Of Gas and Greed

 The government has to ensure Reliance Industries will extract and distribute the nation's oil assets responsibly

Mohan Guruswamy Delhi

The announcement by Mukesh Ambani a few weeks ago that the new oil discovery in the Krishna-Godavari Basin will meet as much as 40 per cent of India's energy requirements is the best news the country has had for a while now. True, this too will have to be paid for, but the important thing is that it will bring relief to our adverse trade situation and the benefits of not having a huge current account deficit year after year will be quite enormous. Whether this will happen or not in the near or contemplatable future is a matter that will be decided by the Mumbai High Court, where there is a dispute pending over pricing. This is a matter primarily between Reliance Industries Limited (RIL) and the Government of India owned National Thermal Power Corporation (NTPC).

The story begins in 2002 when NTPC accepted RIL's bid to supply three million metric tonnes per annum or 12 million metric cubic meters of natural gas per day for NTPC's power plants at Kawas and Gandhar. In the bidding process there was a caveat in the ‘Request for Proposal' (RFP). It stated that failure by the ‘preferred bidder' to enter into a ‘Gas Sales and Purchase Agreement' (GSPA) with NTPC would prevent the ‘preferred bidder' from becoming the ‘selected' bidder - and this would lead to forfeiture of the bid bond following which NTPC would be free to invite the next bidder for negotiations.

In other words, bidding the lowest and being accepted wasn't enough. The bidder had to enter into a GSPA with NTPC for the contract to become ironclad. Clearly, NTPC was still to work out the details and hence this transition from preferred to selected bidder was envisaged. If the preferred bidder did not agree with the terms of the GSPA, it could back out as long as it was open to losing the bid bond amount.

In this particular instance, there were two final bidders - of which RIL was identified as the ‘preferred' bidder with its offer to supply gas at a delivered price of $3.18 per MMBTU (metric British thermal unit) plus taxes. NTPC issued a Letter of Intent (LoI) to RIL in June 2004, requiring it to confirm acceptance of the LoI. RIL accepted the LoI on condition that the GSPA, which is critical to the successful conclusion of the contract, would be mutually satisfactory.

As far as RIL is concerned, the hitch in the GSPA lay in a clause inserted by NTPC whereby it could, in the event of a disruption or stoppage of supplies, even for reasons beyond RIL's control, extract colossal damages from the latter. These damages could even be as high as the monetary value of 17 years' supply of the alternative fuel, naphtha in this case, at the prevailing market prices. Acceptance of these
terms was nothing short of financial harakiri in the event of a failure. At today's prices of naphtha and natural gas, the price differential works out to Rs 30,000 crore per annum.

In 1998, the Hindujas were seeking a similar indemnity from Coal India Limited for their proposed 4000 MW power plant in Vizag. This indemnity was to protect them from losses in the event of non-supply of coal even if the reasons were out of the control of the supplier (such as a cyclone or earthquake or civil disturbances). The government had rightly turned this down and thrown the Hindujas proposal into the wastepaper basket. Was it then surprising that Reliance too turned this down?