People's Democracy

KG BASIN GAS 

Sordid Saga of Duplicity and Subterfuge

Nishith Chowdhury

A news item, of little interest to the public at large, recently appeared on a certain website. However, it sent ripples in the concerned circles across the nation. It said, “The pressure of natural gas emanating out of D-6 block of Reliance Industries Ltd (RIL) has fallen sharply to nearly half its normal value at the land fall point at Gadimoga in Andhra Pradesh.”

Some explanation is necessary to understand as to how this seemingly innocuous and insignificant piece of news can potentially affect the economic wellbeing of millions of our countrymen.

PRECIOUS

RESOURCE

Natural gas is a precious natural resource. The two major users of natural gas are the power sector where it is used as fuel and the fertiliser industry where it constitutes the feedstock (i.e. the primary raw material) as well as the fuel to produce utilities like steam and power. In terms of available natural resources, India is woefully short of petroleum and natural gas when compared to the quantity required to fulfil its needs, necessitating huge imports.

Prior to independence the only oilfields known were in Assam and Gujarat. Offshore reserves of petroleum and natural gas were discovered in Bombay High, off the coast of Mumbai, in the late 1960s where commercial exploitation started in mid-1970s. In mid-1980s gas was first struck in Krishna-Godavari (KG) Basin. The reserves are spread across more than 50,000 square kilometres in the Krishna’s and Godavari’s river basins in Andhra Pradesh. The KG Basin is considered to be the largest natural gas basin in India.

Before we go any further, the issue of ownership of this precious resource needs to be examined. By virtue of article 297 of the constitution of India, all petroleum reserves, including gas reserves in their natural state in the territorial waters or the continental shelf or in the exclusive economic zone of India, vest in Union of India and are held for the purposes of the union. There is not a shred of ambiguity. The government of India is the sovereign owner of the KG basin gas and it is the duty of the government to make sure that these resources are used for the benefit of this country’s citizens. No less an authority than the Supreme Court of India reiterated this clear constitutional stipulation in its verdict on May 7, 2010 in a case related to KG basin gas. However, ownership of natural gas in KG basin is not an issue under discussion, which, in any case, is settled beyond question. The issue is: How this gas is priced?

Going back to the main issue, we would pick up the thread from the beginning of the story about falling gas pressure from RIL’s D-6 block. Alarm bells have started ringing. Nagarjuna Fertilisers Ltd, which has its urea manufacturing plant in Kakinada, has sent an SOS to the petroleum ministry, saying that gas pressure has come down precipitously from the specified 80-90 barg to only 41 barg now. The company has every reason to be alarmed. In fact, the panic button was initially pressed by another Reliance group company, Reliance Gas Transportation Infrastructure Ltd (RGTIL), which is engaged in the business of transportation and distribution of KG basin gas. In a communication to Nagarjuna, RTGIL stated that if the pressure went below 40 barg it would not be possible for them to compress and transport the gas. The consequences can be disastrous for Nagarjuna Fertilisers which would have to simply shut down its plant. Much more, however, is at stake for the country.

A FRESH ACT

OF CHICANERY(?)

Yet another recent news item says the government seems to be at a loss about how to deal with National Fertiliser Limited’s gas requirement of 2.8 mmscmd of cheap gas to manufacture urea in its three fertiliser plants at Nangal, Bhatinda and Panipat. The company has spent a whopping Rs 4066 crore to convert these fuel oil based urea units to gas based units and the investment is likely to be stranded if cheap gas is not found quickly.

What has caused this loss in gas pressure or production, is not known at the moment. One can only speculate. The reason may be a temporary technical snag which can be overcome in due course. Such problems do happen and if this is the reason there is nothing to worry about. Or, is it that the well is drying up? Admittedly, it is a wild speculation, only remotely possible. What, however, is quite possible, even if speculative at this moment, is that this is a fresh act of chicanery being staged by Mukesh Ambani’s Reliance Industries Ltd. One cannot forget the instances of continuous fall in KG Basin output. During March 2010 the gas production was 53 million standard cubic metres per day (mmscmd) which fell down to 23 mmscmd by 2012. Reliance did not increase the output on the plea that there are technical snags, even after the ministry repeatedly intervened. The Petroleum Ministry rejected the plea and reiterated that the daily gas production was supposed to be enhanced to 80 mmscmd by 2012-13 but, instead, it is falling day by day. The cause obviously was to pressurise the government to increase the price. Thus it a continuation of the sordid saga of duplicity and subterfuge which have plagued virtually every aspect of RIL’s dealings with D-6 block gas in the KG Basin.   

