Choking on gas

Now that the Bombay High Court has rejected the Ministry of Petroleum and Natural Gas' (MoPNG) attempts to help Mukesh Ambani's Reliance Industries Limited (RIL) wriggle out of its 2005 contract to supply 28 million metric standard cubic metres per day (mmscmd) of gas to Anil Ambani's Reliance Natural Resources Limited (RNRL), the pressure on it has increased several times over.

The implications of the verdict go well beyond the petty games the ministry played, and the fall in RIL's profits as it has to sell the gas to RNRL at $2.34 per million metric British thermal units (mmBtu) -- this is significantly lower than the $4.2 RIL will get from selling gas to its new customers.

MoPNG first rejected the RIL-RNRL contract arguing it was not an arm's-length one [the court rejected this saying MoPNG had no such rights under its Production Sharing Contract (PSC) with RIL and that its rights pertained only to the share of the RIL gas that it got by way of profit-sharing].

But there's a lot more at stake than the profits of the two Ambani brothers or MoPNG's tattered image -- in any case, RIL will go to the Supreme Court, so the case will drag on.

The government had come up with a gas allocation policy last year which made it difficult for new power plants to get gas from RIL, but this policy did not apply to the RIL-RNRL case since that was already in court.

So one possible way to help RIL, if Attorney General Ghoolam Vahanvati agrees, is to come up with a new gas allocation policy that applies even to RNRL.

More important, MoPNG needs to take a call on whether the $4.2 per mmBtu it has fixed as the price for RIL gas will continue to hold for all sales other than those to RNRL and NTPC (RIL has also failed to honour its commitment to sell 12 mmscmd of gas to NTPC at $2.34 per mmBtu and the case is in court).

The problem here is that the $4.2 price was based on a restricted bid where RIL invited just 10 companies to bid. The short point is RIL structured the bids in such a way it has virtually no downside (even if oil prices fall from $105 per barrel to $45, prices of gas fall from $4.43 per mmBtu to just $4.07) and restricted bidding is not permitted under the PSC.

Indeed, while RIL says the Prime Minister's Economic Advisory Council upheld its pricing formula, the EAC actually said, "Since there appears to be some doubt about the transparency of the bidding process … especially relating to placing restrictions on who was invited to bid … invite fresh bids in a transparent and well-publicised manner from all parties … so as to discover the true arm's-length competitive price for the gas."

Sticking to the $4.2 price means RIL's cash inflows remain high (how high will depend upon what the capital expenditure is, since the government's share of the RIL gas under the PSC really becomes significant only after RIL has recovered 2.5 times its capex . . . this is a subject best dealt with in a separate piece).

But more than that, it raises prices of electricity (a $4.2 price means consumer prices rise by at least a rupee a unit) and fertiliser and hence government subsidies will also rise sharply. RIL got the $4.2 price by structuring its bid in a particular fashion and deciding who it would invite to bid -- if this is acceptable, ONGC, GSPC and others who find gas will also be free to structure their bids as they want. In other words, India can get caught in a high-cost gas spiral even at a time when, like now, global gas prices are lower.

Lastly, the government needs to decide if it is going to interpret the PSC differently from the way the courts have -- that is, does it have the right to clear each and every contract a gas/oil producer makes? Rejecting the RIL-RNRL contract and not forcing RIL to honour its commitment to NTPC has, for instance, ensured that 10,000 MW of new electricity capacity has not come up -- by the way, according to the Integrated Energy Policy, India needs to build fresh capacity of around 25,000 MW each year till 2031-32 if it wishes to sustain an 8-10 per cent GDP growth.

In other words, the petroleum ministry's playing favourites has already cost the country dearly. This cannot be allowed to continue.