GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  Within a week, Moily found it necessary to come up with a second rebuttal, this time with ‘all guns blazing’ as the Times of India reported on 13 June 2013. The minister alleged on this occasion that opposition to the gas price hike was coming from a ‘powerful lobby’ of importers of crude oil and LNG which did not want India to reduce its imports of oil and gas. The minister implied that a conspiracy was afoot to slow down the country’s natural gas extraction facilities, since, without the ‘incentive’ of a higher price, the gas producing companies would simply not explore more. In his statement, Moily claimed:

  India is a wealthy country full of natural resources that can help cut our $160 billion oil import bill. We need to exploit the resources for the welfare of our people. For this we need investments. But without the right pricing and policy regime, which investor will come? If we shirk our responsibility, no investment will come and the resources will remain buried.

  There were more statements to come from Moily. He was quoted by Rediff.com on 14 June as saying:

  I am not helpless. Any timid minister will not go forward.... I have come here to strive hard for the sake of the country. If anybody thinks that decision-making process in the oil sector will be prevented they are totally wrong. After having dismantled many of the obstacles, it is in the national interest to go for aggressive exploration. Investors should also come.

  The minister refuted claims that his actions were helping one company (RIL) and recalled that during his tenure ‘as law minister (he had) ensured that natural resources such as gas are declared as sovereign property’. The same day (14 June), finance minister Chidambaram said: ‘All views will be considered and the government will take a decision. My intention is that the government must decide on these matters.’ He added that a decision on pricing of natural gas was important to revive investment.

  Earlier, in March 2013, after the Cabinet had sent back the petroleum ministry’s note for revision of gas prices, the ministry constituted a new committee headed by economist and former bureaucrat Vijay Kelkar to put in place an energy security policy and design a roadmap for enhancing domestic oil and gas production to reduce dependence on imports by 2030. Kelkar, who had earlier authored a report on deregulation of the retail oil and gas sector, was asked to submit the new study within six months. When, on 14 June, Business Standard questioned Moily on how he would handle an overlap between the reports of the Kelkar and Rangarajan committees, the minister said that there was no ‘conflict’ and Kelkar would ‘pick up’ where Ranagarajan ‘has left’. Moily said that Rangarajan’s methodology on gas pricing till the end of the 12th Plan (31 March 2017) would be adopted. He added that Kelkar had not just been appointed to examine the issue of pricing after the 12th Plan but also prepare a ‘roadmap for self-sufficiency in gas and oil production’. The minister added: ‘The idea is (that) by 2020, only half (of the petroleum products the country needs) would be met by imports; by 2025, only 25 per cent would be met by imports and we would reach energy independence by 2030.’

  The government’s critics claimed that Moily’s arguments had a serious flaw. Dasgupta and others alleged that RIL was effectively sitting over some of the major natural gas finds in India’s recent history and holding the government to ransom by lowering gas production. The government, in turn, was ‘incentivising’ RIL to spur investment in gas exploration and production by increasing the price of gas. But Moily was unfazed by such criticism. When he was asked in an interview with Rajeev Jayaswal of the Economic Times published on 16 June 2013 why he had made ‘sensational revelations’ that import lobbies were exerting pressure on the country to continue importing petroleum products, including LNG, without identifying who these lobbyists were, Moily said that there were people with vested interests ‘who do not want us to reform our energy sector so that we remain dependent on imports’. He added that ‘all reform moves are resisted’ and that bureaucrats were ‘hesitant to take bold decisions’. While the media accused the government of policy paralysis, the petroleum minister claimed that what ‘you people...fail to see (is) that we are paying $160 billion (a year) for imports’ and that sellers of LNG wanted India to remain an importer ‘so that they thrive on our money’.