Till recently the production and marketing of natural gas was entirely with the public sector. The Oil and Natural Gas commission (ONGC) and Oil India, both owned by the government of India, were the only companies engaged in gas exploration and production. Distribution and marketing were carried out by the Gas Authority of India Ltd (GAIL), another public sector undertaking. In fact GAIL was formed only in 1984 with the specific task of forming a national gas grid for gas distribution in the country to ensure regional balance. Gas pricing was done through the Administrative Pricing Mechanism (APM).

However, after the economic reforms were initiated in the early 1990s, this area was opened up for private participation. The New Exploration and Licensing Policy (NELP) was notified in 1999 to award oil/gas blocks to private companies as contractors. In the first NELP round RIL was awarded the contract for operating KG Basin. In this process, a production sharing contract (PSC) was executed in April 2000 between the government of India and the undivided RIL (i.e., before RIL was divided between two brothers) and its minor (10 per cent) partner, NIKO Resources Ltd, for production of gas in an area of 339.41 square kilometres (D-6 field) in KG Basin.

The entry of private sector into the field of natural gas production and distribution resulted in dual pricing of gas --- administered and market linked. The administered price was determined through APM; it essentially was cost of production plus reasonable profit. However, reasonable profit is not something which could quench the appetite of a gargantuan business empire that RIL is. Determination of the cost of production of D-6 gas has been shrouded in secrecy --- as per the old manipulative business practice of many a business tycoon. The objective is very clear and simple --- to inflate the cost of production by any means, fair or foul (mostly foul) and to garner windfall profit. The Reliance Industries are past masters at this game. It is crony capitalism at its worst.   

PRICING OF 

NATURAL GAS

The production and marketing of KG Basin gas started in 2009. Prior to this, natural gas was priced, through the APM, at the rate of 1.83 USD per mmbtu and ONGC sold gas at this price. Though the pricing of KG Basin gas has much of muck in it and its narration would take quite a while. However, we may better state at the outset how matters stand at present.

(1) An empowered group of ministers (EGOM) approved a rate of 4.2 USD per mmbtu on September 12, 2007, as against the ONGC rate of only 1.83 USD. Astonishingly, RIL itself had in June 2004 offered a price of 2.34 USD per mmbtu to NTPC, a maharatna PSU, against international competitive bidding and the offer was for 17 years. (The case of NTPC is dealt with later.) In retrospect, this EGOM decision seems to have been taken in undue haste, as the production of KG gas started only from April 1, 2009. This rate was only slightly lower than that of 4.33 USD per mmbtu as per the RIL’s pricing formula. It may be noted that when the concerned ministries examined this formula, they found it flawed. 

(2) This rate is valid for five years, but and it may be extended after 5 years. Any revision of rate is not due before April 2014.  

(3) Despite the price validity till April 2014, Reliance recently demanded an immediate increase in KG gas price in view of increase in gas price in the international market. It demanded that it be hiked to USD 14.2 per mmbtu. The Petroleum Ministry, under the recently removed minister S Jaipal Reddy, stoutly resisted the demand.

(4) If Jaipal Reddy was shifted from the ministry in the recent cabinet reshuffle, there is widespread feeling that he paid the price for opposing the Reliance. It was pressure from the RIL that led to removal of Reddy from the Petroleum Ministry. Not unlikely, as the acceptance of the RIL’s demand for a premature gas price hike, stoutly opposed by Reddy, would have meant a windfall profit of Rs 43,000 crore to the company. 

It is certainly a welcome development that sections of the civic society have come forward to protest against widespread corruption in the country. The phenomenon of Anna Hazare has roused a sense of outrage among Indian citizens over several incidents of corruption of staggering proportions in which politicians were hand in glove with corporate entities. The issue, though vociferously dealt with by various Left parliamentarians in the past, could not get media attention. But now the issue of RIL’s misdeeds has attracted nationwide attention, though one has to highlight that the parliament of India was seized of the matter since long. This is required to correct the impression that all parliamentarians are either ignorant or negligent, or worse, a part of the system which breeds corruption. An attempt is made to describe below how the CPI(M)’s members of parliament continuously tried to expose the questionable decisions of the government, including the ones which were unduly benefiting the RIL but detrimental to the interest of government owned companies and of people of India as a whole.

THE CASE

OF NTPC

In June 2004, RIL offered a price of 2.34 USD per mmbtu to the National Thermal Power Corporation (NTPC), a government owned power generation company, and NTPC accepted  the offer. The gas was meant for its 2600 MW Kawas and Gandhar power projects. In a written reply to a question dated February 20, 2009 in Lok Sabha, Jairam Ramesh, the then minister of state of power, said: “NTPC invited bids under International Competitive Bidding for procurement of natural gas @ 132 trillion British Thermel Units (BTU) per annum for Kawas-II and Gandhar-II power projects for 17 years. Reliance Industries was evaluated as the lowest techno-commercially acceptable bidder and NTPC accepted its offer. Accordingly, a Letter of Intent (LOI) was issued to RIL on 16.06.2004 which was duly accepted and confirmed by RIL.”   

