RIL, headed by Mukesh, feels it followed a fair process to find the market price of its gas. And the price is competitive compared to other gas sources.
"Everyone, including Anil Ambani, is making presentations and we will take a final view soon. Anil sees me more often these days than Mukesh Ambani." Murli Deora Union petroleum minister
He denies RIL's costs have gone up. "All plans have to be approved and costs are audited on a yearly basis."
V.K. Sibal , Director General of hydrocarbons
"As of now, it is for the petroleum ministry to reach a decision. We have not been advised to the contrary."
M.S. Srinivasan, Petroleum secretary
"Affordability is an issue—for the power sector. We would like to get sufficient gas at a price that is reasonable."
Anil Razdan, Power secretary
"A two-price regime is one option. A lower price for the power, fertiliser sectors; a higher one for others."
P. Dasgupta CMD, Petronet LNG
***
At the petroleum ministry these days, the discussion centres around Mukesh Ambani and Reliance Industries Ltd (RIL). It's the same in other places—in the ministries of power and fertilisers, PSUs like GAIL and NTPC, and in the boardroom of ADA group, headed by Mukesh's younger and estranged brother, Anil. The question on everyone's mind: is the petroleum ministry helping Mukesh to get a higher price for gas from ril's fields in Krishna-Godavari basin off Andhra Pradesh coast?
Union petroleum minister Murli Deora told Outlook that "everyone is making presentations, including Anil Ambani", and the ministry "will take a final view soon". Denying that he is siding with Mukesh—and against Anil—he laughingly added, "I don't think anyone can say that as junior Ambani (Anil) sees me more often these days than senior Ambani (Mukesh)." Sources in the ministry contend that Deora knows both the Ambani brothers well; in fact he was closer to their late father, Dhirubhai.
Political sources hint that given the sensitivity of the issue, the government may refer the matter to a group of ministers besides the committee of secretaries, with representation from the ministries like finance, power and fertiliser. But petroleum secretary M.S. Srinivasan firmly states that "as of now, it is for the petroleum ministry to arrive at a decision. We have not been advised to the contrary." However, the final verdict will be crucial for energy security, the performance of RIL's competitors and gas users, and for Anil to realise his dream power project.
Under the New Exploration Licensing Policy (NELP), 2000, firms that were subsequently awarded exploration blocks have to seek the petroleum ministry's permission to fix sale prices. Reason: as the owner of the fields, the government earns revenues (including royalty) and therefore wants to ensure a transparent and fair price-fixing mechanism to protect its interests. In the case of RIL, the price has to be finalised by mid-August this year, or one year before the expected production.
But when Mukesh's RIL submitted a price band of $4.4-4.6 per million British thermal units (MBTU) for its Krishna-Godavari gas, the simmering and differing expectations between the various interested parties became a matter of public discussion. As an industry expert puts it succinctly, "The users want the lowest price and producers wants a higher one." In this case, the major buyers for the gas are likely to be the power and fertiliser units, including psus like NTPC, and they think the price is unviable for them.
Says Anil Razdan, power secretary: "Affordability is a key issue for the two sectors. In the interest of the consumer, we would like to get enough quantities at a reasonable price." Experts explain that a gas price of $6 per mbtu translates into a retail power tariff of Rs 6-7 per unit, if one considers the level of t&d losses in the sector. Adds J.S. Sarma, fertiliser secretary: "We are keen to ensure appropriate price for gas." He feels that if the price of gas is too high, it will obviously hike the government's fertiliser subsidy outgo, which is expected to be Rs 48,000 crore in 2007-08, including arrears.
Although one of the largest users, NTPC, the state-owned power behemoth, is not getting involved in the cross-firing, it is hoping that it will not have to pay the proposed high price, even if it is accepted by the petroleum ministry. One, it feels that it will win the legal battle against RIL, which had agreed to supply 12 mmscmd of gas at below $3 per MBTU but did not sign the final sale agreement. Also, NTPC is banking on the power ministry to persuade the petroleum ministry to get the gas at a subsidised rate.
For Anil, RIL's proposed price creates a different set of problems. Under the split agreement, inked between the two Ambani brothers in June 2005, Mukesh had agreed to supply gas for Anil's 'dream' project—the 10,000-MW gas-based unit in Dadri, Uttar Pradesh. The price for the promised 28 mmscmd of gas was fixed at the same terms and conditions as will be finalised between RIL and NTPC, or possibly much lower than $4.4. So, if the petroleum ministry accepts RIL's higher price, it will hike Anil's costs and ensure that the project will never take off. The ADA group has argued that if the gas price is not attractive, new investments in power may not be viable.
The petroleum ministry is not entirely an unbiased party as it gains if it accepts RIL's price. As per the production-sharing contract, signed between the owner and explorer under nelp, the share of government revenues goes up if the gas price is higher. If the price is fixed at $1.5-2, the government's share in the returns will be 16 per cent. But if the gas is priced at over $3, it can be an astounding 85 per cent. An expert reveals that if the RIL price is $2.5, the government can earn Rs 400 crore over the estimated fields' life of 12-17 years; if it is $4.5, the figure will jump to Rs 1,500 crore.
