Letter dated August 22, 2009

Visakhapatnam
August 22, 2009

E.A.S.Sarma                
14-40-4/1 Gokhale Road                                         
Maharanipeta
Visakhapatnam 530002
Tel. Nos. 0891-6619858/ 9866021646

To

Dr. Manmohan Singh
Prime Minister

Dear Dr. Manmohan Singh,

Subject:- Reliance gas from K.G. Basin

This is in continuation of my letter of 12-8-09 addressed to you on the subject.

From Times of India (22-8-09), I understand that you have asked the Ambani brothers to come to an amicable “settlement” to improve the business environment. If the report is correct, your intervention raises crucial concerns of public importance.

The government seems to be far too engrossed in trying to patch up the ongoing tussle between the two Ambani brothers to be able focus its attention on more fundamental issues of public importance. I will cite a few of them here.

Government’s rights under the Production Sharing Contract (PSC):

The government, of late, has come up with statements to the effect that natural gas belongs to the country; the government has the right to determine the priorities of inter-sectoral allocation of gas and has the authority to determine its price. Does the present model of the PSC fully factor in these pronouncements? If not, against the background of the ongoing RIL-RDAG litigation, has the government tried to adapt the NELP VIII model PSC to take these requirements into account? Perhaps, it is not the case. The PSC is merely an instrument through which the government appoints the contractor and delimits his rights within the overall framework of what it perceives as “inalienable rights”.

Price of Natural Gas:

Clause 21.6.3 of the PSC states as follows.

“The formula or basis on which the prices shall be determined pursuant to Articles 21.6.2 (b) or (c) shall be approved by the Government prior to the sale of Natural Gas to the consumers/buyers. For granting this approval, Government shall take into account the prevailing policy, if any, on pricing of Natural Gas including any linkages with traded liquid fuels, and it may delegate or assign this function to a regulatory authority as and when such an authority is in existence.

Since there are no homogenious gas markets and it is difficult to discover the market price, the government should have entrusted the responsibility to the regulator appointed under the Petroleum & Natural Gas Regulatory Board Act of 2006. The government, despite my repeated entreaties, had let that opportunity to slip away.

When NTPC’s international enquiry elicited a bid from RIL at $2.34 per MMBTU, the government chose to ignore it altogether. Later, your government that firmly believes in depoliticizing the pricing issue, conveniently handed over the matter to the Group of Ministers. The latter, in the name of maximizing the royalty income for the government, knowing well that every extra dollar of royalty income will correspondingly hand over more than that extra dollar to RIL by way of unearned profits, fixed the price of gas at $4.20 per MMBTU in a highly non-transparent manner.

Since the government has anyway resorted to administered pricing, should it not have laid down some principles for price fixation?

The Gas Pricing Committees in the past had adopted the usual normative-cost-plus-reasonable-return approach which could have served as a robust basis. Would the government set right the situation in NELP VIII.

Incidentally, the relative value of gas as a fuel or a feedstock varies from end-use to end-use and from location to location. The reason for this is that there are different sets of substitute fuels/ feed-stocks for gas in different sectors and the relative opportunity costs of gas also vary from location to location as the alternate fuels have similar cost variation across different locations. Studies based on such “imputed economic values”, attempted in the past, are available in the Planning Commission. Instead of adopting ad hoc methods of pricing, the decision makers should have looked around for the necessary technical inputs to render the exercise more scientific and objective.

Inter-Sectoral & Inter-Regional Allocation Priorities:

The imputed economic valuation method should be the basis for inter-regional and inter-sectoral gas allocations. Such an evaluation will take into account the relative costs of, say, gas transportation vs electricity transmission, in addition to the relative costs of alternative fuels etc. Such a quantitative analysis will depoliticize the allocations and enhance their public credibility.

Other Issues:

There are issues of transparency and accountability in the matter of operating the PSCs. On an application filed by me under the RTI Act, the DGH has invoked the confidentiality clause to block giving information on the cost of RIL gas! Should not the government, on its own, disclose all such information to the people of this country?

Should private gas developers be allowed to wield monopolistic power over strategic resources?

Should gas developers dictate to the government as to which agency should evaluate their operations?

Instead of addressing these fundamental issues of importance, I am surprised that your government should involve itself in “patching up” private squabbles and devoting attention to marginal issues. Business environment will improve if only we can tell the rest of the world that we are conscious of our sovereign rights, we have faith in scientific analysis and we deal with concepts, not petty trivialities!

Regards,

Yours sincerely

E.A.S.Sarma
Former Secretary to GOI