Sunil Jain: What Murli's actions mean

RATIONAL EXPECTATIONS

While the government is yet to get over the allegation of playing favourites in the first round of the fight between the Ambani brothers, when it refused to investigate the charges younger brother Anil levelled against elder brother Mukesh, Petroleum Minister Murli Deora's intervention in the two brothers' dispute over the supply of 28 mmscmd (million metric standard cubic metres per day) of natural gas has only added fuel to the fire. For several reasons.

For one, the ministry of petroleum and natural gas' role in the dispute of supplying gas from the Mukesh Ambani-controlled Reliance Industries Ltd's (RIL's) gas fields to Anil Ambani's Reliance Natural Resources Ltd's (RNRL's) 5,600 Mw Dadri power plant at a price of $2.34 per million btu (British thermal units) was at best limited. Yet, based on the ministry's press release, newspapers have reported, RIL is no longer under any obligation to supply RNRL the gas at the contracted price.

Under article 21.3 of the production-sharing contract (PSC) signed by RIL with the government, which granted it the right to explore for oil/gas, RIL has the freedom to sell the gas, at whatever price, to whoever it wants""this applies not just to RIL, but to all contractors in PSCs. But, in return for this right, the government gets to share part of the profit, and this is where the ministry's role in the Mukesh-Anil fight comes in.

Under the PSC, if the gas is flared, its value will be taken to be zero""that is, the government will not get any share of the price of the gas. If, on the other hand, it is sold to the government or any other government-nominee, the price at which the contract is executed shall be taken as the value on the basis of which the government will get its share. If, however, the gas is sold to a private party, the price of this contract is irrelevant, and the government's royalty will be based on a price that is arrived at "on the basis of competitive arm's length sales in the region for similar sales under similar conditions".

In which case, if the ministry of petroleum felt the price at which RIL was selling gas to RNRL was too low, all that it should have said was that while RIL was free to sell at any price, the government royalty would be calculated on the basis of a higher notional gas price. Instead, the ministry's press release complicated matters by saying the contract did "not meet the PSC criteria of 'arm's length sales' ... (and that) the prevailing domestic gas price from fields operated by Joint Venture/private companies commands a significantly higher price than the proposal of RIL." Interestingly, the ministry also ignored the fact that both the price and the terms of the RNRL sale were exactly the same as the RIL deal to supply 12 mmscmd of gas to the state-owned NTPC, which was arrived at through a competitive bidding in 2004 (this is the deal that RIL and NTPC are now locked in a dispute over), right down to the marketing and transport costs. The RNRL deal was announced also in 2004, around the same time as the NTPC deal""of course, at that time, the Ambanis were united and RNRL was part of the RIL group.

The other problem with the ministry's intervention, and the more serious one from the point of view of the country's electricity consumers, is the stand on how gas prices are to be determined. The ministry's press release says that the gas should be priced as the result of an open and transparent competitive bidding process (nothing wrong with that) that allows "fair and equal opportunity to all gas consumers to participate in". Sounds innocuous, but what it means is that it is no longer enough to arrive at a gas price through a bidding process of the sort RIL did when it won the bid to supply gas to NTPC. What it wants, instead, is that RIL, or any other gas producer, should auction the gas it has and that all users of natural gas, such as fertiliser units and other power plants, take part in it and bid for buying this gas""since gas is in short supply, its price will sky-rocket as will then the cost of electricity produced using this gas. On average, a one-dollar rise in the price of gas raises the price of electricity by around 30 paise a unit. So, even if the Ambani brothers were to come to another agreement, the ministry will not accept anything less than a high price, and that in turn will translate into higher electricity prices""by the way, since electricity prices are regulated by law, a lower gas price for Anil Ambani doesn't translate into higher profits for him, but means lower power tariffs for consumers.

Normally, any move to raise gas prices like this would a whole host of people worked up, such as the ministry of power and Delhi Chief Minister Sheila Dikshit, whose only hope of getting enough power to her voters is the RNRL Dadri project. But since politics comes first, the only persons exercised by the ministry of petroleum's actions are Mulayam Singh Yadav and Amar Singh, in whose state the Dadri power project is located.

suniljain@business-standard.com