People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)

Vol. XXXV

No. 27

July 03, 2011

 

From 2G to KG:

Where Does the Buck Stop?

 

Dipankar Mukherjee

 

 

THE government of the day does not own the natural gas from Krishna Godavari (KG) basin. It is a natural resource owned by the people of this country and the government is only the trustee. National resources are owned by the doctrine of public trust as held by the Supreme Court. Natural gas being one of the main sources of energy for production of power and fertilizer, higher price of gas means higher tariff from gas-based power plants and higher fertilizer subsidy. That is why the recently revealed CAG’s draft report very correctly categorises the loss on KG gas scam as “unquantifiable” unlike 2G scam where the quantification is more specific to the tune of Rs 1.76 lakh crore.

 

But the most glaring difference between these two cases is on the issue of accountability i.e. where does the buck stop in the KG gas scam? Let the facts speak for themselves.

 

GENESIS OF

THE CASE

Till recently gas production and marketing was entirely with the public sector and pricing was administered. This was opened up for private participation in the nineties. The New Exploration and Licensing Policy (NELP) was announced in 1997 and M/s RIL was awarded the contract in the first NELP round for operating KG basin, which has India’s largest gas discoveries. A Production Sharing Contract (PSC) was signed between the government and RIL, the contractor, to govern gas production and pricing. The opening of gas production and marketing to private sector resulted in dual pricing of gas: administered and market-linked. Administered Price was through “Administrative Pricing Mechanism” (APM), which comprised actual cost of production plus reasonable profit, determined by the government. Before the production and marketing of KG basin started in 2009, the pre-dominant part was covered by APM @ 1.83 US dollar/unit. Before the marketing of KG gas, market pricing was done for relatively small volumes by private operators which were in the field before NELP.

 

CAG’s draft report has actually vindicated one of the two major charges leveled by CPI(M) MPs against government-RIL nexus on KG gas viz the “gold plating” or “manipulating the development cost of the gas fields”. The other charge was regarding high price of Reliance gas @ 4.2 USD/unit fixed up in 2007 by an Empowered Group of Ministers, in spite of the fact that actual production cost of KG gas was 1.43 USD/unit, the APM cost of ONGC was 1.83 USD and most shockingly RIL itself had quoted 2.34 USD/unit to M/s NTPC, the Maharatna PSU, in response to an international competitive bidding in 2004. This issue of pricing of gas has not been dealt in CAG’s Draft report.

 

CHRONOLOGY

OF EVENTS

                               I.            The question was first raised in Rajya Sabha on December 12, 2006 by CPI(M) MPs late Chittabrata Majumdar and Tapan Sen. The government informed that M/s RIL-Niko consortium had submitted a development plan that envisaged increase in production from 40 to 80 mmscmd and increase in expenditure from 2.47 billion dollar to 8.84 billion dollar. It was immediately pointed out in a letter dated 21.12.2006 to minister of petroleum and natural gas by Tapan Sen, MP and a member of Standing Committee of Petroleum and Natural Gas that the expenditure per unit of production, which should come down with the increase in production due to economy of scale, had been inflated abnormally, warranting immediate intervention by the government.

 

                            II.            This was followed up with three letters dated 25.01.2007, 27.02.2007 and 12.03.2007. On April 30, 2007 a detailed letter was again sent to minister of petroleum and natural gas with copy to the prime minister about the likely impact of gold plating on price of natural gas. On 15.05.2007 in reply to a question in parliament, it was informed by the government that the revised capital investment has been approved by DGH.

 

                         III.            Three more letters dated 11.6.2007, 4.7.2007 and 13.7.2007 were sent by Tapan Sen to the prime minister directly for his intervention to stop gold plating and ensure that the price of natural gas is not arbitrarily increased. No action was taken other than mere acknowledgement of letters.

 

                        IV.            The prime minister and his office swung into action only when the then chief minister of Andhra Pradesh late Y S Rajasekhar Reddy raised a number of issues on KG basin gas, including the gold plating and pricing of gas in a series of three letters dated 16th, 29th & 30th June 2007. Some of issues raised by Reddy were common viz

 

a)     The proposed market discovery price of natural gas produced from KG basin @ $ 4.5 to $ 5/MMBTU would mean an increase of 256 per cent from the present APM prices.

 

b)    RIL has obtained bids from consumers with stranded assets and claim this to be market driven price forgetting its own bid to NTPC. This bid should be treated as market price because this price came through global competitive bidding.

 

c)     The government should monitor the investment by the contractors and have it scrutinized by independent and autonomous authority so that costs are not unduly inflated.

 

d)    It will also be necessary to constitute an independent autonomous regulatory authority to decide upstream pricing of gas.

 

                           V.            PM/PMO immediately referred these letters to a Committee of Secretaries headed by cabinet secretary which was assigned to give report on issues related to supply and pricing of gas.

 

This raises an immediate question – why did the PM/PMO selectively choose to refer only the three letters written by Andhra Pradesh CM to the Committee of Secretaries ignoring the letters from an MP, that too an MP who was a member of Parliamentary Standing Committee on Petroleum and Natural Gas? Were these letters that contained several facts and figures ignored only because he was neither a Congressman nor someone from civil society? Who is responsible for this sidelining of a people’s representative in parliament?

