Not all were equally sanguine about what was being claimed by the Indian government. Outlook weekly (15 July 2013) ran a cover story titled ‘The Great Gas Heist’ with the subtitle: ‘One beneficiary, clear and corporate. How the UPA played for political positioning’. The article said back-of-the-envelope calculations indicated that the loss to the country would be in the region of Rs 54,500 crore a year. It stated right upfront:
...apart from the Left parties and AIADMK, few even in the political establishment are raising obvious questions about this deal, of which Reliance, the country’s largest private sector gas producer, is the major beneficiary. The whole pricing exercise has been riddled with conflicts between the ministries of power, fertiliser, finance and petroleum; the formula has invited severe criticism; and there’s an attempt by the UPA to airbrush the obvious negative impact of the hike on the common man and taxpayer. Nearly everything will become expensive; or, obviously, the taxpayer will bear these subsidies.
Outlook quoted Prof K. Nageshwar, member of the legislative council of Andhra Pradesh, saying this was a clear case of ‘placing profit above people’. He estimated that for every one US dollar increase in the price of gas, the profits of Reliance would rise by $73 million and said this was ironical since natural gas is meant to be a cheap, green fuel. The magazine also emphasised the ‘political brazenness’ and pre-emptive nature of the timing of the decision to increase the price of gas well before the model code of conduct of the Election Commission kicked in and quoted an unnamed political analyst rhetorically asking: ‘With elections around, who’d want to upset a major source of funding?’
The weekly wrote about the ‘token response’ against the gas price hike decision by the BJP and stated that ‘considering the growing (and open) corporate support for Narendra Modi, the UPA has made a political bargain by keeping Reliance happy’. It quoted Hyderabad-based professor of law Madabhushi Sridhar saying: ‘The silence is conspiratorial and almost like the main opposition party is rallying around (the ruling) UPA (government).’
The Outlook cover story carried a box item which stated that it was ironical that no major political party (barring the YSR Congress) in Andhra Pradesh was protesting against the gas price hike while recalling how the state’s former chief minister Y.S. Rajasekhara Reddy (YSR) had unsuccessfully tried to obtain more gas from the Krishna-Godavari basin for users in his state. The late chief minister had, reportedly while gritting his teeth, told Outlook’s Madhavi Tata in 2006: ‘Gas is a natural resource, a property of the nation, not of a private company’s.’
YSR said he had raised this issue in the state assembly as leader of the opposition when N. Chandrababu Naidu was chief minister of Andhra Pradesh, at a time when the KG basin blocks had come up for auction. Whereas the Gujarat government’s GSPC had bid for blocks on that occasion, YSR felt his state government should also have done so. By not participating in the auction, YSR alleged that Naidu’s government had ‘compromised the state’s future’. After YSR became chief minister in 2004, he promised free power to farmers in his state. However, Outlook wrote that ‘such was the tussle between Reliance and YSR that files related to laying of pipelines moved at snail’s pace’. In 2008, YSR said he would not call for a reduction in the price of gas as the Union government was bound by a contractual obligation under the NELP with operators (like RIL). After he was re-elected in 2009, the YSR government reopened the issue and a letter was written to the PMO urging that at least 10 per cent of the gas produced from the KG basin should be given to the state on a ‘preferential basis’. Nothing did, of course, come out of these entreaties.
Outlook quoted a spokesperson of RIL seeking to deflate the charge that the price hike was effected to benefit the company by saying: ‘Our production will go up only in mid 2017-18’. The publication said that three years down the line, with new discoveries, RIL would no longer remain a marginal player but ‘could could well emerge as the biggest gas producer in the country’. It also highlighted how the government had selectively ‘cherry-picked’ the Rangarajan Committee’s recommendations to devise a formula that ‘is unique to India: no other gas-producing country has devised such a convoluted way to reward exploration companies’. The government had also departed from the committee’s suggestions for a monthly review of prices and equated the price of domestic gas with that of imported LNG, which has additional cost burdens of liquefaction, transportation and regassification.
