The government’s latest affidavit in the Ambani brothers’ case (Reliance Industries Limited vs Reliance Natural Resources Limited) is certain to set the cat among the pigeons. For it completely changes the perspective on the Production Sharing Contract (PSC) between those that win gas/oil fields for exploration (companies such as RIL, for instance) and the government. Indeed, given that the government has given this affidavit for a PSC that was signed several years ago, it seeks to amend the PSC with retrospective effect. Though the affidavit may help RIL in its case against RNRL, and even the one against the state-owned NTPC, it has important implications for all those who plan to take part in future gas/oil bids in the country and could end up becoming an important source of litigation in future as well.
The PSC, as is well known, is a contract that lays down how the gas/oil is to be shared between the contractor and the government — the reason why the government asks firms to bid for how much of the gas/oil they will share with it each year, instead of asking for a huge upfront once-and-for-all fee, is that there is no certainty over how much gas/oil will be found. The PSC is clear that the contractor is free to market its gas/oil (Article 21.3); then while talking of the ‘value’ of this gas/oil, it says (Article 21.6.2) the gas/oil is to be valued on the basis of ‘competitive arms length sales’; another clause (Article 16.5) which talks of ‘profit petroleum’ (that part of the gas/oil which has to be shared with government in kind/cash) says the price used to calculate profit petroleum will be determined on the basis of Article 21 which is the ‘competitive arms length’ clause. In other words, the government is concerned with the valuation only as far as its share is concerned.
Indeed, this is the exact line the government has also been taking so far. In an answer to the Lok Sabha on August 30, 2007, Minister of State for Petroleum and Natural Gas Dinsha Patel said, “Government does not fix price of gas. The role of the Government is to approve the valuation of gas for the purpose of determining Government take”— a point reiterated while answering other questions on other days. As late as October 21 this year, Petroleum Minister Murli Deora said much the same: “The formula or basis on which the prices shall be determined for the purposes of determining the Government take is required to be approved by the Govt prior to sale of natural gas.”
It makes sense too. If, for instance, RIL was to utilize all the KG Basin gas for making petrochemicals, say, instead of selling it, it couldn’t be asked to conduct (and win!) an arms-length competitive bid first, could it? It would use the gas it needed and just look at a competitive arms length price for the part it needed to give to the government. Alternately, it could just physically give the government its gas share and not worry about any free-market pricing.
But what the latest affidavit does is to turn things on their head. It says, “It is clear from this provision that all the gas and not just the share of the contractor or the Government shall be sold at a price which follows from the price formula/basis approved by the Government, which in this case, comes to US$4.20 per mmbtu.” It then goes on to cite a decision of an Empowered Group of Ministers (EGoM) last year and says, “Moreover, the EGoM decision refers to the price of all natural gas produced from (RIL’s KG Basin). No distinction has been made in the Government decision regarding its own share or the contractor’s share.”
This is really curious. Apart from turning things on their head, the affidavit seeks to turn a decision taken in a government committee into something superior to a signed contract — so, if under the next government, another EGoM comes to the opposite conclusion, this will be considered to be superior to the last EGoM! Why bother to have signed contracts, just have EGoMs to define the contractual relationship from time to time.
What’s even more interesting, of course, is what the EGoM itself said. At the EGoM, some participants brought up the issue of the PSC versus the current fight between the Ambani brothers and the new pricing formula that RIL had come up with on the basis of a bid it had called for. They also asked how the decision of the EGoM would impact existing cases — after all, the price of $4.2 per mmbtu that is being talked of today is substantially higher than the $2.34 RIL bid for when NTPC floated a bid for contracting gas supplies five years ago; since the RNRL contract was based on the NTPC one, $4.2 was substantially higher than the RNRL one as well. The law minister, the EGoM minutes say, “clarified that the present consideration of the EGOM was without prejudice to the two contracts, the one relating to the NTPC and the other relating to a private party, presently being agitated before the Bombay High Court.” The EGoM’s decisions then were: “It will not be in the country’s interests to renege from PSCs ... Sanctity of the contracts signed should be maintained” and “the decisions taken in this EGOM meeting will be without prejudice to the NTPC vs RIL and RNRL vs RIL cases.” And yet the affidavit says what it does.