 

REPORT OF THE

CABINET SECRETARY

The Committees of Secretaries met on 29.6.2007, 2.7.2007, 6.7.2007 and 10.7.2007. And on development cost of the gas field, as per available information, the cabinet secretary reported:

 

‘The accountability of Management Committee mechanism for approval of various costs needs to be enhanced. For this purpose, Ministry of Petroleum & Natural Gas would draw up guidelines and mechanisms with the approval of the government as large amounts of government revenue in profit share are involved. Effective audit mechanisms through C&AG or other reputed agencies would be put in place. It is noted here that under Article 25.5, “The government shall have the right to audit the accounting records of the contractor in respect of petroleum operations in the accounting procedure.” The government must, in consultation with the CAG, appoint an international auditor who has sufficient experience in the field of oil exploration and production.’

 

The report was sent to PMO. Did the prime minister/government consult CAG and appoint an international auditor? Who should be blamed for not taking any preventive step to stop the revenue loss, though cautioned repeatedly by CPI(M) MPs, AP chief minister and even the cabinet secretary? Where should the buck stop?

 

GAS PRICING

FORMULA

What did the cabinet secretary’s report say regarding the pricing formula offered by RIL as per which the “well-head” price (i.e. the price at the production point) was 4.33 dollar per barrel and the delivered price at the user end would be 4.76 to 5.98 dollar without taxes? It reportedly said “the RIL formula may be taken up for approval only after a policy is put in place. Prima facie the formula appears to suffer from several infirmities in respect of the formula employed and the bidding process.”

 

The above was based on the presentations by the ministry of fertilizers and NTPC/ministry of power, which specifically stated:

·        RIL price formula is flawed;

·        A delivery price beyond 5 dollar/unit will be prohibitive for fertilizer sector and every increase of 1 dollar will involve an additional Rs 2000 crore subsidy;

·        Gas price beyond 2.34 dollar will be prohibitive for power sector;

·        Pricing should be fixed by Petroleum & Natural Gas Regulatory Board after amendment in the Act;

·        It was not prudent to fix a price which will jeoparadise the NTPC's case wherein price of 2.34 dollar was arrived at after International Competitive Bidding.”

 

Not only that, the chairman & managing director of NTPC in a letter dated 24.8.2007 wrote to the chairman of EGoM:

 

“In continuation of the presentation I made on the gas pricing issue of Reliance Industries Limited for KG Basin with particular reference to NTPC contract, I would like to convey that implication of the price differential between gas price as delivered at Kawas/Gandhar as per NTPC Contract and RIL's proposed price, will be of the order of Rs 24,000 crore for the quantity contracted by NTPC during the entire contract period of 17 years. This aspect may also please be kept in view.”

 

Inspite of the above, the EGoM approved the price formula in a great haste on 12.9.2007 though the production of KG gas started only from 1.4.2009. The rate was slightly reduced from 4.33 dollar to 4.2 dollar/unit. Why this hurry when there were serious question marks on development cost, pricing formula, loss to NTPC, financial impact on fertilizer and power production? Who is answerable to the parliament on an issue concerning three ministries viz Petroleum & Natural Gas, Power and Fertilizer? A minister or a Group of Ministers or the prime minister?

 

WHY

EGoM?

As outlined at the outset, gas pricing was mostly based on cost plus reasonable profit basis as per APM and there was no sacrosanct formula for pricing for non APM gas produced by private sector, which covered very small volumes before KG basin gas. Keeping this in perspective the "Integrated Energy Policy" document of August 2006, prepared by the Planning Commission, recommended:

 

"As long as there is shortage of natural gas in the country and the two major users of gas, namely fertilizer and power, work in a regulated cost plus environment, a competitive market determined price would be highly distorted. The prevailing regime of fertilizer subsidies & power sector subsidies would further amplify such distortions and cross subsides. In such a situation price of domestic natural gas and its allocation should be independently regulated on a cost plus basis including reasonable returns."

 

The prime minister is the chairman of the Planning Commission and there was a gas shortage in 2007 which continues till date. Then who decided to overrule the Planning Commission recommendation for “Cost Plus” pricing and went for a distorted market determined price through a fast-track EGoM?

 

And finally what was the rationale for forming an EGoM headed by external affairs minister to fix gas price when Energy Co-ordination Committee (ECC) headed by the prime minister and comprising ministers of Finance, Petroleum & Natural Gas, Power, Coal, deputy chairman of Planning Commission, chairman of Economic Advisory Council to PM, with principal secretary to PM as convener was already in place since July 2005. Need for rational pricing to promote inter fuel substitutions (in this case gas, coal and oil) is one of major issues before ECC. Still, why a separate EGoM? Is it a case of shirking responsibility or of willfully insulating oneself from another ‘G’ series scam? Who will answer? Obviously not Jaipal Reddy, Deora, Sibal or Digvijay Singh. WHERE DOES THE BUCK STOP?