While B.K. Chaturvedi, a member of the Planning Commission, who was on the Rangarajan Committee, defended the government’s formula to Outlook, he admitted that a higher price of gas would impact the cost of producing electricity and fertilisers. GSPC chairman D.J. Pandian too acknowledged: ‘Even though GSPC stands to benefit as an upstream company, we will be put to great hardship as power producers, for it will add Rs 2 per unit to our cost.’ What was also questioned was the basic assumption made by the government that a higher price of gas would automatically bring in fresh investments from domestic and foreign companies. ‘The assumption is based on a false premise,’ said CPI(M) member of the Rajya Sabha Tapan Sen, who, as the original whistle-blower on this subject, felt let down by his fellow parliamentarians for not raising this issue.
The magazine carried a short article by former petroleum secretary T.N.R Rao who started off by asking a pertinent question: ‘Why did our market-friendly policymakers revert to the much-maligned administered price only for gas, while batting for market prices for all else?’ He described the episode as a ‘classic case of policy capture by a corporate’ and added that ‘an effete government got inveigled into impleading itself into the Ambani family feud’ on ‘the pretext of gas being a national asset’. Tracing the background to recent developments, the retired bureaucrat pointed out how the government ‘bailed out one sibling from both a private commitment and an inconvenient bid at $2.34/mBtu to the NTPC tender’ and also ‘cheated the country of Malaysian LNG at $3.4/mBtu’. The last reference was to the Indian government not going in for a contract to buy liquefied natural gas from Malaysia. Rao alleged that the government ‘rewarded the truant contractor’ (meaning RIL) with a gas price of $4.20/mBtu, allowed it ‘sell part of the national asset for billions of dollars’ (to British Petroleum), ‘only to see the reserves evaporate by over 80 per cent’. He added that neither the buyer (BP) nor the owner (the government) demurred while the ‘the custodian of our reservoirs, the DGH, has been deafeningly silent’. Dripping vitriol, the former petroleum secretary said that for this ‘vanishing act’, the contractor has been ‘further rewarded by doubled price, on a dubious formula concocted by a body unlettered in oil/gas, making it the highest wellhead price for gas anywhere in the world’.
While accusing the country’s main opposition party of acting like a ‘silent accomplice’, Rao sought to refute the government’s ‘specious’ justification for increasing the price of gas. He pointed out that despite the fact that domestic crude oil producers have been getting international prices since the 1990s, production had stagnated and that the ‘gas story won’t be any different’. He added that the world over, drilling for oil and gas rise and fall with market prices and that fields that are unviable at prices the market cannot bear remain capped. Rao said that if hypothetically, a price of $200 per barrel could be paid, the shale sands of Assam in northeastern India can produce enough oil to make the country self-sufficient. But that was not how the exploration and production (E&P) game is played since such high prices would hurt the economy. He said the finance minister’s statement that higher subsidies may be given to users of gas without touching private profits was akin to a ‘pinch the baby, rock the cradle’ act. Rao said that while power plants in India were switching to coal from costly LNG and natural gas, adding to higher carbon emissions and imports, the US was attracting investments by powering energy prices.
The former petroleum secretary added that the high gas price, fixed in dollars against a falling rupee, would have a ‘disastrous effect’ on the country
’s economy. Instead of doing the market’s job of determining prices, the government ought to have exerted itself to formulate policy measures that were non-existent. Such initiatives, according to Rao, included putting together a ‘strong, independent and stable regulatory regime’. He pointed out that all gas pipelines are natural monopolies and fragment the market. ‘The policy regime should mandate the trunk pipelines to meet, ensure non-discriminatory access, destination flexibility facilitating price arbitrage so that gas-to-gas competition is generated,’ he stated, adding that ‘disclosure norms’ for gas and oil reserves should be made ‘statutory’. Rao felt the Competition Commission of India should ‘discourage monopoly pricing practices and start processes to decouple gas prices from oil’. He wondered whether gas production would rise in the KG basin? ‘If so, why is ONGC being “persuaded” to lease the gold-plated facilities, instead of building its own?’ he asked, since all the infrastructure set up in the KG basin is financed by the cost of gas and oil and hence, should rightfully belong to the government. He argued that ‘any lease rentals should accrue only to the government’ and called on the CAG and CVC to note this point.
