It
was a dispute waiting to arise. When the government,
under its New Exploration and Licensing Policy (NELP),
decided a decade back to let the private sector exploit
India's limited oil and gas reserves through production
sharing contracts (PSCs), the question of who ''owns''
those reserves was at least partially sidestepped. In
principle, the fact that the private sector was to invest
in extracting the oil and gas while the government was
to get a share of the output amounted to an implicit
recognition of the government's right over these reserves.
However, there was no clear equation made between sharing
production and sharing revenues. This allowed for the
possibility that at least a part of the gas could be
disposed of by private contractor to buyers they select
at prices they choose, so long as the government is
paid a royalty computed on revenues earned at an arms-length
or transparently discovered price approved by it.
Among the successful bidders in the different rounds
of licensing under the NELP was Reliance Industries
Limited, which by 2004 held more than a quarter of the
acreage leased for drilling. The company's success was
not restricted to winning the right to drill and explore
for oil and gas reserves. It had by 2004 also made two
large discoveries -- a 14 trillion cubic feet field
in the Krishna-Godavari basin (October 2002) and a large
field in the Orissa block (June 2004). In the KG basin,
gas was discovered in the very first well Reliance drilled
in the deepwater block D6.
RIL's production sharing contract with the government
required that it paid the latter 10 per cent of the
total revenue computed at a mutually agreed arms length
price, until Reliance recovers 1.5 times its investment.
The government's take would rise to 16 per cent of that
gas value when revenues amount to 1.5 times to two times
the RIL's investment, to 28 per cent when revenues amount
to two to 2.5 times the investment and 85 per cent thereafter.
There are two issues that are unclear here. First, whether
RIL is allowed to sell gas at a price lower than the
valuation price approved by the government for computing
its share in revenues at different levels of RIL's earnings
relative to its investments. Second, whether the computation
of RIL's revenues aimed at ensuring the viability of
its investments would be based on the valuation price
or the price at which it actually sells gas to different
buyers.
Two years back the government fixed the base price of
the gas to be produced at KG-D6 at $4.20 per million
British thermal units (mBtmu). RIL had proposed a value
of $4.33 per mBtmu, which was examined by a committee
of Secretaries. The committee recommended lowering of
the price to take account of appreciation of the rupee.
The pricing formula was subsequently accepted by the
government based on the recommendation of an Empowered
Group of Ministers (EGoM), which felt that accepting
it was important since: ''it would not be in the country's
interest to renege on the contractual provisions under
the PSCs [production sharing contracts] entered into
in good faith under the New Exploration and Licensing
Policy."
There were, however, two problems. First, RIL had arrived
at the $4.33 per mBtmu price on the basis of bids it
invited from a shortlisted set of power and fertilizer
companies, and therefore considered a trifle arbitrary
and not all arms-length according to some observers.
Second, at the time of the split of the Reliance empire
in 2005, which had resulted in a demerger of companies
as part of a asset-sharing arrangement between brothers
Mukesh and Anil Ambani, RIL had worked out a deal with
sister company Reliance Natural Resources Limited to
sell 35 per cent of the gas or 28 million cubic metres
a day (mcmd) of the projected peak output of 80 mcmd
per day at the KG-D6 field at a price of $2.34 per mBtu.
This gas was to be used by Anil Ambani-controlled RNRL
in two power plant projects that it was to set up at
Dadri in Uttar Pradesh and Patalganga in Maharashtra.
The price specified as part of the MOU between the brothers
was not without any basis. It was the price at which
RIL had won a bid to supply 12 mcmd of gas to the National
Thermal Power Corporation in 2004. That was the then
prevailing market price. But thereafter the price rose
significantly, permitting RIL to propose a higher price
in 2007, when it arrived at an agreement with the government
to price gas from the KG-DG field at $4.20 per mBtmu.
Given the obvious benefits that RIL would derive from
the higher price, it has since been demanding that this
should be the price at which gas is sold to all its
clients. And given the higher revenue share that the
government would derive if this is the price at which
revenue is computed, it has been supporting RIL's contention
on the grounds that the $2.34 price is not an arm's
length price. However, that is a contention that even
public sector NTPC disputes.
It is indeed true that Mukesh Ambani's RIL is using
the government's current position to renege on the agreement
it entered into with Anil Ambani's RNRL. It is dressing
up this opportunistic position with five other arguments.
First, that the price it had settled with NTPC is no
more a market price and therefore an ''arms length'' price.
And that it had not converted the MoU to supply gas
at that price to NTPC into a binding agreement. Second,
that a memorandum of understanding between the brothers
was not equivalent to a contract between the two coporate
entities: RIL and RNRL. Third, that given the development
costs it has incurred, selling the gas at the $2.34
per mBtu price would result in an annual loss of around
$1.2 billion to the company. Fourth, that if RNRL was
sold the stipulated volume of gas at $2.34 per mBtmu,
the government would lose close to $15 billion over
the next eight years. And, finally since the power plants
for which the gas from the KG-D6 field was earmarked
have been indefinitely delayed, RNRL would be trading
in the gas for profit rather than using it for its own
production activities.
