Kya Congress Mukesh Ambani Ki Dukaan Hai?
Text of the document with fresh allegations released by India Against Corruption
(All documents mentioned in this note are available on our site www.indiaagainstcorruption.org)
- In 2006, Mani Shankar Iyer was removed and Murli Deora brought in to increase RIL capex from $ 2.39 billion to $ 8.8 billion and to increase gas price from $2.34 per mmBTU to $ 4.2 per mmBTU.
- In 2012, Jaipal Reddy has been removed and Moily brought in to increase gas prices from $ 4.2 per mmBTU to $ 14.2 mmBTU and to condone RIL’s blackmailing of reducing gas production.
- Huge benefits given to RIL in last one decade despite flagrant violations of various agreements by RIL. Benefits to RIL causing serious price rise in the country.
- Both BJP and Congress involved. BJP signed a sweet deal with RIL in 2000. Congress faithfully implemented it.
- If RIL demand of increasing the gas price to $ 14.2 is accepted, it would lead to shut down of several gas based power plants and increase in power and fertilizer prices. It would result in Rs 43,000 crores of additional benefits to RIL.
In the Nira Radia tapes, Ranjan Bhattacharya (Vajpayee’s son in law) is heard telling Nira that Mukesh Ambani told him –"Congress to ab apni dukaan hai." Facts below show that both Congress and BJP are in his pocket.
Reliance Industries Ltd (RIL) has the contract to extract oil from KG Basin. Under an agreement of 2009 with the government, they are supposed to sell gas at $ 4.2 per mmBTU upto 31st March 2014. Midway now, RIL is demanding that the price be increased to $ 14.2 per mmBTU. Jaipal Reddy resisted that and he was thrown out.
Jaipal Reddy had prepared a note for EGOM, in which he mentioned that acceptance of RIL’s demand would mean an additional profit of Rs43,000 crores ($8.5 billion) to RIL(in 2 years) at current levels of low production. Most of this gas is used in fertilizer and power production. Increasing gas price would mean an additional financial burden of Rs 53,000Crores ($ 10.5 billion) on central and state government (copy of relevant page of EGOM note is attached as annexure 1). This would in turn mean higher electricity and fertilizer prices in the country or a higher subsidy burden.
In order to pressurize the government, RIL substantially reduced its production of natural gas. Total consumption of natural gas in the country is 156 mmscmd. According to agreement, RIL was supposed to produce 80mmscmd (more than 50% of the total demand) from 2009. However, they are producing just 27 mmscmd, almost a third of their commitment. Production has been artificially kept low to blackmail the government. They are not just hoarding the gas, but also forcing various consumers to buy gas from abroad. Gas from abroad costs around $ 13 per mmBTU.
RIL’s stand is simple – "hum to gas $14.2 par hi denge, lena hai to lo, nahin to jao." Who does this gas belong to? According to Supreme Court of India and the Indian Constitution, this gas belongs to the people of India. Complete surrender of UPA before RIL indicates UPA’s inability to run governance in accordance with the Constitution.
Drastic reduction in production has forced many gas based power plants in the country to shut down or run at much lower capacity. According to media reports, almost 9000 MW of gas based power plants are lying idle.
Today, power from gas based power plant costs around Rs 3 per KWH. If gas price is increased from $ 4.2 to $ 14.2 as demanded by Reliance, power rates would go upto Rs 7 per KWH. That’s too expensive. At that cost, most of these plants would have to permanently shut down.
This is not the first time that a union minister has been eased out at Mukesh Ambani’s insistence. In 2006, when RIL had to get its capex increased from $ 2.39 billion dollars to $ 8.8 billion dollars, Mani Shankar Iyer was removed and a more Reliance friendly MurliDeora was brought in.
RIL got this contract during NDA regime in the year 2000. The contract was meant to favor RIL right from the beginning. In any business, increase in costs means decrease in profits. However, the NDA government , signed a contract dictated by RIL wherein an increase in cost by one rupee meant additional profits of RIL by almost Rs 2.2. Isn’t it strange? A parameter called Investment Multiple has been defined in the contract as under:
Investment Multiple (IM) = Total Revenue / Total Investment
According to the contract, till IM is below 1.5, RIL takes away more than 80% of profits and government gets less than 20% of profits. It is only when IM becomes more than 2.5 that government gets 85%. This means, RIL has a huge incentive to keep IM below 1.5 by increasing the expenditure artificially. Thus if Reliance were to increase expenditure from 1 Billion to 2 Billion on a revenue of 5 billion, their own net income would go up from 1.6 Billion to 3.5 Billion. This is what the CAG has stated in para 8.1 of its performance Audit of Hydrocarbon PSCs. (extract from executive summary of CAG as annexure 2)
In 2004, RIL submitted an Initial Development Plan (IDP) saying they would produce 40 mmscmd for an investment of $ 2.39 billion. All this happened when Ram Naik was the petroleum minister in Vajpayee regime.
Within 2 years, RIL submitted another plan saying they would produce 80 mmscmd for an increased investment of $ 8.8 billion. Doesn’t that sound strange? To double production, you increase your investment by four times? Having put the initial infrastructure in place, it should have cost lesser to create additional production capacity.
Mani Shankar Iyer, who was the then Petroleum minister, would not have allowed this. So, Mani was shunted out of petroleum ministry and Murli Deora, famous to be Reliance man, was brought in January 2006. Despite strong protests by some MPs like Tapan Sen, Deora approved $ 8.8 billion expenditure. By
allowing $ 8.8 billion expenditure, in effect, Deora allowed a future revenue of over Rs 1 lakh crores ($ 20 billion dollars) for RIL.
