GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  As the debate on the price of gas raged, the lead author of this book interviewed Vinod Rai, former Comptroller and Auditor General of India, on a programme broadcast by Lok Sabha Television on 9 June 2013. Rai, who had demitted office on 22 May 2013, was asked to comment on the situation in which the CAG’s office was asking for data from RIL but the company was reluctant to provide the data saying it was not supposed to give it. This is what Rai said in reply:

  ...it was in 2007 before I took charge (as the CAG) that the petroleum ministry made a request to my predecessor that, please come in and audit this particular activity of (the) government. It was not only the KG basin, but there were two other projects under similar implementation and then, after examining the request of the government, my predecessor, Mr V.N. Kaul, took the decision that we will conduct the audit. But we made it very clear that we were basically conducting the audit on the initiative and the invitation of the ministry.

  What could the CAG do if the private operator, in this instance, RIL, refused to part with its data, the question was repeated. Rai responded that this did not concern the CAG at all. ‘It is the government which has made the request that we conduct the audit. So...the onus, the responsibility (is on)...the government to ensure that the records are provided.’

  The former CAG said there had been ‘some initial reluctance’ on the part of RIL to make documents available to the government auditor. He explained that when an audit is conducted on a public-private partnership arrangement, it is based on the PSC which is a contract between the ‘operator’ and the government. Said Rai:

  It is a very detailed contract, a very well conceptualised contract document, which writes down all the details on how the operations will be done, how the approvals will be given, how the audit will be conducted, etc. Now it was some difference in the understanding of the audit process between the government and the operator that delayed the audit, but I think the government managed to convince the operator to make the documents available.

  Towards the end of June 2013, the value of the rupee had fallen to a record low of Rs 60.72 to one US dollar. The price of compressed natural gas had been hiked by the government. The Cabinet was going to take a decision on the administered price of gas, a decision that was bound to generate a huge controversy.

  11

  PRICE OF GAS: END-GAME OR NEW BEGINNING?

  On 27 June 2013, the government of India decided to effectively double the administered price of domestically produced natural gas to $8.4 per million British thermal units (mBtu) with effect from 1 April 2014 by accepting a new pricing formula based on certain recommendations made by an official committee headed by Dr Chakravarthi Rangarajan, chairman of the Prime Minister’s Economic Advisory Council and a person known to be close to Dr Manmohan Singh himself. The decision itself was not entirely unexpected. The writing on the wall had become clear a few weeks earlier. But the decision was not unanimous. The Cabinet Committee on Economic Affairs (CCEA) was split right down the middle on the issue of increasing the price of gas and to what extent. It was late in the evening and hence, it was decided that a media briefing would be organised only the next day. A terse statement was all that was put out.

  With this decision, the major gas producing companies in India, the private sector Reliance Industries Limited (RIL) and the public sector Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL) stood to gain substantially in terms of profits earned. At the same time, gas-based electricity was expected to become more expensive. Those in charge of a number of gas-based power plants with large idle capacities were far from happy and they were not alone in feeling this way. Subsidies to manufacturers of fertilisers are also expected to rise, since natural gas is the main raw material or feedstock used for the production of urea, the most widely used fertiliser in India. The increase in the price of gas went beyond what the petroleum ministry had initially suggested, that is a price of $6.67 per mBtu, which too was opposed by the power and the fertiliser ministries. Since the price of gas has been linked with world prices, the domestic price of gas could theoretically go higher or lower than $8.4 per mBtu if international prices rise or, for that matter, come down. According to one estimate, after 2014, the price of gas could well rise above $10 per mBtu since the price cap on public sector Petronet’s deal with Qatar’s Ras-Gas gets over in January 2014 and thereafter, gas prices get fully linked with prices of crude oil (Hindu, 28 June 2013). Petronet, as has been already stated, is a government-controlled undertaking that imports liquefied natural gas (LNG) to India.

