Natural gas

The gas price fix

Print edition : March 21, 2014

Petroleum Minister M. Veerappa Moily. Photo: V. Sudershan

V.K. Sibal, former Director General of Hydrocarbons. Photo: Mohammed_YOUSUF

Murli Deora, former Petroleum Minister. Photo: Shanker Chakravarty

Mukesh Ambani, RIL chairman. Photo: AFP

The FIR filed by the Anti-Corruption Branch of the Delhi government against Union Ministers Murli Deora and M. Veerappa Moily, former Director General of Hydrocarbons V.K. Sibal and RIL chairman Mukesh Ambani alleges rigging of the price of gas to favour the corporate giant.

ON FEBRUARY 11, a few days before stepping down as the Chief Minister of Delhi, Arvind Kejriwal of the Aam Aadmi Party (AAP) dealt a serious blow to the unholy nexus between corporate companies and corrupt politicians. In an atmosphere where corruption in high places of power has already been at the forefront of public debate, the AAP’s action against a corporate conglomerate has significant political implications.

As the Anti-Corruption Branch of the Delhi government filed a first information report (FIR) against former Petroleum Minister Murli Deora, current Petroleum Minister M. Veerappa Moily, former Director General of Hydrocarbons V.K. Sibal and Reliance Industries Limited (RIL) chairman Mukesh Ambani, concrete action, in the form of an investigation, was initiated for the first time by an elected government against alleged collusion between corporate interests and the political class leading to a loss to the public exchequer and the squandering away of valuable natural resources.

The filing of the FIR followed a complaint made to Kejriwal by former Cabinet Secretary T.S.R. Subramaniam, former Power Secretary E.A.S. Sarma, former Chief of the Naval Staff Admiral R.H. Tahiliani, and Supreme Court advocate Kamini Jaiswal. The FIR, a copy of which has been accessed by Frontline, seeks to initiate an investigation into what is termed by the complainants as the “single biggest act of corruption by the UPA [United Progressive Alliance] government”, the recent decision to allow the doubling of the price of natural gas from $4.2/mBtu (million British thermal units) to $8.4/mBtu from April this year due to active collusion between RIL and some Ministers of the Central government. (The gas price formula is based on the recommendations of a committee headed by Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister.)

The complaint links the issue of gas pricing to concerns of inflation and the subsidy burden of the government. Kejriwal describes the benefits given to RIL as an “assault on India’s economic sovereignty”, which amounted to “anti-national activity”.

The complaint states, “It is to be noted that millions of poor in India would be severely affected on account of the huge benefits given to the contractors. Inflation would increase enormously, impacting food and energy security, giving rise to higher prices for fertilizers, food products, cooking gas and the like. A vast majority of the Indian population lives below the poverty line of $1.25 per day and this section will be deprived even further by the lavish benefits gratuitously given to the contractors. Thus, their right to life, already very precariously balanced, will become even more vulnerable. The subsidy burden of the government would also increase enormously causing huge fiscal deficits.”

In 2010, the Supreme Court, while upholding the legality of increasing the price of gas, observed that the government should act as a trustee of natural resources, which belonged to the people of the country. Two public interest litigation (PIL) petitions, filed by Communist Party of India leader Gurudas Dasgupta and E.A.S. Sarma, on the issue are being heard by the Supreme Court.

On January 7, 2014, the Supreme Court observed that the proposed doubling of the price of gas would be subject to the outcome of the present petitions. The final hearing of the PIL petitions is in March.

In a letter to the Prime Minister on May 23, 2013, Dasgupta highlighted the fact that the Fertilizer and Power Ministries were strongly opposed to the demand of Reliance for a gas price hike and the recommendations of the Rangarajan Committee, as a price increase would lead to a massive hike in power tariffs and a hefty rise in fertilizer prices and subsequently put a huge financial burden on the government. Dasgupta also estimated that accepting the recommendations of the Rangarajan Committee would result in an increase in fertilizer and power subsidies by Rs.14,250 crore a year. This would mean an additional subsidy burden of Rs.71,250 crore in the five-year period from 2014-15 to 2018-19, after which the prices are to be revised again. He estimated that the enhanced profit of Reliance would be Rs.64,000 crore in the period. In a subsequent letter to the Prime Minister on June 10, 2013, Dasgupta pointed out that a gigantic scam was in the making with the generous assistance of the Ministry of Petroleum. Communist Party of India (Marxist) MP Tapan Sen had also protested against the undue benefits bestowed on Reliance.