CAG has remarked that there is strong evidence that RIL is gold plating its capital expenditure. Expenditure has been artificially increased (for reasons mentioned above). For instance, RIL is required to place orders for its plant, machinery and other requirements through international competitive bids. CAG alleges that bids were arbitrarily rejected to favor some parties. Just one company namely Aker group got many contracts (see annexure 3, which is an extract from CAG report). Is this group related to RIL? Is RIL siphoning off money through this method?
RIL’s pressure tactics:
RIL signed a contract with NTPC in 2004 to supply gas for its power plants at $ 2.34 per mmBTU for 17 years. It signed a similar contract with RNRL to supply gas at $ 2.34 per mmBTU. However, RIL went back on its word. Under RIL’s pressure, EGOM headed by Sh Pranab Mukherjee, revised gas price in September 2007 to $ 4.2 per mmBTU. NTPC and RNRL were forced to accept gas from RIL at revised price. By doing this, Pranab Mukherjee headed EGOM gave an undue benefit of Rs8000 crores to RIL.
What is RIL’s actual cost of production?
Cost of production is much less than $ 2.34 per mmBTU. (Copy of extracts from an SC order Annexure 4).RIL had actually signed long term agreements with NTPC and RNRL for supplying gas at that rate for 17 years. This means that at $2.34 per mmBTU also, RIL was making adequate profits. India is getting gas at $ 0.9 per mmBTU from Oman. Gas rates in Canada are at $ 1.74 per mmBTU. This means that at $ 2.34 per mmBTU also, RIL was making huge profits.
RIL sold out nation’s resources:
Ownership rights of this gas belong to the people of India. RIL is just a contractor hired by GOI to extract gas. Strangely, RIL sold 30% stake in 21 of 29 oil blocks to British Petroleum in July 2011 at $ 7.2 billion. Government gave approval to RIL to do that. How can they do that? It is almost like – I hire a driver to drive my car and that driver sells off my car after a few days.
Performance of RIL so far has been much worse than perhaps the worst performing government department.
- 4 times cost escalation within 2 years from $ 2.39 billion in 2004 to $ 8.8 billion in 2006.
- Increase in gas price from $ 2.34 per mmBTU in 2004 to $ 4.2 per mmBTU in 2007 to the present demand of $ 14.2 per mmBTU.
- Capacity created for producing 80 mmscmd after incurring such a huge cost ends up producing just 27 mmscmd after 12 years.
- 31 oil wells should have been in production till now. Out of them, just 13 are functional.
Has any government department fared as badly? If this had happened in any government department, it would have been ripped apart by all government agencies and media.
RIL scam akin to coal scam:
This scam is on similar lines as Coal block allocation scam. Coal blocks were given away saying that coal production was less in the country and private sector participation would increase coal production. Rather than produce coal, the private parties hoarded coal blocks to sell them at appropriate time in future.
In this case also, oil blocks were given away to RIL on the excuse that oil and gas production in the country was less and private sector participation would bring "efficiency". Rather than the production going up, RIL is hoarding the gas.
Role of PM:
RIL’s request for increase in gas prices was turned down by Ministry of Petroleum under Jaipal Reddy and EGOM several times in the last 2 years. EGOM had fixed $ 4.2 per mmBTU price for RIL upto 31.3.2014. When Jaipal Reddy did not budge, RIL approached the PM. PM was very sympathetic to RIL. PM requested Ministry of Petroleum to seek AG’s opinion on whether gas prices could be increased midway as demanded by Reliance. It is strange why did the PM not show similar concern when NTPC was forced to accept higher gas price from RIL? Why is the PM not pulling up Reliance for not producing 80 mmscmd gas as per their commitment? Why did the PM not seek legal opinion when country’s interests were at stake? Why is PM showing so much interest when RIL interests are at stake?
Notice to RIL by Jaipal Reddy:
When RIL failed to meet its production targets, Jaipal Reddy decided to disallow their capital expenditure. In the first instance, a notice for disallowance of $ 1 billion expenditure was sent to RIL (Annex 5). This would mean a loss of $2.2 (11,000 Crores) billion to RIL, if we consider IM ratio. Next year, this disallowance could be $ 1.5 billion, which would mean a loss of $ 3.3 billion (16,500 Crores) for RIL.
That is the reason why Mukesh Ambani got restless. And that is the reason why Jaipal Reddy was transferred out.
Real reasons for price rise in the country:
This episode explains the real reasons for price rise in the country. The government seems to be succumbing to illegitimate demands of some powerful corporates in the country (like RIL in this case). Benefits provided to RIL in this case contributed to price rise in power and fertilizer sectors. Similarly, on one hand, government says that they do not have Rs 35,000 crores to provide LPG subsidy to the people, on the other hand, the government bends backwards to provide benefits to these corporate.
- Who is running the government? It appears that telecom companies select their own nominee as Telecom minister and RIL selects its own person as Petroleum minister.
- So, is this government being run by powerful corporates?
- Is Dr Manmohan Singh succumbing to corporates under some compulsions or out of ignorance? What are the compulsions, if any?
RIL blackmailing should be immediately stopped. Their KG Basin contract should be cancelled. Government should immediately put in place adequate systems to get full production from KG Basin at cheapest prices for the country.
Annexure 1: Note Prepared for EGOM
Annexure 2: Executive Summary of CAG Report
Annexure 3: CAG Findings Related to KG Block Annexure 3_CAG Chap4 - Findings Related to KG Block
Annexure 4: Supreme Court Order Annexure 4_SC Order
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