  Questioned further as to whether he was referring to OPEC (the Organization of Petroleum Exporting Countries), Moily said he did not want to name anyone but there were groups that did not ‘want gas price to be revised so that investors will have no incentive to find and produce more gas’. Thus, importers would charge high prices of $18 to $20 per unit of gas or more, while domestic gas producers would receive $45 per unit. The minister said he wanted to ‘move forward and frustrate their design’, that ‘Moily can’t be cowed down’ and that he had ‘rolled out’ a ‘new vision’ that aimed at reducing India’s crude oil imports by 50 per cent of total consumption by 2020, 75 per cent by 2025 and eventually achieve self-sufficiency and energy independence by 2030. Asked if he had spoken to the prime minister about the designs of these lobbies, Moily said he knew ‘how to handle such elements’, that he knew his job and his responsibilities. He took credit for protecting the government’s ‘right to natural resources’ as law minister and referred to the Supreme Court judgement in the RIL versus RNRL case.

  The Economic Times then asked Moily point blank to reply to the allegation that he was promoting the interests of Reliance, to which he responded by saying it was ‘wrong’ to say the government wanted to raise gas prices to help RIL since ‘about 79-80 per cent exploration in India is done by our PSUs (or public sector undertakings)’ and ‘not even five per cent is done by Reliance’. The petroleum minister said the government had to revise the price of gas since it was a ‘contractual obligation’ and that this ‘process was initiated long before I joined this ministry’. He praised the new pricing methodology suggested by the Rangarajan committee, added that his (meaning Rangarajan’s) ‘credibility is unquestioned’ and that the committee had balanced the interests of consumers and producers ‘very well’. He added that it was not him but the CCEA that would take a final call on the price of gas and that the Cabinet’s decision would ‘renew investors’ faith in India’s oil and gas sector’. Moily claimed he had read a report stating that ‘more than $100 billion of our investments went abroad’ and asked: ‘Should we not halt and reverse this process?’ The petroleum minister claimed this ‘flight of money is because of obstructions, obstructions, and obstructions (in taking policy decisions)’.

  Moily’s comments on a so-called import lobby drew sharp reactions from his political opponents. Ram Naik, former petroleum minister in the BJP-led NDA government who served in his post between October 1999 and May 2004, was quoted by the Hindu (15 June 2013) saying:

  It is strange that Mr Moily is talking about non-existent lobbies. Major imports of oil and gas are done by the PSUs. There are hardly any other oil importers in India. His statement does not make sense but a deeper investigation in the matter would be the right thing to do. I did not encounter any lobby during my time and it all depends on the message you send.

  Dasgupta too scoffed at Moily’s remarks and alleged that he was a ‘liar’ making allegations against ‘invisible’ lobbies when the country was being ‘looted’. He pointed out that only two public sector undertakings, GAIL and Petronet LNG, were importing gas into India.

  On another count, Moily’s claims about import lobbies at work were way off the mark. It can be argued that if prices of domestically produced gas are much lower than imported LNG, a so-called gas import lobby would have pushed for a hike in domestic gas prices as that would introduce an element of parity by making the imported product competitive. Spot LNG prices were at that time ranging between $18 and $19 per mBtu while LNG prices on long-term contracts were around $11 per mBtu, against prices between $4.2 and $5.7 per mBtu for domestically produced gas. Total gas consumption in the country during 2012-13 was around 160 mscmd, of which 50 mscmd were imported (Business Line, 25 April 2013).

  Those who argued th
at a higher price of domestic gas would automatically encourage exploration and production were applying a pure and simplistic laissez faire economic logic. Writing in the Economic Times on 25 June 2013, Himangshu Watts gives the example of the United States where the ‘free market in that country allowed natural gas prices to soar to nearly $14 seven years ago, when India had frozen the rates at about $2’. Watts believes that ‘either ONGC should find natural gas, produce it very competitively and cost-effectively, and sell it cheap to customers; or the government should give private companies the incentive to produce so much gas that market forces ensure that the precious resource is reasonably priced’. He wrote that profit potential provided the incentive to US exploration companies ‘in deploying risk capital in oil and gas exploration as well as developing new sources like extracting natural gas trapped in shale rock formations’. Companies invested in new technologies and ‘quickly recovered their investments’. The abundance of shale rocks in the US ensured a huge supply of natural gas and led to prices crashing ‘below $2’ and thereafter, with demand rising, prices reached ‘towards $4’ per standard unit.

