Visakhapatnam
August 3, 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: Pricing of Reliance Gas
This is in continuation of the series of letters I have addressed to you, the last one on 13-7-09. I am yet to receive an acknowledgement, leave alone a satisfactory response from the government on any of these letters!
I appreciate the hurried and somewhat belated attempt on the part of your government to declare that the natural gas resource found in the K.G. Basin is not the private property of the licensee and it is a resource held in trust by the government on behalf of the people of India. From what one learns from the news reports, the government has also filed an affidavit, though somewhat delayed, before the Hon’ble Supreme Court that it has the sovereign authority to determine the value and the priorities of allocation of natural gas. A family agreement that violates the sovereign authority of the government cannot survive. I hope the government will be able to argue these points emphatically before the Hon’ble Court.
While my RTI applications to Cabinet Secretariat and the Petroleum Ministry have so far drawn a blank, as I had already stated in my letter of July 13, 2009, RIL’s mandatory disclosure to DGH apparently shows the following:
i. Total capital expenditure estimated till end 2009-10: $4.8 billion
ii. Recoverable Reserves : 9.12 Trillion MMBTU
iii.Total “post well head” cost as indicated by RIL : $0.8945 per MMBTU
iv. Total “post well head” cost as per DGH’s
interpretation (only operation expenditure from
wellhead to delivery point to be included) : $0.2211 per MMBTU
(In these estimates, the interest on the cumulative expenditure on exploration & development has been capitalized, assuming an annual interest rate of 14%. A lower interest rate would have been more appropriate! The unit cost then would be lower)
I am not sure whether the GOM had the benefit of having this information before it, while it arrived at the price of $4.20 per MMBTU! While the government may be anxious to maximize its royalty income by hiking up the gas price, it should know that every extra dollar of royalty will simultaneously give away more than a dollar extra profitability to RIL! Both royalty and the profit will adversely impact the consumers of electricity, the users of fertilizer and the households that use gas for cooking. These are the three large consuming sectors for gas. Indirectly, since these are sectors that cannot bear high tariffs, the additional cost will have to be borne by the government through subsidies.
In Rajya Sabha question No. 336, the Petroleum Minister informed the Parliament on 27-7-2009 that Reliance expects to invest $8.8 Billion on its KG fields to obtain a peak production of 80 MMSCMD of gas. The Petroleum Minister further informed the House that this figure stands validated by “independent” experts. This implies that RIL is going to claim a quantity equivalent to this investment as “cost” gas to be sold by them as their own share, in addition to the “profit” gas share they will be entitled to, as per the terms of the Production Sharing Contract. If RIL were to claim its entitlement of gas against $8.8 Billion investment, how long will the government have to wait till they start getting their own share of gas from the profits?
While a family agreement among the members of the Reliance Group should not be allowed to override the role of the government in gas pricing and allocation, I believe that the government should allow NTPC to protect its own commercial interests based on RIL’s bid to NTPC, keeping in view the real cost of gas from the KG field and the need to provide electricity to the consumers at affordable prices.
I understand that RIL is going to earn additional profits to the tune of one dollar per MMBTU for transporting the gas through its own pipeline to different consuming centres in western and northern parts. I had earlier cautioned the government to preempt this by asking GAIL to have exclusive rights over gas transportation. GAIL should have been brought into the picture fully by allowing that company to lay out a national gas grid to permit healthy competition among the gas suppliers. Unfortunately, my letters have evoked little or no response from your government.
I am afraid that the government has brought itself into a messy situation by not heeding to sane and timely advice. I wish the government had anticipated this situation, as cautioned by me several times in the past, and framed the Petroleum & Natural Gas Regulatory Board Act of 2006 so as to empower the regulator to fix the gas price and the gas allocation priorities.
I hope the government, even at this stage, makes a public disclosure of all the financial and technical information on gas and allow a healthy debate to take place in the public interest.
Regards,
Yours sincerely
E.A.S.Sarma
Former Secretary to GOI
