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Uneasy Truce At The Wellhead

The government stands firm at the Reliance gas row, holds all future levers, keeps ends open

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Uneasy Truce At The Wellhead
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In The Pipeline, On The Morrow

Grey areas in the next round of Anil vs Mukesh

  • Price The $4.2/mmBtu price ceiling is due for revision in 2012. Will the government then step in, or let market forces discover end price?
  • Gas Allocation Changes required in government policy for Anil to get committed supply of gas for his greenfield power plant.
  • Tenure The 17-year tenure demand will not be respected. Under new policy, only five-year pacts are being signed.
  • Quantity Government will have to do a balancing act to assure supplies. Anil’s demand for 28mmscmd will not be met.
  • The Future SC hasn’t commented on Anil’s right to seek 40% of RIL’s existing and future E&P discoveries. Leaves door open for Anil tonegotiate.
  • Arbitration If all these issues aren’t resolved, Anil will seek implementation of MoU as per SC terms

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True to form, everyone has anointed a winner, and a loser, after the recent Supreme Court judgment on the sharing of gas from the D-6 block in K-G basin. Mukesh is up, Anil is down, and the government is sitting pretty, having protected its interests. But the bigger question remains: will the bruising battle between the Ambani brothers be resolved over the next 14 weeks, as dictated by the SC? Well, don’t count on it.

On the face of it, the SC has resolved the big issue—the memorandum of understanding inked between the two brothers five years ago is not legally binding on Reliance Industries Ltd (RIL). At the same time, by urging the warring brothers to keep to the “spirit” of the document that helped divide the assets of Dhirubhai Ambani, the verdict raises many questions. “There is no finality (in the judgement) as the court has left it open for the brothers to renegotiate. Only the government has been able to protect its interest,” avers Atul Dua, senior partner of Seth, Dua & Associates.

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Other observers agree that while the SC holds the MoU subservient to government policy, it doesn’t dismiss it altogether. “The SC has left the room open for ADAG to argue about the supremacy of a family arrangement in so far as the business of the groups is concerned,” says Venkatesh Raman Prasad, partner, J. Sagar Associates. “This leaves the door open for renegotiations between the two groups pursuant to the MoU with the caveat that it has to be within the framework set by the SC,” says he.

To add to the cocktail, the government holds the keys in the negotiations to follow. For instance, how will RIL negotiate without a government mandate on signing a gas-sale agreement for Anil’s greenfield power project (only allowed for existing plants, as per current policy)? Also, to what extent can Mukesh Ambani take shelter behind the government’s gas utilisation policy guiding the volume, price and tenure of supply? For now, the SC has approved the government ceiling price of $4.2/mmBtu.

Experts say this still remains a great deal for Anil, given that the cheapest gas in the market costs $5.2/mmBtu. That’s why J.P. Chalasani, CEO of Anil’s Reliance Power, is optimistic. “There is so much clarity in the SC judgement, so why will the negotiations not go forward?” Chalasani says that the SC-mandated agreement will ensure that RNRL doesn’t become a “shell company”. He also does not feel the lack of progress in setting up a gas-based plant will be a handicap, as once the gas sale agreement is in hand, a plant can be set up within three years.

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While the government has been keen to resolve the matter—Anil called on the prime minister soon after the verdict—it remains to be seen if it will support RNRL’s demands for gas allotment. Remember, there’s still considerable anger within government on Anil’s media campaign that questioned government decisions, including the EGOM-formulated gas policy. Petroleum secretary S. Sundaresan bluntly states, “Presently, gas has not been allocated to units not producing power. Any new unit will be considered as and when there is a policy formulation for units under consideration.”

Of course, at a broader level, given the huge unmet power demand, a rethink in government policy isn’t ruled out. “The gas allocation policy is somewhat crazy. There is some confusion, which will have to be sorted out, as new gas-based projects cannot come up unless gas has been allocated,” says energy expert Kirit S. Parikh. Regardless of the Reliance case, Parikh feels the gas utilisation policy will have to be “tweaked sensibly” as domestic gas production increases.

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Former petroleum secretary S.C. Tripathi echoes this view, saying, “The government has to decide whether the Reliance Power projects are important enough to be allocated the required quantity of gas and for Reliance Power to take steps to realise their project quickly.” The tougher issues will be those of volume and tenure of gas fielded from D-6. Anil’s Reliance Power is seeking 28 mmscmd gas for a 17-year tenure to produce 10,000 MW of gas-based power.

Experts say the Reliance Power demand alone will outlive the current envisaged life of the D-6 block, the largest Indian gas find in decades. At its peak, the D-6 block is expected to produce 80 mmscmd from a current level of 62 mmscmd (Anil’s group says it can go up to 120 mmscmd). It’s doubtful the Centre would allow RIL to make a long-term commitment of 17 years to RNRL as against the present firm supply commitments of five years. One may expect tough negotiations on the quantity of gas sought by RNRL as per the MoU. On the price front, ambiguity persists. The current government price ceiling of $4.2/mmbtu is due for revision in 2012. What happens after that is a big unknown.

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There are broader issues as well. Beyond the three key players, experts feel the SC judgement highlights lack of trading freedom by field contractors and may thus impact foreign investor sentiments. Sundaresan is not so worried. “The judgement has been an excellent signal...investors can be sure that the judicial system will protect all the rights of contracts entered into between the government and the companies,” he says. But concerns persist here.

So, with RNRL planning to stick to the MoU to ensure that talks ahead are not “unfair” to its shareholders, the road ahead seems tricky. The final answers will once more rest with the government, and how much it will bend to accommodate Anil. If the differences between the two brothers aren’t resolved, arbitration proceedings may come into play.

Then there’s a missile left unattended by the SC. As JSA’s Prasad says, “Under the MoU, ADAG had the right to seek 40 per cent of the entitlement from RIL’s existing and future E&P discoveries. This has not been commented upon by the SC.” Clearly, there are battles to come. For now, one can only hope that the Centre will follow the SC observation to “use natural gas for national development”.

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