  Watts argued that in India, ‘abundant gas reserves’ are ‘located in deep-sea fields’. Extracting this gas is costly because of technological challenges. He pointed out that ‘connecting one well to the subsea network of pipelines’ costs ‘as much as $100 million’ and added that financial returns would have to be ‘commensurate with the risk of sinking billions of dollars in unpredictable deep-sea terrain’. He blamed the lethargy of India’s public sector exploration companies and claimed that government companies had found nothing ‘of commercial consequence’. Thus, the government had invited private companies to this sector with the message that the country ‘was desperately in need of new energy resources’ and that a company which could discover oil and gas would get the ‘freedom to market its produce’.

  In the debate on who should determine gas prices, the likes of Sunjoy Joshi and Himangshu Watts would have markets determine gas prices, whereas Surya Sethi clearly favoured an administered system. In a rejoinder to Joshi’s rejoinder to his article the Hindu (7 February 2013), Sethi wrote that his criticism of the gas pricing formula recommended by the Rangarajan committee was based on the ‘absence of a natural gas market in India and the fragmented/ non-fungible global gas market’.3 He emphasised that a market, and hence a market price, ‘can only exist when full fungibility is assured and multiple buyers and sellers compete freely under rules established by enlightened, independent and watchful regulators’. This, Sethi added, was clearly not the case in India. He added that across the world, only the market for gas in North America, ‘exhibits these essential characteristics’. Hence, he said, ‘I believe the Rangarajan committee and indeed Sunjoy Joshi (should) accept this truth and support the need for an administered price for Indian natural gas producers’.

  Sethi went on to explain his position that his criticism was not on account of the Rangarajan committee choosing numbers from foreign markets ‘but that it chose numbers that do not reflect prices obtained by natural gas producers in the three markets covered’. He said the ‘absurdity’ of the committee’s formulation was ‘best demonstrated by the inclusion of Japan that has no natural gas producer/supplier’. Sarma, also a proponent of administered prices for gas, highlighted another important issue, namely, that of the need for a regulator. In a letter written to the prime minister on 18 January 2013 on the ‘serious irregularities in the pricing of gas’, Sarma had commented that the government was rushing through accepting the Rangarajan Committee’s recommendations without a proper system of regulation in the sector. He wrote:

  In the absence of a reliable market, the only way to determine the price of gas is through an independent, rule-based regulatory authority appointed under the law. Deliberately, your government disempowered the petroleum regulator, only to hand over the responsibility to the EGoM which is no more than a political entity.

  Soon after Dasgupta leaked the Cabinet note on gas pricing, Raghuvir Srinivasan wrote in the Hindu (30 June 2013) about the crying need for ‘transparent and fair regulation’ in the gas sector. He stated that in the absence of technical data, there was no way of ascertaining if RIL was deliberately creating a scarcity to jack up prices and whether the company was unable to monetise gas finds due to what it claimed were ‘technical problems’. Srinivasan argued that in order to protect user industries such as fertilisers and power, the government would have to place a ‘cap on the price based on reasonable return of investment for the producer’. He also felt the need to buffer the ‘currency risk’ for user industries since pricing was driven by the dollar. For this a ‘mechanism to adjust for rupee depreciation (or appreciation)’ would have to put in place which could be ‘reviewed at periodic intervals along with the price itself’. Thus, there was a need for a regulator to manage these different mechanisms, he contended.

