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?

Between August 2004, when RIL accepted the letter of intent and began discussing the GSPA, and December 2005 till the matter went to court, the talks with the NTPC did not budge even a wee bit. RIL insisted that the indemnity clause be removed and NTPC insisted upon it. Given this impasse, NTPC went to court. The NTPC also had the choice to accept the bid of the next lowest bidder, in this case Petronas of Malaysia. It decided, for reasons best known to it, not to exercise this option and insist on a GSPA only with RIL. Three months later, the then NTPC Chairman CP Jain, retired, and joined Anil Ambani's Reliance Natural Resources Limited. Was this possibly just a coincidence because good professionals like Jain are hard to come by?

Following differences between brothers Mukesh and Anil Ambani, a Scheme of Demerger was propounded by the Board of Directors of RIL, which was approved by its shareholders and creditors on October 21, 2005. RNRL is one of the four companies born out of this demerger scheme. Clause 19 of the scheme, sanctioned by the Bombay High Court, requires RIL to enter into suitable arrangements for supply of gas exclusively for power projects of Reliance Patalganga Power Limited and Reliance Energy Limited (REL). Following this, RIL and RNRL entered into a Gas Supply Master Agreement (GSMA) on January 12, 2006 that RIL would supply RNRL natural gas at the same price as it would to NTPC.  Notably, this was a good two years after the disputed agreement with NTPC was inked on and when prices had moved upward significantly.

Now, the Union government, particularly the Department of Company Affairs, must take a call on whether in-house and private family partition is in the best interests of the other shareholders of Reliance? The Ambani family has promoted Reliance and even made it the colossus it is today. It may even be, together with persons and entities that would act in concert with it, the majority shareholder of the company. Nevertheless, Reliance is still a publicly held company where certain norms and restraints should be applicable. Unfortunately, being in majority doesn't give anyone license to
do anything. Therefore, the legality and even morality of this partition and the GSMA is questionable. There is much more than family harmony involved here. Majority shareholding and management control can never be unfettered when the rights and interests of other shareholders are involved.

Significantly, RIL operates the Krishna-Godavari Basin gas fields under a production sharing contract executed with the Union government, the terms of which require RIL to apply to the government for approval of the formula or basis on which price shall be determined prior to sale of gas to customers. Given that the government has a share in the production, this requirement is entirely logical.

It is in line with the nature of RIL's contract with the government that it included, in clause 13.9(a) of the GSMA with RNRL, the ironclad term that all gas sale and purchase would be "subject to the receipt and continued effectiveness of approvals under the applicable upstream arrangement". In other words, a government nod was necessary. RIL just does not have the right to give away the nation's gas to all and sundry at prices well below those prevailing; ultimately the gas belongs to the people of this nation and RIL is only the chosen contractor to extract from the ocean's depths. The government, therefore, has a great responsibility to ensure that national assets are not given away at bargain basement prices.

Consonant with this responsibility, on July 27, 2006, the Government conveyed its inability to approve the price for the purpose of supplying gas to RNRL. There could be two reasons behind the government's disapproval. First, energy prices had begun their great upward trajectory by then, and the government, as the ultimate owner of the gas field, apart from being a shareholder in production, had thought the price too low. Besides, the REL power project at Dadri in Uttar Pradesh, for which the gas was sought, was nowhere near completion. Nor is it now. 

It is in this context that one must see the infamous letter the Samajwadi MP Amar Singh has written to the prime minister of India. In it he makes no bones about the true constituency he represents.