  The new gas price, based on the Rangarajan committee’s formula, would be applicable for a period of five years, that is, till the end of March 2019. There would be quarterly reviews of the price once every three months, a suggestion of the petroleum ministry accepted by the Cabinet. The Rangarajan committee had suggested monthly , not quarterly reviews. It had earlier been decided that the new price of gas would apply to firms producing gas under the administered pricing mechanism (APM) with immediate effect, but what was made clear by the CCEA is that the new price of gas would come into effect from 1 April 2014, the day after the government’s contract with RIL (that fixed a price of $4.2 per mBtu) comes to an end. Currently, public sector companies such as the ONGC and OIL come under the APM and the administered price of gas was last revised for them in June 2010 from $1.79 per mBtu to $4.2 per mBtu. For RIL, however, which began production from the KG-D6 field in April 2009, the price of gas was raised from $2.34 per mBtu to $4.2 per mBtu in September 2007 by the EGoM (then headed by Pranab Mukherjee) till 1 April 2014. During the 2012–13 financial year, APM gas comprised roughly 60 per cent of the country’s total domestic gas production of around 110 million standard cubic metres per day (mscmd), of which RIL’s contribution was around 14 mscmd or less than 13 per cent of the total. In 2012–13 (year ending 31 March), India produced 47,558 million cubic metres of gas, a drop of 14.5 per cent from the output in the previous financial year. India’s gas imports have been steadily rising, up to 30 per cent of total consumption in 2012–13 and which is expected to rise to roughly half during 2013–14.

  Before examining the issue of gas pricing further, here is a brief account of what transpired during the 27 June meeting of the CCEA. The meeting was, from all accounts, a rather stormy one. Finance minister Palaniappan Chidambaram, deputy chairman of the Planning Commission Montek Singh Ahluwalia (a special invitee to the meeting and who holds the rank of a Cabinet minister) and, not to mention, petroleum minister Veerappa Moily, were all reportedly in favour of a steep increase in the price of gas from $4.20 per mBtu. A number of media reports quoting unnamed insiders who were present at the meeting stated that Chidambaram, Moily and Ahluwalia wanted the price of gas to be raised to $11 per mBtu, against $8.4 per mBtu which was eventually agreed upon. This group was said to have received the support of law minister Kapil Sibal and commerce and industry minister Anand Sharma.

  Ranged against this group of so-called neo-liberal hawks were S. Jaipal Reddy, minister for science and technology (who had been replaced as petroleum minister by Moily in October 2012), power minister Jyotiraditya Scindia, fertilisers minister Srikant Jena and rural development minister Jairam Ramesh. This so-called left-wing or ‘socialist’ group argued that a higher administered price of gas would not automatically and expeditiously lead to new discoveries of gas and higher output. That had certainly not been the country’s experience with RIL between 2008 and 2012, they said.

  It was not surprising that Scindia and Jena stoutly opposed the move to increase the price of gas at the Cabinet meeting. The power and fertiliser ministries had recorded their reservations about a gas price hike all along. According to the power ministry’s calculation, for every $1 per unit increase in the administered price of gas, the costs incurred by the power sector as a whole would stand to rise by an amount of more than Rs 10,000 crore per year. The fertiliser ministry estimated that the rise in outgo on subsidies would go up by over Rs 3,100 crore for every $1 p
er mBtu increase in the price of gas. Thus, the two ministries stated that once the price of gas went up to $8.4 per mBtu, the increase in the annual outgo on subsidies to the fertiliser sector would be nearly Rs 17,000 crore while the increased cost of fuel for the power sector would be over Rs 43,000 crore for a year. For a period of four years, between 2013 and 2017, the total impact on the national exchequer would be of the order of Rs 2,40,000 crore or around $40 billion (assuming an exchange rate of Rs 60 to one US dollar). But these calculations were based on the assumption that world gas prices would be where they were in July 2013, an assumption that was clearly unrealistic. Just as the actual outgo on fertiliser subsidies or expenses on generating electricity from gas could fall if world gas prices came down, if, on the other hand, international prices of gas rose to the region of $14–16 per mBtu over the next five years, the impact on the exchequer would be much bigger, perhaps of the order of Rs 4,00,000 crore or between $65 billion and $70 billion depending on the rupee-dollar exchange rate.

