The Union Government’s decision on Wednesday evening to defer any proposed hike in the price of natural gas until the issue has been discussed with all stakeholders over the next three months is wise, especially since it benefitted only one corporate house which was behind the pressure.
Media reports that the Prime Minister, Finance Minister, and Oil Minister were deeply engaged over the past three days in allegedly working out a “more palatable” increase – from former Union Petroleum Minister M Veerappa Moily’s unilateral hike from $4.2 per million British thermal units (mmBtu) to $8.8 with effect from July 1, 2014 – unleashed a spate of complaints from the BJP, particularly from States like Maharashtra that are going to the polls this year.
Sources say that senior leader Amit Shah was told that the increase would trigger inflationary pressures on the economy and sharply raise the prices of transport, electricity, fertiliser, CNG and piped cooking gas. This would enable the Congress and the Aam Aadmi Party to bounce back in the Delhi Assembly election that is expected to take place within a few months, and jeopardize the BJP’s chances. Any defeat in States where the BJP is perceived as strong will put the regime on a slippery slope at a time when there are conflicting views about the strength of the monsoon and the Iraq-Syria crisis is hurting oil prices.
The party leadership was told that the hike in railway fares was understandable, but Veerappa Moily’s decision to double the price of indigenously produced natural gas was widely perceived as mala fide. Some also questioned the decision to price a domestic product meant for domestic consumption in dollars, rather than rupees. The AAP had approached the Election Commission to intervene and get the hike deferred. The BJP-led Government was not bound to uphold the UPA decision, they said, especially as the issue is complex and one case of 2005 is still pending in the Mumbai High Court.
The gas pricing case is convoluted, and calls for a brief recapitulation. It may be recalled that in 2007, a dispute arose between Mukesh Ambani’s Reliance Industries Ltd (RIL) and Anil Ambani’s Reliance Natural Resources Ltd (RNRL) regarding the cost fixed by the Government for purchase of natural gas from private players. The Supreme Court verdict of May 2010 went in favour of RIL, but raised more questions than it answered.
In 2007, the Government fixed a price of US$ 4.20 mmBtu for the public sector National Thermal Power Corporation (NTPC) to purchase gas from the RIL-operated KG-D6 block in the Krishna Godavari basin. But in 2005, in the course of a ‘peace deal’ brokered by former ICICI Managing Director KV Kamath while setting the Dhirubhai Ambani estate, RIL agreed to sell gas to RNRL at US$ 2.34 per mmBtu.
The Petroleum Ministry never explained why it virtually doubled the price at which the public sector would purchase gas from the same seller. Emboldened by the largesse, RIL demanded that RNRL pay the new rate; the parties landed in court. The Supreme Court held that gas is a natural resource belonging to the nation, and allowed the Government to fix its price, even if it meant fixing the price at a higher rate than necessary in the free market (which is what the deal between the brothers was). The verdict gave RIL additional profits pegged at tens of thousands of crores. An unnoticed collateral damage was that the sanctity of a business agreement between two parties (RIL and RNRL) was scuttled by both the Government and the judiciary, and no reasons given, thereby introducing arbitrariness into the pricing policy in a critical area like the energy sector. The 2010 success emboldened RIL to once again seek a doubling of the price of gas, in violation of contract.
When there was an alleged deliberate drop in production of gas from the KG-D6 basin, the former cabinet secretary TSR Subramanian, former Navy chief Admiral RH Tahiliani, lawyer Kamini Jaiswal and former Union secretary EAS Sarma filed a complaint with the Anti Corruption Branch (ACB) of the Delhi government that the Central Government had taken no action against RIL in this regard. Worse, the Centre ignored the CAG report and the then Solicitor General’s opinion (May 2012) and accepted the RIL demand for doubling gas prices from April 1, 2014.