Political patronage

The UPA government has refused to act on the allegations of corruption in the issue of gas pricing or take concrete action against the corporate giant. In fact, political patronage facilitating the allocation of natural resources to Reliance goes back a long way. During P.V. Narasimha Rao’s tenure as Prime Minister, a contract for the Panna-Mukta oilfield was awarded to a joint venture of Reliance and Essar. The Comptroller and Auditor General (CAG) pulled up the government for giving undue benefit to the two companies. Documents of the Central Bureau of Investigation’s (CBI) probe into the case, available with Frontline, show that Brijnath Safaya, who was then Additional Private Secretary to Satish Sharma, the then Petroleum Minister, told the investigating agency that these industrialists used to come with suitcases full of money to Sharma’s residence.

Both the Bharatiya Janata party (BJP) and the Congress have refrained from speaking out against Reliance on the gas pricing issue. The complaint filed with the former Chief Minister of Delhi ascribes motives to both the major political parties for not taking Reliance on. The complaint states that the government ought to have left the decision of a price hike to the next government since it involves serious economic considerations, inflationary consequences and a massive increase in the subsidy burden. It further goes on to state that the fact that the decision was taken in advance by the present government shows that it wanted to favour RIL for corrupt considerations, which would then help with the expenditure for the coming national elections. It also questions the silence of the BJP. It states that “as during election time when huge slush of funds is required by the major political parties, no one is willing to speak against this decision, even though price rise is normally an important political issue”.

On February 21, Kejriwal wrote to the BJP’s prime ministerial candidate, Narendra Modi, asking him to make clear his stand on gas pricing. On February 27, he shot off a similar letter to Congress vice-president Rahul Gandhi.

The complaint highlights several post-contractual benefits given to RIL at the cost of the larger public interest and points out the involvement of public servants in the same. RIL had signed a contract with NTPC in 2004 to supply gas to its power plants at the rate of $2.34/mBtu for a period of 17 years. It also signed a similar contract with Reliance Natural Resources Limited (RNRL), an Anil Dhirubhai Ambani Group company. The complaint states that under pressure from RIL, the government, with Deora as the Petroleum Minister, revised the gas price in 2007 to $4.2/mBtu, which was clearly an act of corruption. The decision of the UPA government to allow another gas price increase, to $8.4/mbtu, will make the price of gas in India one of the highest in the world.

It argues that RIL’s pleas for a gas price revision were accepted by the government without factoring in the cost of production and thereby the government gave in to the “ mala fide intent” of the company. It states that the cost of production at the well head was never calculated by the government or the Rangarajan Committee independently and accurately. “According to experts, the maximum price of gas at the well head would not be more than $1.43 and the current price of $4.2 is already one of the highest in the world. To add to this fraud, there is no explanation as to why, when the entire domestic production is consumed internally, the price was fixed in U.S. dollars. The fluctuation in the dollar rate had now effectively doubled the price of gas even further,” it says.

Other examples are cited to indicate that RIL’s demands were only meant to garner more profits. A letter written by RIL to the Directorate General of Hydrocarbons (DGH) on May 22, 2009, giving its cost calculations, shows that the cost of production was less than $1/mBtu. Niko Resources, RIL’s partner, has a 25-year contract with the Bangladesh government to supply gas at the rate of $2.34/mBtu.