  At the Cabinet meeting, Jena and Scindia said the price of gas should be maintained at $4.2 per mBtu and pointed to the adverse impact that higher prices of power and higher subsidies on fertilisers would have on the country’s economy. Jena pointed out that the fertiliser industry was already dependent on the government for subsidies to the tune of Rs 70,000 crore a year, while power minister Scindia reportedly complained that his ministry had not been adequately consulted by the Rangarajan committee before framing its recommendations. Jaipal Reddy and Jairam Ramesh backed them and said that the price of gas should be maintained below $6 per mBtu to ‘save’ these crucial sectors from financial difficulties. Former petroleum minister Jaipal Reddy raised the various controversies relating to extraction of gas from the KG basin by RIL and reminded everybody present at the CCEA meeting that the government had never made any serious attempt to work out the true cost of production of gas. Ramesh said that although the government believed that the higher price of gas would provide an incentive to step up production and exploration, the prospects of this actually happening had not been verified.

  Prime minister Manmohan Singh, who heads the CCEA, is said to have maintained a stony silence right through the proceedings. The neo-liberal group won the day.

  Writing in Rediff.com the day after the Cabinet meeting (28 June 2013), Sheela Bhatt quoted a ‘senior source in the government’ as saying that RIL had wanted a review of the price of gas after three years, that is, after March 2017, and this demand was supported by finance minister Chidambaram at the Cabinet meeting. However, the CCEA decided not to accept this demand as this would have made a ‘mockery’ of the decision to increase the price of gas. Bhatt claimed, quoting ‘highly reliable sources in the government’ that, given a choice, the Rangarajan Committee would have preferred a hike in the gas price to around $6 per mBtu but some members in the committee wanted to have a pricing regime more favourable to gas producers, including RIL. In any case, the decision to increase the price of gas came after almost a year of lobbying by RIL, and lengthy deliberations among various government ministries besides, of course, the airing of allegations and counter-allegations in the media. With the announcement of the gas price hike, stock market indices rose by around 3 per cent. The price of ONGC shares jumped 5.4 per cent in early trade on 28 June, while the RIL scrip rose 3.4 per cent. The Cabinet decision to increase the price of gas generated much controversy and concern with different publications and television channels taking positions in favour of, and against, the move. Political parties and user bodies too reacted.

  A statement from the All India Kisan Sabha, a farmers’ organisation affiliated to the CPI(M), noted that on the day that the CCEA cleared the hike in the price of gas, the government also announced ‘a meagre hike of only Rs 60 per quintal in the MSP (minimum support price) of paddy’ with no substantial changes in the MSP of jowar, urad, bajra, moong and arhar (various kinds of pulses and coarse cereals). ‘None of the MSPs announced reflect the increased costs of production or the expectations of the farmers,’ the statement added.The Left, which had been campaigning against the proposed hike, cried foul. Gurudas Dasgupta fulminated and reiterated what he had been saying when he crossed swords with the petroleum minister in the run-up to the government’s decision to hike gas prices, namely, that this was the ‘biggest’ scam of its kind and aimed at helping one company, RIL. He said that the hike would lead to an increase in power tariffs by Rs 2 per unit (kilowatt hour) and increase urea prices by Rs 6,000 a tonne. Dasgupta said the Left would ‘stubbornly oppose’ the decision inside and outside Parliament.

  Even the BJP, which otherwise favours ‘market friendly’ policies like the Congress, agreed with the Left though the party’s position on the issue was less strident. A statement released by the BJP’s spokesperson Prakash Javadekar said:

  The twin factors of the depreciating rupee and the government’s decision to double the natural gas prices will hit the common man the most. The common man, already reeling under ever-rising prices, was expecting some relief from the government. Instead of offering such a relief, the government has once again targeted him with a big dose of price rise.

  M. Venkaiah Naidu, BJP MP and former party president said that this was an ‘anti-farmer’ decision. Chief Minister of Tamil Nadu, J. Jayalalitha also criticised the hike, saying that the ‘decision seemed to favour a particular large firm’ which instead of ‘facing action for drawing lesser gas than guaranteed from the KG-D-6 basin’ would only ‘benefit from it’. Although she did not specifically mention Reliance by name, there was no doubt about the identity of the ‘particular large firm’ she was referring to.