The Outlook cover story also carried an article based on an interview with Mohan Guruswamy, who was identified as chairman and founder of the Centre for Policy Alternatives. Guruswamy is a former adviser to finance minister Yashwant Sinha in the BJP-led NDA government and has been a trenchant critic of many of the government’s policies (for instance, the one on foreign direct investment in multi-brand retail and its strategy of tackling left-wing extremism). What was not mentioned by Outlook was that Guruswamy is also listed as a visiting fellow on the website of the Observer Research Foundation (ORF), which is supported by Reliance.1 However, the title of the article based on an interview with him was adequately revealing: ‘Self-Reliance, Not Reliance’. The subtitle quoted him as claiming that the opposition to the hike in the price of gas was akin to a ‘new and indigenous form of McCarthyism’—a reference to the US senator and Republican politician Joseph McCarthy who accused thousands of Americans of being Communist sympathisers in the 1950s and after whom, the term McCarthyism is coined to signify the practice of levelling allegations of disloyalty, subversion or treason without adequate evidence. Guruswamy batted for Reliance and the government using sophisticated arguments and selective facts, though he would later claim to the lead author of this book that he had expressed his view as an independent analyst which had nothing to do with his association with ORF. He said RIL had demanded a higher gas price a year before it got it and that by offering a price that will ‘only be applicable in mid-2014, the government loses nothing and has everything to gain’. He said the ‘major’ part of the selling price would go to the state, that the gap between the price announced and prevalent international prices (presumably of imported LNG) was ‘still large’ and that India should have a ‘liberal economic regime, not one that robs Peter to pay Paul’. Guruswamy then asked why other business families like the Ruias and Mittals should sell steel at international prices while using subsidised gas and claimed that subsidies on production of fertilisers were ‘misdirected’ and went to ‘all the wrong people’. The academic, who is not exactly known for his expertise on energy pricing, claimed that there was a ‘direct relationship between oil prices and available reserves,’ that prices rose as more reserves became ‘viable’.
Echoing the government’s (and RIL’s) position, he claimed that ‘most of the reserves lying just under the surface have been exploited’ and that exploration would now have to take place in ‘deeper’ and in ‘far more hostile’ environments. ‘Drilling 10,000 metres below in the middle of a deep sea is not an easy business and few have the expertise and technology to do so,’ he remarked, adding that this was also more expensive. Once prices rose, extracting from such reserves becomes more feasible and the country is thereafter able to reduce its dependence on imports. Guruswamy asked that if ONGC and OVL did not take up exploration of blocks outside India at ‘pre-fixed’ prices, why should others be expected to agree to invest in India when prices are fixed. He thought the ‘best way to attract the big oil drillers here is to offer production-sharing options at market prices’. Guruswamy patronisingly added that his ‘good friend’ Jaipal Reddy ‘could never understand this’ and ‘I am not sure if even Veerappa Moily understands this’. Obliquely referring to Moily’s claim that lobbies wanted India to continue importing, he claimed that the minister had ‘understood well...that there are many oil brokers near and within government who collect good brokerages on every import deal’.
Pitching for domestic gas prices to be linked to imported prices of LNG, Guruswamy said the country was importing coal at prices that were one and a half times higher than domestic prices. He then asked a series of rhetorical questions: Was Mukesh Ambani happy that the domestic price of gas was going to be $8.4 per mBtu while the international landed price of LNG was nearly $14 per mBtu? Why should Indian gas producers be penalised? And why was everybody so allergic to corporates making profits? He said corporate profits led to more taxes for the government and more investment, that companies did not let their money lie idle and that unlike politicians who made money to consume, businessmen reinvested what they earned. The academic and activist from Andhra Pradesh wondered: ‘...how much can one man consume? How many houses will Mukesh Ambani build and how many planes will he buy?’