The complaint has also questioned the argument presented by RIL that a hike in gas price would bring in more investment for exploration. The complainants have alleged that there is a deliberate reduction in gas production by RIL in its KG-D6 block in order to garner larger profits. In the production sharing contract (PSC) between the government and RIL, a parameter termed the Investment Multiple (IM) has been defined as the ratio of the total revenue to the total investment. According to the PSC, as long as the IM is below 1.5, RIL is entitled to more than 80 per cent of the profits and the government gets 20 per cent. It is only when the IM becomes more than 2.5 that the government gets 85 per cent of the profits. Therefore, RIL is said to have an incentive in keeping the IM below 2.5 by artificially increasing expenditure. The CAG, in a detailed report in 2011, had found that RIL exaggerated its capital expenditure for this very reason. The complaint also alleges that RIL made unjust enrichment by over-invoicing the capital costs and ensuring that it took a longer time to recover the capital costs. RIL raised its capital expenditure from the proposed $2.4 billion in 2004 to $8.8 billion in 2006. The DGH allegedly accepted this artificial increase in RIL’s capital cost, which it could have objected to.

Underproduction

The issue of gas pricing has also brought to the fore the inefficiency of the private sector in utilising valuable natural resources for the greater public good. Ironically, this flies in the face of the argument propounded in favour of privatisation of natural resources. Speaking to Frontline, AAP leader Prashant Bhushan said that this form of privatisation only facilitated the loot of valuable natural resources meant for the larger public good. The report of the production week of June 10-16, 2013, showed that only nine out of 18 wells in the KG-D6 basin were in production. The gas sales were reported at just 14.63 mscmd (million standard cubic metres per day), a mere 18 per cent of the target rate of 80 mscmd. The complaint alleges that RIL’s inability to start production work in more fields has caused a heavy loss to the economy, forced several power plants to stop production, increased inflation and forced consumers to buy gas from abroad. Gurudas Dasgupta felt that RIL’s failure to meet production targets could be a valid ground for the cancellation of its contract.

In a brief dated December 28, 2011, the DGH pointed out that there was a cumulative shortfall of 76 per cent of the approved target of production until the end of 2011-12. Subsequently, a show-cause notice was issued to RIL on July 2, 2012, by the then Petroleum Minister, S. Jaipal Reddy. The strongly worded notice said, “…you have failed to fulfil your obligations and to adhere to the terms of the PC [production contract] and are in deliberate and wilful breach of PC and have thereby caused immense loss and prejudice to the Government. You have also repeatedly failed to meet your targets under the PSC.” However, soon afterwards, in October 2012, Reddy was removed from the Ministry and Veerappa Moily was appointed. The FIR states that Moily has not taken any action against RIL for this deliberate drop in production.

Hoarding of natural resources

The UPA government also, according to the FIR, allowed RIL to renege on certain provisions of the PSC that are meant to prevent the hoarding of natural resources by a private party without utilising them for the greater public good. A PSC has a mechanism for the progressive surrender of exploration area back to the government as the contractor discovers gas for commercial production in specific pockets and as it delineates certain portions as relatively less promising. This is a mechanism to prevent the monopoly of a particular private party over natural resources without tapping them and also to ensure higher prices for the resources through a mechanism of competitive bidding.

In the PSC with RIL, the exploration was divided into three phases. At the end of phase III, the contractor was only to hold on to that area where the operator discovered petroleum resources in commercially viable quantities and was willing to develop further for production. The rest of the area was supposed to go back to the government. According to a CAG report in 2011, the original end date of phase III exploration was June 2007, and it was extended to July 2008 by the government. However, RIL held on to the entire area of 7,645 sq km instead of the 390 sq km from which it had begun commercially tapping reserves after phase III. The government, in gross violation of the PSC, declared the whole of the area as a “discovery area” and awarded it to RIL for future exploration.

The complaint alleges that the then Minister of Petroleum and the DGH connived with RIL and allowed RIL to expand production into the areas to be relinquished. It further notes that former Director General of Hydrocarbons R.N. Chaubey reviewed the position and recommended relinquishment as per the PSC. However, according to the FIR, Moily overruled it.

The FIR has charged the public servants of the UPA government under Section 13(1)(d) of the Prevention of Corruption Act, 1988. This section deals with a public servant obtaining for himself or any other person any valuable thing or pecuniary advantage, or abusing his position as a public servant to do the same. The accused have also been charged under Sections 420 and 120 B of the Indian Penal Code. However, with the Kejriwal government no longer in power, the fate of the FIR and the investigation initiated by it is uncertain.

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