Sunil Jain: Petroleum ministry's gas

RATIONAL EXPECTATIONS

The fight between the two Ambani brothers on the supply of natural gas from Mukesh's Krishna-Godavari basin to Anil's Dadri power plant has taken a fresh twist with the petroleum ministry now changing its view on how this gas can be utilised. The first time the ministry got into the picture was in the middle of 2006, when it intervened in the fight and said, wholly incorrectly, that the price contract between the two brothers was invalid because it was not at an arm's length (see "What Murli's actions mean," 31/07/06). It was incorrect because the contract was a replica of Reliance's contract with NTPC, which took place after an international bid; and because the Reliance KG Basin Production Sharing Contract (PSC) clearly said the company was free to market its gas "" the ministry's role was restricted to ensuring it got its correct share of the proceeds. So Mukesh could even give Anil the gas free as long as he paid the ministry its share based on the 'correct' arm's-length price.

That was then. The contract subsequently found its way to the Bombay High Court, where the judge ruled that the two brothers should sort out the matter amicably. It is here that the ministry's sudden change in stance comes in.

Around the time the Mukesh-Anil fight was going on, Mukesh's Reliance was having another battle, with the state-owned NTPC. After winning NTPC's bid for the supply of natural gas to its Kawas and Gandhar power plants, Reliance refused to supply the gas for reasons too complicated to explain here. At that time, Power Secretary RV Shahi kept writing to his counterpart in the petroleum ministry asking him to get Reliance to fulfil its obligations. Right through this period, Petroleum Secretary MS Srinivasan kept arguing "the provisions of the Production Sharing Contract (PSC) do not normally provide for the Government to determine the outcome of commercial transactions between a buyer and seller" and went on to say that, under the PSC, the contractor had full freedom to sell the gas.

This was a view constantly reiterated by the ministry and its bureaucrats/politicians through much of 2006 and 2007, including in replies to questions asked in Parliament. In November 2006, for instance, a committee was set up to formulate transparent guidelines for approving gas pricing formulae which the government could use to approve contracts like the Reliance-NTPC one and the Mukesh-Anil one. In the middle of last year, an Empowered Group of Ministers (EGoM) was constituted to discuss commercial utilisation and pricing of gas. In each case, the ministry said the same thing about the freedom given to contractors under the PSC and how it could not force contractors to sell their gas to different users/sectors such as power or fertilisers.

Suddenly, however, the ministry has changed its tune. Its view now is that the government is the owner of the gas and that since Reliance is merely a contractor, the entire gas has to be sold in accordance with how the government decides; that the agreement between Mukesh and Anil was in violation of the Production Sharing Contract and had jeopardised the government's interests! The matter has now been referred to the law ministry for advice. So you can now expect another round of hectic lobbying by both the Anil and Mukesh camps.

A new gas utilisation policy now being discussed says the needs of fertiliser plants must be met first, then those of LPG/petrochemical units, existing gas-based power plants, city gas projects and finally other industrial units like steel, cement, paper and so on. If there is any gas left after all this demand has been met, it can go to new gas-based power units (like Anil's Dadri!). In other words, if the gas utilisation policy comes about in this fashion, Mukesh's Reliance will be legally empowered to not sell gas to Anil!

A few points need to be made here, regardless of what the law ministry finally opines and whether the government accepts or rejects its opinion. One, changing the meaning of contracts, either through the law ministry route or through a new gas utilisation policy, well after they've been signed can only be bad news for those investing billions of dollars and can lead to even more prolonged litigation "" the PSCs, for instance, were signed 7-8 years ago and there was no gas utilisation policy then. Two, there is little chance of India sustaining its current economic growth without more capacity "" as against the current achievement of around 4,000 Mw of additional capacity each year, the current Plan's target is 16,000 Mw and, according to the Integrated Energy Policy, this needs to go up to 40,000 Mw per year if the 2030 target of 900,000 Mw is to be achieved. How this is to be done if there is no gas for new power plants is anybody's guess.