However, RIL explains that it followed the best procedure to get a fair and market-related price for its gas. According to its senior executive, "For price discovery, we went to sectors—like power and fertilisers—that have large demand. We invited 10 companies in the private, state-owned and cooperative segments to submit bids. All these firms are located along the 1,600-km pipeline that runs from Andhra Pradesh to Maharashtra to Gujarat, and have connectivity to the pipeline." He adds that bids were received for an annual supply of 35 mmscmd for nine years.
In addition, the Mukesh Ambani group feels that the price is competitive with domestically available gas and the current price negotiations for LNG (liquified natural gas) imports. At present, gas from Panna-Mukta-Tapti blocks on the western coast, in which RIL is a stakeholder, is being sold at $4.75 per MBTU. The joint venture has also a contract with Torrent Power at $5.7 for deliveries beginning in 2008. Similarly, gas from Ravva fields (K-G basin), an nelp block, is sold at $4.30. A petroleum ministry official admits that RIL's price of $4.4 for the new discoveries compares favourably with the $6-7 that India may have to pay for supplies from Iran through the proposed Iran-Pakistan-India pipeline.
But this is an area where potential users, including Anil Ambani, differ vehemently. For one, the ADA group has alleged that RIL's field development costs are being allowed to escalate without any checks. Such expenses are expected to go up from the initial estimate of $3 billion to over $8 billion. According to ADA group, "it may impact government revenues." The logic is that revenue-sharing between the owner and the developer is after deducting certain exploration-related costs incurred by the latter.
The exploration regulator, V.K. Sibal, director general of hydrocarbons, rebuts such charges. According to him, RIL has so far invested only $54 million "as per the activity-oriented budget. The development plan has to be approved each year and the work is undertaken as per the development plan. All costs are audited on a yearly basis and only those will be recoverable by the explorer". But industry experts do say that the price of hiring rigs has doubled due to a global scarcity.
Anil has also questioned Mukesh's basis for inviting bids from 10 companies for the price-discovery process. According to the split agreement between the two brothers, say his supporters, of the 40 mmscmd of estimated gas production estimated in the first phase beginning mid-2008, 28 mmscmd has been committed to ADA group. And the remaining quantity may have to be supplied to NTPC. With both these deals are under legal disputes, RIL has no surplus gas unless it doubles its production in the second phase.
RIL's counter is that Anil may not be in a position to lift gas in 2008-09. His project is delayed and, after the change in the political regime in Uttar Pradesh, there are question marks over its fate. Anyway, RIL plans to double its production within a year and, thus, will be in a position to supply to other users. In fact, the Mukesh Ambani group wishes to become a major player in the city gas-distribution segment and has applied for supplies in 100 cities. But it is waiting for the government to finalise its city gas policy.
What is being forgotten in these various battles is the national implication, whatever may be the price that is fixed for RIL's new discoveries. The importance of RIL's gas, the biggest find in India in several decades, can be gauged from the fact that at peak production of 80 mmscmd, it will be close to the current domestic gas production of 86 mmscmd. The situation becomes critical because production from some of the existing ONGC and oil fields is expected to decline over the next few years.
Given the current bullishness in global oil and gas prices, domestic users in the power and fertiliser sectors are looking at more discoveries in India and supplies from RIL's fields at affordable prices to meet the rising demand. At another level, environment concerns are forcing them to adopt the cleaner fuel, gas, rather than naphtha or diesel. Therefore, the price fixation becomes critical, both for India's energy security and availability of cheap power and fertilisers to the consumer.
At the same time, the government needs to balance its various objectives. It obviously cannot afford to lose too much of revenues by harping on lower gas prices. Two, since it has publicised its intent to shift to market-related prices, it cannot force explorers to supply at lower-than-market rates. Finally, it doesn't want power costs to zoom, or for fertiliser subsidies to flare up as it will negatively impact inflation and the fiscal deficit. So, the petroleum ministry has to balance these factors judiciously.
One option, says P. Dasgupta, CMD, Petronet LNG, a joint venture between state-owned energy companies, is the emergence of a two-price regime. "A lower price for the power and fertiliser sectors, and a higher one for other industries," he points out, adding that his company plans to tie up more gas supplies from new and old sources through both short-term and long-term contracts to boost future supplies.
Energy experts think the government needs to "graduate from the controlled mechanism to a market-determined price in order to give fillip to oil and gas exploration activities." Adds V. Raghuraman, energy expert, CII: "There are several issues that need to be resolved to ensure affordable gas and oil, including bringing petroleum products in the 'declared goods category' and have uniform tax regime in all states." Only a long-term vision will enable the Indian consumers and farmers to access cheap power and fertilisers. And not a short-term tussle between explorers and buyers.
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