This prompted the Arvind Kejriwal-led Delhi Government to file a criminal case under the Prevention of Corruption Act against Petroleum Minister M Veerappa Moily, former Petroleum Minister Murli Deora, Reliance Industries Limited, its chairman Mukesh Ambani and former DG Hydrocarbons VK Sibal for alleged collusion in hiking prices of natural gas from KG basin.
Kejriwal – who has shrewdly apologised to the Delhi electorate for his impatient and ill-conceived resignation – has been keenly watching the BJP-led Government on this issue, as he hopes for an electoral comeback. The AAP has previously alleged that former Petroleum Minister Jaipal Reddy was shunted out of office for sending RIL a show-cause notice regarding drop in gas output from the KG-D6 field, and imposing a penalty upon it. Former Minister Mani Shankar Aiyar is said to have been similarly booted out for resisting the demand to boost prices.
Although Veerappa Moily insisted that all norms were followed in fixing prices, the facts suggest collusion to bring unearned gains to one party. Reliance secured the right to explore the Krishna Godavari (KG) Basin for oil and gas through the New Licensing and Exploration Policy (NELP) at the turn of the century. The CAG report pointed out that the pre-qualification norms were diluted to help RIL to qualify. There was no due diligence of the claimed size of gas discoveries, field development plans and proposed investment outlays proposed; nor were the company’s commitments under the PSC on gas output enforced.
In June 2004, National Thermal Power Corporation (NTPC) invited bids for supply of gas for its 2600 MW power plant in Kawas and Gandhar. RIL, which expected to start production of gas by the time NTPC’s plant was ready, offered a price of $2.34 per mmBtu for 17 years. It won, and was issued a Letter of Intent (LoI) to supply 132 trillion units of gas per annum at the stated price. But soon after, Reliance refused to sign the Gas Sale and Purchase Agreement agreed during the bidding process and sought major changes in the draft GSPA. NTPC took it to the Bombay High Court in December 2005, where the case is still pending.
In 2007, the UPA referred the matter to an Empowered Group of Ministers (EGoM) headed by then Finance Minister Pranab Mukherjee; it virtually doubled the price to $4.2, using a formula devised by Reliance itself! (This became the cause of dispute between the Mukesh and Anil Ambani; but the NTPC case has still not been resolved).
This price was hiked even before a single cubic meter of gas was produced from the gas field, and elicited strong objections from then cabinet secretary TSR Subramanian and Surya P Sethi, then Principal Adviser, Power and Energy, Government of India. The duo said that nowhere was the cost of production of natural gas more than $1.43; nowhere in the world was the Reliance formula used; and that RIL had quoted $2.34 for 17 years in a global tender just three years back. The objections were brushed aside.
Gas production in KG-D6 field began in April 2009, and soon after Reliance expressed unhappiness at the new price of $4.2. The production of gas fell to one-third of what was promised in the production sharing contract (PSC). The UPA set up a committee headed by C Rangarajan, former Reserve Bank of India Governor and then chairman of the Prime Minister’s Economic Advisory Council. He created a formula to double the gas price to $8.4 – a price not applicable anywhere in the world!
More pertinently, natural gas is considered the world’s cheapest and cleanest fuel. The question arises – why is it being made uneconomical? Can even the Government build gas-fired power stations at this price? Further, when Reliance quoted $2.34 to NTPC in 2004 for 17 years, a dollar was worth Rs. 47; now it gets $4.2 when the dollar hovers around Rs. 60. This raises the fundamental question why gas produced and consumed in India is priced in Dollar.
The production sharing contract contained no provision for revising wellhead price of gas from fields already declared commercial. It is pertinent that while declaring natural gas (and other minerals) a national wealth, the Supreme Court placed the responsibility for pricing and allocating natural resources upon the Government. The onus of acting responsibly is thus on the Government. By refusing to succumb to the pressure of an artificial deadline placed by the outgoing regime, it has won the first round.
Niticentral.com, 26 June 2014
http://www.niticentral.com/2014/06/26/deferring-gas-price-hike-a-wise-move-232272.html