Anil Ambani's plea is that the agreement between RIL
and RNRL has nothing to do with the contract with the
government. The former has to be honoured by providing
RNRL 28 mcmd of gas at $2.34 per mBtu, while the latter
must be honoured by providing the specified revenue
share to the government by valuing all output sold from
the KG field at $4.20 per mBtu. Implicit in this stand
is the view that it is possible to distinguish between
the sale price and the valuation price. According to
this view, a contractor in a production sharing agreement
has the right to dispose of the output to whomsoever
he chooses at whatever price, so long as the royalty
on sales is paid by computing revenues at the valuation
price.
This is a position the government has on occasion erroneously
entertained. Thus in an e-mailed interview given to
Business Line (4 August, 2009), Anil Ambani has said:
''On August 30, 2007, the Government told Parliament
in a written answer and I quote: As per the PSC signed
by the Government under the New Exploration Licensing
Policy (NELP), the operators have the freedom to market
the gas in the domestic market on an arm's length basis.
The Government does not fix the price of gas. The role
of the Government is to approve the valuation of gas
for determining Government's take.''
RNRL's strength derives from the fact that in the legal
dispute between the RIL and RNRL over the issue, the
Bombay high court, while calling for a new arrangement
between RNRL and RIL, has upheld RNRL's position on
the gas price and supply issue. Two verdicts have favoured
RNRL—one from the company judge of the Bombay High Court
in October 2007 and another from the division bench
of the same court in June 2009. Both have held that
the MoU between the brothers is binding on the two companies
as it was a part of the scheme of demerger that was
officially sanctioned.
With the government implicitly on its side, however,
RIL is not willing to comply, taking the fight to the
Supreme Court. There are four players here: RIL and
RNRL; the government; and the courts. The court is merely
reading and interpreting a set of contracts, in the
light of the statements and actions of those who entered
into them. The government, on the other hand, has more
recently chosen to take the principled position that
it is the people and the government as their representative
which owns the nations mineral resources. Hence, a private
contractor in a production sharing agreement under which
the right to mine a specific leased area has been provided
in return for payment of a royalty to the government
does not have the right to decide the allocation and
pricing of output. RIL and RNRL being profit-seeking
entities are attempting to maximise their gains from
the right to mine the nation's resources that the government
gave the entity they jointly managed before 2005.
Unfortunately, in the long-drawn out interaction between
RIL and RNRL on this issue, the government has not held
a consistent position. This ambivalence, attributed
by some to manipulation by individual decision makers,
also reflects the changed relationship between the state
and private capital in India ever since ''reform'' began
in the early 1990s. In the first three to four decades
after Independence, India was characterised by the fact
that even though the state and private capital were
clear that development must occur within a ''mixed economy''
framework in which private investment decision making
had an important role to play, the state sought to maintain
some distance from private capital. It did circumscribe,
through regulation, the area of operation of private
industrialists. But within the circumscribed sphere
it let industrialists pursue their own designs, taking
care to make clear that it did not favour one business
group or another.
The creeping reform of the 1980s and the accelerated
liberalisation of the 1990s and after changed that relationship.
The rise of the Reliance group is itself attributed
to that change. Increasingly, the government has presented
itself as being in partnership with private capital,
and eager to prove that it would not ''renege'' on the
contractual relationships it forged with private industrialists.
In the process it was inevitable that at differrent
times and different circumstances one or the other business
group had a special relationship with one or the other
segment of the state.
Offering access to the nation's mineral reserves in
the name of finding resources to exploit them has been
one of way in which that partnership between the state
and private capital has evolved. Unfortunately, mineral,
oil and gas reserves are limited. So providing access
to some implies excluding the other. This meant that
the state had to favour some relative to others, even
if it claimed it was not doing so. The problem is that
actions which in the first instance are justified in
terms of expediency are soon influenced by design.
This is true of many areas. But it has stood out in
the present episode because a peculiar turn in the relationship
between two joint partners to the original contract.
That turn has revealed how much is at stake in terms
of private profit to be made from common public resources.
It also reveals the new state-supported forms that ''primitive
accumulation'' has taken in the neoliberal era. The spat
between two brothers has forced the government to reveal
its bias. Given its past actions many would argue that
the claim of being principled is just a ruse to defend
the fact that expensive resources have been handed over
to the private sector. In fact, taking a new track,
Anil Ambani has alleged that the government consciously
or otherwise ignored the inflation of capital expenditure
estimates by Reliance Industries to increase its share
of profits and leading to losses to the exchequer. As
the financial crisis has demonstrated, in the new world
order the state works to rescue and strengthen private
capital, even while it declares that the rest of society
including the poor and the marginalised have to learn
to deal with a world of market mediated relationships.
But in the process the relationship between state and
private capital increasingly turns murky.
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