The oil ministry needs to respond to the power ministry on the issue of RIL’s margins.
Now that the power ministry has come out against the marketing margin charged by Reliance Industries Limited (RIL) for gas supplied to NTPC’s power plants from RIL’s Krishna-Godavari Basin, the ball is once again in the petroleum ministry’s court. The power ministry’s point is that since the government is deciding who the buyers of RIL’s gas will be as well as fixing the price ($4.2 per mmBtu for now) for each buyer, there is no real marketing of the gas or even developing of the market for which a margin is required. Apart from this, there is also the issue of the transportation cost charged by Reliance Gas Transportation Infrastructure Limited (RGTIL), a firm owned by RIL Chairman Mukesh Ambani — at $1.25 per mmBtu, the cost of transportation works out to a whopping 30 per cent of the $4.2 price.
But first, the marketing margin. While the petroleum ministry has argued that the matter is a commercial one between the buyer and RIL, it’s hardly that simple. RIL says it needs to charge a margin for a variety of reasons — namely, that while its risks and costs of exploration and production are covered in the Production Sharing Contract (PSC) with the government, the risks and costs associated with the marketing of gas are not. So, for instance, it says it has inked contracts with 45 customers and has to bear the risks associated with, for example, them not paying on time; it also has to pay liquidated damages if it does not supply gas to buyers — there are several other such points made in a letter sent by RIL to the power secretary.
While this may be logical, the petroleum ministry cannot treat it as a bilateral matter for a variety of reasons. For one, when it is fixing the price of the gas, and the transportation costs are also to be eventually fixed by the Petroleum and Natural Gas Regulatory Board (it has appointed consultants to look at RIL’s costs), it is difficult to see why the marketing margin should be left open. More so since, while RIL has to share its gas-sale revenues with the government as per the formula in the PSC, it gets to keep the margins to itself. That’s an arbitrage possibility which you’d think the government would be anxious to plug — in the case of the Panna-Mukta-Tapti fields, interestingly, the government auditors took exception to the marketing margin not being shared with the government.
Nor is it quite clear how the marketing margin is really worked out. In the original bid to NTPC in 2004, RIL bid $2.34 per mmBtu for the gas itself, 36 cents for the marketing margin and 48 cents for transporting the gas. In May 2005, however, RIL sent a letter to NTPC suggesting that while the overall price be kept at the same $3.18 and the gas also at the same $2.34, the marketing margin be cut to 12 cents while the transportation margin be raised to 72 cents — the net amounts for both NTPC and the government remained the same, but it shows the figures aren’t sacrosanct. RIL shareholders would also want to know how their take was reduced while that of RGTIL, a privately-owned firm, was raised.
This transportation price, for all new contracts, has now risen to $1.25. RGTIL’s explanation for this is similar to the one for the sharp hike in its costs for the KG Basin fields — the output has risen considerably, raw material costs also peaked, and the peak production profile has doubled. While that explains why the costs of the pipeline have gone up, it doesn’t explain why tariffs have risen to 2.6 times since the costs are being recovered through the transport of a lot more gas. While claiming, incorrectly, the 72 cents tariff was there in the 2004 NTPC bid, the RGTIL spokesperson points to a change in the pipeline policy which says that instead of a uniform tariff across the pipeline, it has now to be distance-based — this, however, doesn’t make a difference for buyers such as NTPC who are taking their gas at the end of the pipeline.
All of these are issues that the government and/or the PNGRB need to have answers for, and not just for this project. All too often in the recent past, we have seen private sector projects being cleared on the basis of one figure, whether in airports or elsewhere, and when the final figure comes out, there is little connection between it and the original number. None of which is conducive to making you believe privatisation is the great thing it is made out to be.