The statement continued: “After issuance of the LOI, RIL did not come forward to sign the Gas Sale and Purchase Agreement (GSPA) and sought major changes in the agreed draft of GSPA. NTPC pursued with RIL at various levels and various meetings to sign the GSPA, as per draft accepted by RIL during the bidding process. However, inspite of all the efforts RIL did not sign the GSPA agreed during the bidding process.”

This was an act of extraordinary brazenness on the part of RIL. Indeed, it is doubtful if any other corporate house of India would have dared to commit such an act of outright chicanery. The bid was won by RIL on lowest acceptable offer basis, through an international competitive bidding process. How, then, could they deny to honour it? It is as if RIL knew that once they could somehow grab the contract by offering a low quotation it would be easy for them to jack up the price thereafter, utilising their close nexus with the UPA government. In fact subsequent events leave no doubt that such a nexus did exist. When all its efforts to get the RIL sign the GSPA failed, and having been aggrieved by this refusal, NTPC filed a suit against RIL in Bombay High Court on December 20, 2005. The case is still sub judice. The result is that 2600 MW of power, much cheaper than nuclear power, could not be generated --- to the loss of the nation and the people. 

The UPA government’s role in this NTPC-RIL dispute is beyond belief. It did not support the NTPC’s cause even once. On the contrary, it weakened the case of its own company by forming an EGOM on September 12, 2007 --- clearly to serve the RIL’s cause. There can be no other explanation. What was the tearing hurry when actual production of gas was still two years away and, more importantly, when the NTPC-RIL dispute was under adjudication? The EGOM did its duty faithfully. It arbitrarily determined a high price of USD 4.2 per mmbtu, which RIL was bargaining for. Besides indirectly sabotaging the NTPC’s case, this decision of the EGOM at one stroke hiked the price of both power and fertiliser.

DISPUTE BETWEEN

AMBANI BROTHERS 

Dhirubhai Ambani, the founder of RIL, died in July 2002 and then his sons, Mukesh and Anil, fell out over inheritance of their father’s vast business empire. In course of time, a settlement was arrived at. What is relevant here, however, is that the RIL, which executed a profit sharing contract (PSC) with the government of India in April 2000 for gas production in KG Basin, was demerged into two companies --- with RIL going to Mukesh and RNRL (Reliance Natural Resources Ltd) to Anil.

Natural gas from KG Basin is like the proverbial hen that lays the golden eggs and, naturally, the issue of sharing the spoils of KG Basin gas also came under much haggling. But when this dispute was going on, the country witnessed a strange spectacle. The prime minister and another, very senior cabinet minister appealed to the two brothers to settle the KG Basin gas dispute between them in national interest. Whether to laugh or to cry, one does not know. Could there be anything more ridiculous? Who did the gas belong to? Not to the Ambanis, surely. It belonged to the people of this country. The Ambanis were only contractors who had a PSC with the government of India.

In June 2005, the RIL and the RNRL signed a MoU between them regarding utilisation and pricing of the gas produced. This MoU completely ignored the fact of government’s sovereign ownership over KG Basin gas. This was so atrocious a presumption that the government had to finally file, after an inexplicable four years delay, a special leave petition before the Supreme Court in July 2009 to assert its sovereign rights. Not that the UPA government was unaware of this infringement of its rights. As early as on May 4, 2006, CPI(M) MP, late Comrade Chittabrata Majumdar, had asked the minister of petroleum and natural gas to intervene in this matter. The letter was acknowledged on May 25, 2006, without any action.

The NTPC, strangely, was not allowed to be a party to the petition. This PSU was keen to intervene, as was the secretary to the Ministry of Power who publicly stated his views. But the power minister Shinde and petroleum minister Deora were not. Why? Because many embarrassing facts could have been exposed. For instance, the fact that EGOM decided on a gas price of USD 4.2 per mmbtu in September 2007 while the NTPC had issued an LoI to RIL in June 2004 to supply gas at the RIL’s quoted rate of USD 2.34 per mmbtu, with the rate remaining valid for 17 years.

The Supreme Court gave its verdict on May 7, 2010, setting at rest the ownership issue, as mentioned earlier. However, NTPC did not get any relief as it was prevented from being a party in the case.

