another note on 27 May, three days after his (that is, Dasgupta’s) exposé, for the perusal of the CCEA recommending a gas price hike. In the process Moily overruled the petroleum secretary Rae who had refused to sign the document. In fact, Dasgupta alleged that the draft note had been prepared by Reliance, approved by Moily and then signed by a junior officer in the ministry. The MP alleged that the minister was ‘spearheading the scam for Mukesh Ambani with the blessings of finance minister P. Chidambaram and Planning Commission deputy chairperson Montek Singh Ahluwalia’.

  The CPI leader and trade union activist claimed that officials of the ministry of finance had admitted to the Parliamentary Standing Committee on Petroleum and Natural Gas that had met the previous week, that they had not calculated the production figures of domestically produced natural gas. ‘They told us that they were treating the increase in (the) price of gas as incentivising the investment of private contractors. This is the fraud. Why is the government not calculating the cost of production of natural gas?’ Dasgupta asked.

  This was precisely the same question that had earlier been raised in the wake of Jaipal Reddy’s departure from the petroleum ministry, for which no answers were provided by the government.

  Dasgupta said that he now possessed a copy of the new Cabinet note and added that petroleum minister Moily had suggested that import parity prices of $14 per mBtu be given for 2018-19 and 2019- 20 (the first two years of the 13th Plan) and the new (to be decided) gas prices would be applicable for the period between 2014-15 and 2017-18 (the last four years of the 12th Plan). Dasgupta said that in ‘great anguish’, he had written another letter to the prime minister on the same topic for a second time in quick succession.