Follow Economist Ambedkar: RELIANCE The Great Gas Heist One beneficiary, clear and corporate. How the UPA played for political positioning. LOLA NAYAR, ARINDAM MUKHERJEE, MADHAVI TATA

Sunday, July 7, 2013

RELIANCE The Great Gas Heist One beneficiary, clear and corporate. How the UPA played for political positioning. LOLA NAYAR, ARINDAM MUKHERJEE, MADHAVI TATA

It's done PM Manmohan Singh with Mukesh Ambani. (Photograph by Jitender Gupta)

RELIANCE

The Great Gas Heist

One beneficiary, clear and corporate. How the UPA played for political positioning.

LOLA NAYAR, ARINDAM MUKHERJEE, MADHAVI TATA

http://www.outlookindia.com/article.aspx?286692

In the Niira Radia tapes, there's this one delicious conversation the PR lady has with lobbyist Ranjan Bhattacharya. It was May 2009, and UPA-II cabinet formation was in full swing. Bhattacharya quotes Reliance Industries' Mukesh Ambani as telling him, "Haan yaar, you know Ranjan, you're right, ab toh Congress apni dukaan hai." Apocryphal or not, that earthy expression of ownership is relevant in the aftermath of the UPA's recent decision to raise gas prices for five years, starting at a flexible $8.4/mmbtu—conceding a long-standing demand by India's most powerful business house and its global partner BP.

This must be said because, apart from the Left parties and AIADMK, few even in the political establishment are raising obvious questions about this deal, of which Reliance, the country's largest private sector gas producer, is the major beneficiary. The whole pricing exercise has been riddled with conflicts between the ministries of power, fertiliser, finance and petroleum; the formula has invited severe criticism; and there's an attempt by the UPA to airbrush the obvious negative impact of the hike on the common man and taxpayer. Nearly everything will become expensive; or, obviously, the taxpayer will bear these subsidies.

Back-of-the-envelope calculations by Outlook show that the cost of this gas hike on just the power, fertiliser and lpg industries will be in the range of Rs 54,500 crore per annum. Also, the costs of industry in general will go up. "It is a massive loss to the nation. Already, fertiliser prices are soaring. Now, they will be increased again. This is a clear case of placing profit above people," says Prof K. Nageshwar, an MLC from Andhra Pradesh. On the other hand, aided by a depreciating rupee, gas producers will rake it in. "Every $1 increase in gas price means $73 million profit for Reliance," says Nageshwar. The irony: gas was meant to be a cheap, green fuel.


	"Bartering India's interests to the corporate world, the damage they have done is unfathomable."D.A. Somayajulu, Member, YSR Congress Governing Council

There's also a political brazenness to the timing. A decision slated for April 2014 has been announced a good ten months before, neatly sidestepping an election code of conduct and buying the support of a crucial corporate. Given that AIADMK has said that it would review the deal if a coalition it is part of comes to power, this pre-emptive pricing takes the decision out of the hands of (potentially, of course) an unreliable Third Front coalition. "With elections around, who'd want to upset a major source of funding?" says a political analyst.

Given the token response by the BJP (see box), it appears that the national interest will ignite in the principal opposition party only after 2014. It's no secret that, considering the growing (and open) corporate support for Narendra Modi, the UPA has made a political bargain by keeping Reliance happy. It is not just political parties that are observing a measured silence. Industry chambers, normally eager to put their point across to the media, were also trying to avoid eye contact. Last week, Modi, who normally draws a full house in his meetings, saw only a handful of prominent industrialists attending his session at a CII conclave in Mumbai.

Finance minister P. Chidambaram and petroleum minister Veerappa Moily have rightly pointed out that currently the public-sector ONGC and OIL dominate gas production. But what they have failed to clarify is who will bear the subsidy burden for the power and fertiliser sectors. Going by the track record of the government, the state-owned exploration companies may well have to pick up the tab. That leaves only Reliance. With global energy giant BP as its partner, there is no telling when the incentivised partners may reverse the drop in production to capitalise on the higher gas prices. "They (Reliance) have been waiting for this announcement for a long time. Production will go up," says a person associated with Reliance's D-6 block in the Krishna-Godavari basin, declining to be quoted. "The biggest beneficiary is going to be Reliance—eyes closed."