GOLD-PLATING TO HIKE

PRICE FRADULENTLY

One of the major charges of CPI(M) MPs was that there was a government-RIL nexus on KG gas for “gold-plating” or manipulating the development cost of the gas fields, with the sole purpose of hiking the gas price. Both late Chittabrata Majumdar and Tapan Sen repeatedly raised the issue in parliament and wrote on many occasions in 2007 to the petroleum minister and also directly to the prime minister to defeat this nefarious design. Late Comrade Dipankar Mukherjee exposed in his numerous articles the unholy alliance of the government with the Ambanis. But all this was completely ignored. However, when a powerful Congress chief minister, late Rajsekhar Reddy of Andhra Pradesh, raised similar concerns in a series of letters to the prime minister in 2007, the latter immediately referred the matter to a committee of secretaries headed by the cabinet secretary to examine the issues related to gas supply and pricing of gas. The RIL had submitted a development plan to increase production from 40 to 80 mmscmd, with an increase in expenditure from USD 2.47 billion to 8.84 billion, and thus demanded a hike in gas price. Meeting in June-July 2007, the committee recommended that an effective audit mechanism through CAG, or an international auditor in consultation with CAG, must be put in place to examine the contractor’s accounting records. The committee also looked into the pricing aspect and its implications for the economy. Its observations, briefly, were as below:

(1) A delivery price beyond USD 5.0 per unit will be prohibitive for fertiliser sector and every increase of USD 1.0 will involve additional subsidy of Rs 2,000 crore.

(2) Gas price beyond USD 2.34 will be prohibitive for power sector.

(3) Pricing should be fixed by a regulatory board.

(4) It is not prudent to fix such a price as may jeopardise the NTPC’s case while a price of USD 2.34 was arrived at after international competitive bidding.

Yet we saw what the EGOM did despite the above observations and recommendations. Is it any wonder that in popular perception it is Mukesh Ambani and not the prime minister who runs the government?

THE GAME OF

ENTRY & EXIT

It has been said that RIL had submitted a development plan to increase production from 40 to 80 mmscmd with an increase of expenditure and to demand a hike in gas price. As per the PSA between the government and RIL, the government has to bear the technological expenses for production from D-6 field. But the CAG has confirmed that the stated expenditure was much on the higher side. It also observed that the petroleum ministry has repeatedly succumbed to the RIL’s demands without any effective scrutiny. Murli Deora was then the minister. Later, Jaipal Reddy ordered an audit of the expenditure, commenting that expenditure of crores of rupees due to acceptance of the inflated cost was questionable. It was a general feeling among high officials too of the ministry --- that the so called development plan was nothing but a tactic to garner more profit. Mukesh Ambani talked to Dr Manmohon Singh quite a number of times on the issue and finally on October 23, 2012, the Petroleum Ministry informed the RIL that it expenditure plan has been accepted. RIL was vehemently opposed to Jaipal Reddy’s move to get its accounts and performance audited, taking the plea that it is a private company. But Reddy’s stand was that government money had been provided for execution of the project and the CAG has the right to audit how the money was being spent. The PSA between the government and RIL does have a specific clause in this regard.

In fact, even without going into the Reliance accounts and while conducting a routine audit of the Petroleum Ministry’s accounts, the CAG made specific observations on irregularities in KG Basin case. RIL and their associate, British Petroleum, were also given notice to submit their detailed accounts. An agitated Reliance went on objecting in various ways and told that they might agree to a financial audit but would not allow any performance audit. Finally, overruling Reddy’s observations at the instance of the PMO, the Petroleum Ministry agreed to what the RIL wanted and this it communicated vide its the letter dated October 23. It was clear then that Reddy’s exit was imminent.

Just as there are instances of ministers’ removal at corporate houses’ bidding, there are instances of installation of ministers of their choice. The role of corporate houses in appointment of a telecom minister during the formation of the second UPA government in 2009 was clear. The tapes of conversation between a few politicians, corporate PROs and a renowned journalist have been exposed. Corporate houses wanted to see A Raja (DMK) in the post and were successful. Similarly, the main man behind the Coalgate scam, Shriprakash Jaiswal, the coal minister, has been retained in the ministry though substantial irregularities have now come to the surface. His presence is, after all, sure to serve the corporate interests. Apart from the telecom, coal and petroleum ministries, there are other ministries too, like finance, industry and commerce, power, corporate affairs, civil aviation etc, to which the interests of the corporate houses are directly related. Hence who will be the ministers in these departments is not the sole propriety of Sonia Gandhi or Manmohan Singh.

Coming back to falling pressure of D-6 gas, a number of personalities have said that the RIL’s performance was worse than the worst performing government departments. It is at present producing only 27 mmscmd gas as against 80 mmscmd, which is supposed to be its capacity. But this may not after all be so simple. The shenanigans of the Ambanis are all too familiar now. Is the fall in gas pressure deliberate, aiming to perpetrate an artificial crisis? Is there some hoarding and is the commodity to be released to the market only when prices are more favourable and profits more attractive? Is there going to be a black market for natural gas too? Who knows? Everything is possible when a pliable prime minister bends to the Ambanis’ will and appoints a petroleum minister of their choice.