  Veteran business journalist T.N. Ninan, in his ‘Weekend Ruminations’ editorial-page column in Business Standard (29 June 2103), bluntly asked: ‘Is it masochism that makes the government invite controversy?’ He sarcastically added: ‘It is not clear who or what persuaded the Cabinet committee to agree to a price that was obligingly recommended by that world authority on energy pricing, C. Rangarajan’ and added that the ‘Planning Commission, headed by another economist ally of the Prime Minister, apparently wanted an even higher price.’

  Ninan’s view was echoed by others, including Nilotpal Basu, MP of the CPI(M) on a panel discussion broadcast on 1 July on Rajya Sabha Television. He said: ‘This is no way to fix prices, since it is said that these things are done in a techno-economic way. Rangarajan, what understanding does he have about gas prices? How can he equate the gas which is coming out of the wells with that of LNG (liquefied natural gas)?’

  On the same discussion anchored by Girish Nikam, former power secretary, Anil Razdan said that the major flaw in the Rangarajan report was that the power and fertiliser ministries had not been adequately consulted. He pointed out: ‘There was only marginal consultation with one power company as far as I know. Once the Cabinet note had been moved and there had been comments from the power and fertiliser ministries, one had expected that these would have been taken into account.’

  Razdan added that it seemed that the government had acted in needless haste. He said:

  It has been mentioned somewhere that the gas based (power) stations are a small fraction of the overall power generation basket. That will skew the demand more towards coal based power which globally people are trying to reduce for (lowering) greenhouse gas emissions. Maybe we could have waited a little more for getting views and a little bit of public debate. The gas price was due now, but I think the picture over the years has become a little confusing. Who has the right to set up the price through the NELP contracts? Was it the (production sharing) contract, the EGoM, or the Supreme Court which has given... directions at different times?

  Razdan also wondered whether the price of gas should be denominated in US dollars or Indian rupees? Basu went hammer and tongs at Reliance alleging that the company had ‘held the country hostage’. He remarked:

  When $2.30 (per mBtu) was fixed (for the price of gas), and Reliance went back on that, the me
dia was reporting the separation of the (Ambani) brothers, not the techno-economic issues. They had asked for a price which could not be arrived at even by a Committee of Secretaries. And the EGoM took a decision without any techno-economic inputs. What was the logic given by RIL at that time? That, they had huge deposits and so needed more investment, and therefore prices had to be high. Then they scaled down the production saying that they had a technical problem and needed a partner. But by that time with the first increase (in rates), they had managed to sell 30 per cent of their stake to British Petroleum at a huge premium. Then they started scaling down (production) and actually gas production has not gone up, (it has) only (come) down. Now they are saying that with the new prices they would be able to attract investors. I believe they will sell off more of their stake. Reliance refuses to be examined by any independent body. Earlier they said that they would not be examined by the CAG, or any concurrent independent authority... They are just blackmailing the government which is only too eager to please them. I understand that every one dollar rise in the price of gas per unit will fetch 6 crore 70 lakh dollar ($67 million) profit for the company. This is for Reliance, by Reliance, of Reliance. The other actors are incidental.

  Besides the lead author of this book, there were two other panelists on the Rajya Sabha Television programme, Himangshu Watts, editor, energy and infrastructure, Economic Times and Salil Garg, director at the Fitch group’s India Ratings and Research. Responding to my remarks that the logic behind the decision to hike the price of gas was flawed, Watts emphasised Rangarajan’s ‘credibility’ and argued that the Cabinet decision to increase the price of gas was not flawed. In his view, the government considered that at the current prices there were many gas fields which were ‘not viable’. At a gas price of $4.2 per mBtu, it made no economic sense to extract four to five trillion cubic feet (tcf) of gas which was available, but in difficult terrain, he said. Nikam intervened to ask if this had not been realised by British Petroleum when the group put in $7 billion in the venture. The anchor asked if BP had known what would be the price of gas and whether it would be viable to explore at that price. While Watts criticised the PSC as being ‘ambiguous’, he did agree that ‘it was perhaps not unviable for the existing fields’.