Against the committed production of over 70 million metric standard cubic metres per day (mmscmd) at the KG basin, output has been as low as 15 mmscmd. Reliance has been in a high-octane war with the CAG, which has said the company is to be faulted for not complying with agreed investment and development plans. "Our production will go up only in mid 2017-18," an RIL spokesperson says, seeking to deflate the charge that the price revision was orchestrated to benefit Reliance. In some three years, when Reliance hopes to bring its 'R' cluster and satellite fields in the KG basin block into production, the gas price in the country may well have reached $10/mmbtu. The company has made other finds of gas condensates in recent months. The indications are all in Reliance's favour. It could well emerge as the biggest gas producer in the country unless ONGC can be stirred to monetise its discoveries, including in the KG basin. ONGC and OIL did not respond to Outlook's queries.


	"The cost of power and fertiliser will go up, so the government will have to moderate the impact."B.K. Chaturvedi, Member, Planning Commission

The government habit of selective picking of recommendations, including from the Rangarajan committee report, has come in for criticism. The new formula (cherry-picked from the report, and approved for 2014-19) is, to put it simply, based on the average of European nbp, Henry Hub of US and Japan's import gas price plus the average of Indian gas import price. The formula is unique to India: no other gas-producing country has devised such a convoluted way to reward exploration companies. Moreover, the government has deviated from the committee's recommendation of a monthly review, instead opting for quarterly revisions. Thus, the revised price of $8.4 per mmbtu put out by the government is merely an indicative price.

In another instance, the Rangarajan report spells out that the pricing policy should apply only for future investments. In that case, most of the gas being produced in the country currently should not see any change in price. But that distinction has not been kept. The UPA's selective adoption of proposals, totally ignoring the concerns of its own ministries, defies logic. "The US economy has turned around essentially due to lower gas price. What is the window for India?" asks Anil Razdan, former power secretary.

What is particularly upsetting is the decision to equate domestic gas price with that of imported LNG, which has additional cost burdens of liquefaction, transportation and regassification. This also goes against the panel's recommendation. But petroleum minister Veerappa Moily has been persuaded to believe that the "import lobby" is behind alleged attempts to scuttle India's chance to become self-sufficient in oil and gas production.

B.K. Chaturvedi, a member of the Planning Commission, who was on the Rangarajan committee, defends the formula: "As far as the committee is concerned, it stands by its recommendations. The committee was conscious that the government's contractual commitment under the exploration policy (NELP) had to be honoured; therefore the prices were accordingly recommended." He does admit that the higher gas price will have bearing on the power and fertiliser costs, so the government will have to find a way to moderate the impact.


	"Like with GST, this should have been discussed with the states. The decision seems coarse, arbitrary."M.R. Venkatesh, CA And Political Analyst, Chennai

The state government-owned Gujarat State Petroleum Corporation (GSPC) is another likely beneficiary—it has also been seeking a higher price to make production from its K-G basin block viable. At the same time, D.J. Pandian, chairman of gspc says, "Even though gspc stands to benefit as an upstream company, we will be put to great hardship as power producers, for it will add Rs 2 per unit to our cost." Given that a large chunk of power goes to agriculture and industry, the hike in power tariff will hurt end-users.

Experts are critical of the government assumption that higher gas prices will attract foreign investments, as in the last 10 years, despite pegging crude oil prices to import parity and deregulating all petroleum products, inflow of FDI has been insignificant. "The assumption is based on a false premise. What worries me is that the subsidy bill will be humungous if this price goes through," says CPI(M) Rajya Sabha member Tapan Sen, who feels let down by fellow parliamentarians. "The opposition should have come a long time back."

Unfortunately, gas price seems unlikely to be a major issue in the upcoming elections. So far, only Tamil Nadu chief minister Jayalalitha has spoken against the price hike. Says M.R. Venkatesh, a Chennai-based chartered accountant and political analyst, "Like in the case of GST, this should have been discussed with the states, as they would be affected. The decision looks coarse and arbitrary and is likely to be challenged under Article 14 of the Constitution."