Whereas Guruswamy claimed that an issue of ‘basic principles’ had been converted into a debate for or against Reliance and that grievances against the group should be taken up with ‘appropriate’ institutions, others were far from convinced by these arguments. One such person was energy analyst Sudha Mahalingam, former member of the Petroleum and Natural Gas Regulatory Board (PNGRB). In an editorial page article in the Hindu (8 July 2013) entitled ‘A wrong turn on energy’, she first pointed out that the decision to increase the price of natural gas ‘ostensibly to incentivise domestic gas production may render nuclear power less uncompetitive, an outcome that is largely unappreciated, but perhaps not unintended’. She added that the steep hike in the price of domestic gas is ‘bound to freeze, if not drive down the share of natural gas in India’s already skewed energy basket with its attendant implications for energy security’. Mahalingam added that since the country’s energy basket was disproportionately weighed down by coal, which now accounts for more than 85 per cent of actual power generation from all sources, there was ‘little room for manoeuvre’. While imported coal would now appear more viable, its absorption would be hamstrung by bottlenecks in India’s port and handling infrastructure. ‘Certainly no new gas-based generation will come up and even existing Combined Cycle Gas Turbine (CCGT) plants are likely to remain stranded,’ she stated categorically, adding that the price of ‘nuclear power from imported reactors would still be too steep for India and even a couple of imported reactors may set back our power sector by decades a la Enron, (and this) will be a problem for a future government to grapple with’. She argued that the UPA government which had laid a lot of store on the India-US nuclear deal should be happy that ‘high gas prices would tend to persuade us that nuclear power from imported reactors is indeed the only way forward’.
Mahalingam concurred with many of the points made by Surya Sethi in his criticism of the Rangarajan Committee’s recommendations and repeated these. She found the guiding premises of the government formula to determine the price of gas to be ‘rather flimsy’ and described as ‘invidious’ the distinction that had been made between those recommendations that would be applied prospectively and those that would take effect during the currency of production sharing contracts (PSCs) already under implementation. ‘Thus, tinkering with PSC terms to ensure that production costs are not unduly inflated by the contractor has been kept in abeyance to be applied to future PSCs while pricing decisions will apply to existing PSCs,’ she wrote.
Mahalingam added that the Rangarajan Committee had admitted that there had been ‘gold-plating’ of capital c
osts and conceded the need for putting in place a robust mechanism to check such practices. Yet, this key lacuna remained unaddressed in the case of existing PSCs ‘even as higher prices will bestow substantial and unwarranted benefits on the operators’. There was ‘little justification’ for the steep hike proposed by the Cabinet Committee on Economic Affairs (CCEA) in the price of gas from already discovered fields of RIL which were supposed to supply at least 80 mscmd even at $4.20 per mBtu but produce less than a quarter of that quantity. She pointed out that Reliance had built a hugely expensive pipeline across the country to carry 80 mscmd of its own production which was ‘now being subsidised by a few unfortunate users who consume the meagre volumes of gas it transports’.
Like others critical of the government’s move to increase the administered price of gas, Mahalingam argued that the premise that a higher price would automatically and inevitably lead to higher exploration and production was ‘not only flawed but even misleading’. She criticised petroleum minister Moily for claiming that India was ‘virtually floating on hydrocarbons’ and that only inadequate exploration was keeping India dependent on imports. Mahalingam said the preface to the terms of reference of the Rangarajan Committee ‘almost anticipates’ the recommendations by waxing ‘eloquent on the attractive prospects of the grossly under-explored sedimentary basins, and almost implies that only a wellhead price hike stands between the cornucopia of black gold and the investments needed to pour it out’. She argued that the committee itself ‘rises to the bait and uses convoluted logic to justify doubling of gas price, providing a fig leaf to the government to justify the hike’. At the stage of exploration, nobody knows whether a block will yield any gas or oil. For oil, domestic producers have already been given import parity prices since 2002, that is, the international market price plus notional transportation charges and import duties, which Mahalingam calls ‘an unconscionable windfall’. She wrote that ONGC, which was ‘eking out a cost-plus price for its production, suddenly became the beneficiary of this windfall although some of it is sponged back by the government in the form of subsidy-sharing’. Yet, ONGC’s domestic crude production has remained static over the last decade and instead of looking for crude oil at home which can be sold at very attractive prices to refiners, the public sector company had ‘taken the easier and more glamorous way out—of acquiring assets abroad, frequently of dubious quality—which compare poorly with domestic discoveries from the perspective of energy security’.
GAS WARS: CRONY CAPITALISM AND THE AMBANIS Page 36