  After the Cabinet note was leaked by Dasgupta, Sarma recorded his opinions in yet another letter to the prime minister. This letter dated 27 May 2013 cautioned the government against the ‘highly imprudent move’ of ‘rushing into re-fixing the price of natural gas from KG basin at a price ranging between $8 and $10 per mBtu’:

  The core argument offered by the MoP&NG in defence of the proposed price hike appears to be that a higher gas price would spur upstream investment and raise domestic production to meet local demand and reduce dependence on high-cost imports leading to an improved fiscal balance. Does the MoP&NG guarantee that with a gas price of $10 or more per mBtu, the domestic production would pick up to meet the demand-supply gap the press note (of the petroleum ministry) identifies? Is there a time dimension to this dream being realized and what happens in the interim? Has the MoP&NG forgotten that the current gas pricing formula (coined by RIL) was approved holding out the promise that Reliance alone will deliver 120 mscmd of natural gas from the KG Basin by 2008 compared to the 111 mscmd of total domestic production that the press note reports for 2012-13—sixty percent of which, it admits, is produced by the public sector. Does a higher price for gas produced domestically have no fiscal consequences? Domestic gas prices today are three times what they used to be before the current government came to power—why has that not spurred domestic gas availability to meet demand?

  The spat between Moily and Dasgupta threw up fresh discussions on important issues relating to gas from the KG-D6 field. When Dasgupta spoke to journalists on 18 June 2013 he alleged that the petroleum minister was going slow on concluding the arbitration proceedings against RIL seeking to recover the penalty of $1 billion (not the cost recovery of $1.46 billion) imposed upon the company (on the advice of the solicitor general of India) when Jaipal Reddy was petroleum minister. Dasgupta claimed that the MoPNG was ‘deliberately’ not acting on the recommendations of the DGH that RIL ‘surrender 86 per cent of the area of the KG basin block’ including eight new gas discoveries since the firm had overshot the time allotted to it for developing the area. Dasgupta pointed out that the CAG had also made similar remarks about RIL’s alleged ‘land grab’ on the bed of the ocean in the Bay of Bengal and that petroleum minister Moily was now trying to ‘sabotage’ the arbitration process.

  The director general of the DGH, R.N. Choubey was quoted by the Press Trust of India (16 June 2013) as having written to the petroleum secretary on 15 April 2013 informing him that of 19 oil and gas discoveries claimed by RIL, three finds had not been established as commercially viable in the absence of test data and that RIL had not submitted any investment plans for the other five finds. The PTI report also indicated that Moily was bent on having a ‘technical man’ who would be chosen from a list of applicants by a panel comprising the petroleum secretary after the 31 May order to obtain a ‘correct objective opinion’ on the subject.

  The petroleum ministry’s rebuttal of Dasgupta’s allegations that was issued on 19 June 2013 included a chronology of events that would supposedly establish ‘factual inaccuracies’ in the allegations. It is sai
d that no decision had ever been sought from the current minister on the pending arbitration proceedings—the file had not been dealt with by anyone in this ministry after 17 December 2012. The ministry said that Reliance Industries had been served the notice of arbitration on 23 November 2013, much before the notice for denial of cost recovery (and not the notice on imposition of a penalty) which had been issued on 2 May 2012. The ministry clarified: ‘In June 2012, Jaipal Reddy decided to join the arbitration proceedings by appointing the government arbitrator in June 2012.’ In effect Moily was virtually trying to wash his hands off the issue.

  The ministry said that ‘on examination of the CAG report, (the) DGH had made certain recommendations for relinquishment of certain area by RIL which was processed by the ministry and placed before the minister for (a) decision’. The file was thereafter apparently ‘withdrawn by the secretary for re-examination of certain fresh facts/ recommendations made by the DGH’ before the minister could take a decision. The file was yet to be re-submitted to the minister, the ministry’s note stated. In other words, Moily was now claiming that he had not defied the CAG’s recommendations (on relinquishment of area) and that the claim that he was ‘sabotaging’ the arbitration process was a figment of Dasgupta’s imagination. In his reply to the petroleum ministry’s rejoinder, Dasgupta quoted the interview that the petroleum minister had himself given to the Economic Times (23 January 2013) wherein he had stated that the government was thinking of junking the arbitration proceedings and starting ‘direct negotiations’. The CPI MP stated: ‘All of us would welcome massive investment in the oil and gas sector to make India self-reliant but cannot be... (by looting)... national resources.’