Well, even if the deal is done, it's the post-hike reluctance to discuss its fallout that is the most worrying. "I don't see any political fallout caused by this decision because political parties in our country are not vigilant enough," says K. Keshav Rao, a former Congress Rajya Sabha member who recently joined the TRS. That's when one wonders if a delay in decision-making is actually better than a wrong one being taken—all in the name of reforms.

***

Primer: Everything You Need To Know On The Gas Price Rip-Off

What is the gas price all about?
It is natural gas produced within the country; unlike imported liquefied natural gas (LNG). This is viewed as a cheaper and more environment friendly fuel compared to imported crude oil.

Where is this natural gas found?
Both onshore and offshore. Currently Bombay High produces the most gas; Assam, Andhra Pradesh, Gujarat, Rajasthan, Tamil Nadu, Tripura are other states where gas is being produced.

How much gas does India have?
In 2012-13 India produced 47,558 million cubic metres of gas, a drop of 14.5% from the previous year. India's gas imports have been steadily rising, up to 30% of total consumption last year.

Which companies produce this gas?
The biggest players are state-owned ONGC and OIL, and Reliance Industries Limited (RIL). In addition, there are other players like BP, Niko, Cairn Energy working in various joint ventures.

Who do they supply gas to?
According to government allocation, the first priority is to power and fertiliser plants; then for production of LPG or cooking gas; up next is other industries and city gas including piped gas and CNG.

How will you be affected?
Households are obviously impacted as they are the end-users of power, piped gas and compressed natural gas (CNG); if fertiliser costs go up, agriculture produce is bound to reflect it.

Who will benefit from price hike?
Technically, both public and private sector explorers. As ONGC and OIL pay dividend to government and contribute to subsidy bill, the top beneficiary will be RIL, the biggest private producer.

What impact will the gas price hike have every year on tax payers?

Power plants: Rs 46,360 crore p.a.
Urea production: Rs 3,155 crore p.a.
LPG production: Rs 1,620 crore p.a.
Total: Rs 51,135 crore p.a.
At current $ prices: Rs 54,500 crore*

Sources: power, urea, LPG figures based on estimations made by concerned ministries in the CCEA note on gas price hike. Total cost arrived at $ value at Rs 59.

***

Inverted Logic

Why the gas price hike doesn't make sense

Government View	Counter View

Need to attract foreign investment	Import parity price for crude oil in past 10 years has failed to woo big foreign investors
Will help to improve domestic production of oil and gas	The hike with prospective effect comes even as gas production has been slipping in recent years
Public sector companies like ONGC and Oil India Limited will be bigger beneficiaries	PSUs pay government huge dividends, also share part of subsidies: moreover, PSU gas production has hit a plateau
Will subsidise gas for power and fertiliser sector.	Reversing the efforts to cut down subsidies would put fiscal prudence at risk
Government will earn more through profit and royalties	Sure it will earn more but only lose it through additional subsidy burden

***

How UPA's Four Petroleum Ministers Have Dealt With The Gas Issue

Mani Shankar Aiyar, May 2004-Jan 2006 Shunted out for keeping the Ambani brothers, then together, at arm's length. Aiyar, however, also did his best to get ONGC to focus more on improving domestic oil and gas production.		Murli Deora, Jan 2006-Jan 2011 Known as "Uncle" to the Ambani brothers, he pitched for Mukesh in the legal fight with brother Anil. In the process, he changed the provision for market-determined gas prices.

S. Jaipal Reddy, Jan 2011-Oct 2012 Took unprecedented decision of not allowing Reliance to recover $1bn cost incurred on unutilised infrastructure. Paid for not permitting early review of gas price: he was unceremoniously moved.		M. Veerappa Moily, Since Oct 2012 After famously blaming "import lobbies", the minister granted Reliance's demand for high gas prices, ignoring the concerns of power, fertiliser industries and impact on consumers.