Reliance Gas ScamIndian Management Practices

Apoorva Yadav Rituparna GhoshalAmbreen QureshiKanishka Gupta

Merlyn HouVaishnavi Meghe

The RIL Basin

Background

KG Basin is considered to be the largest natural gas basin in India. A total of 19 discoveries have been made in the block during 2002-08

In 1991, Reliance Industries got the rights to explore the D6 block as per NELP (New Exploration and Licensing policy) 

Reliance Industries discovered the biggest gas reserve in Krishna Godavari basin . The site is called Dhirubhai 6 which is 7,645 sqkm in area

  The on-land portion covers 28,000 sq km and the offshore portion, including

deep waters, covers an area of about 145,000 sq km.

Incidents

In 1999 the government came up with the New Exploration Licensing Policy (NELP) allowing private players to enter

 Later RIL (divided between the two brothers) bagged the contract for D6 block of the Krishna Godavari river basin in Andhra Pradesh

Production sharing contract (PSC) was signed in April 2000 between the government and RIL and its minor (10 %) partner, NIKO Resources Ltd (a Canadian corporation), for exploration & production of gas/oil.

Around 7 trillion cubic feet of natural gas was discovered by Reliance in the Krishna Godavari basin in October 2002

The D6 was to produce 40 million MMSCD (Million Cubic meters per day), which was revised to 80 MMSCD.

Initial development cost at $2.4 billion was revised in 2006 to $5.2 billion in the first phase and $3.3 billion in the second

Family pact made in 2005, where RIL was to supply 28 million cubic meters of gas a day at $2.34 per million units to RNRL for 17 years

RIL did not supply the gas at the agreed rate

As per the pact, Reliance should have relinquished 25% of the total area outside the discoveries in 2004 and 2005, but the entire area was declared as a discovery area

Without drilling adequate wells, Reliance kept on claiming that there was potential for petroleum

The investments were quadrupled on paper & the capacity of commercial production was doubled resulting in drastically reducing/ delaying the profit sharing with the government.

Implications

After getting the contract in 2000 for exploration & production, RIL began to assert that the whole basin is full of gas & convinced the government to declare the entire region as ‘discovery area’ in 2009

According to CAG the ‘discovery area’ as per the contract was mere 5% of this area,& rest should be surrendered to the government in 3 stages

Reliance Executive Director P M S Prasad on 29 June wrote to oil secretary G C Chaturvedi protesting that his firm has not received the full copy of CAG report & was not consulted on issues in the report

RIL refused NTPC to sell the gas at $2.34 & instead forced the govt. to grant them a price of $4.2, all the while when ONGC was being allowed a price of $1.83.

RIL demanded ‘import parity’ price of $14.2 while the production came down to 31 MMSCMD (from 61) when it was supposed to go up to 80, apparently due to ‘technical snags’ and lack of gas!

Despite lack of gas and production, Reliance managed to give British Petroleum, 30% stake including the D6 region for $7.2 billion in 2011

Keep in mind that Reliance was supposed to be only the contractor and the assets like natural gas is a national

property!

Key People in the Case

People Involved

The Ambani Family – Mukesh Ambani majorly

The Government – Ministry of Petroleum and Gas headed by Verappa Moily, Govt. officials and lobbyists (Nira Radia)

None of the ministries involved in the process, including the oil ministry, raised the point that the gas reserves belonged to India & is not a property of the Ambani`s.

The deal was cleared by a cabinet committee headed by the Prime Minister

Ambani owns controlling shares in 27 media & news channels. Vajpayee’s son-in-law Ranjan Bhattacharya told Nira Radia that Mukesh Ambani said “Congress to ab apni dukaan hai.”

The press was suppressed by sending lawyers from Ambani`s office to the media houses

Mukesh Ambani & Narendra Modi hugged onstage in last year’s Vibrant Gujarat festival & Akash Ambani attended Modi’s rally in Mumbai.

Tapan Sen and Gurudas Dasgupta & the late Dipankar Mukherjee have exposed the successive scams in gas pricing that have helped Reliance to loot the people.

Unethical Issues

The argument for inviting private and foreign capital is that the govt. also receives a share of the gas/oil found, through profit sharing arrangement that is a part of the contract.

The government should inform amount of share actually received by it through such profit sharing

Every time the govt. increases the price of gas or approves the increased capital cost of Reliance, it claims that this will lead to additional supply of gas. Reliance should be penalized for making unkempt promises

Arvind Kejriwal filed an FIR for cheating against Mukesh Ambani & Moily. He is trying to stall the new price hike from April 2014

The price of natural gas was raised to USD 4/unit and Reliance followed it up by producing less gas due to which India had to import gas, leading to inflation, Kejriwal said

Yesterday, the ministry had approved another price hike doubling the price of gas from $4.2 per unit to $8.4 per unit

No substantial explanations are backed for this rise in price

Current Status

The decision to hike the gas price from existing USD 4.2 (Rs. 262.25) MMBTU ( one million British thermal unit) to USD 8.4 (Rs. 524.20) in India is one of the highest in the world.

This price rise will cost India a minimum of Rs 54500 crore p.a. and allow RIL to make a future windfall profit of Rs 1.2 lakhs crore.

Due to this rates of transportation, power production, fertilisers and food items will also rise

The gas prices should determined based on cost if production and not international rates

Impact on Society

Now What

- Can happen?

Or

- Should Happen?

Higher price = higher investment in untapped hydrocarbon frontiers

Higher investment = higher output of domestic natural gas

Higher output = reduction /elimination of India’s import dependence on costlier LNG(liquefied natural gas )

Elimination of India’s import = improving the country’s fiscal stability and energy security

The Core Argument by Govt.

Wrong Pricing Formula by  Rangarajan Report - The 8.40 number reportedly flows from the Rangarajan formula, not used anywhere else in the world to establish the wellhead price of natural gas

Former Union Revenue Secretary E.A.S. Sharma said the gas price hike is a policy initiative that “socializes costs and privatizes profits.”

The same KG basin gas that was once offered to NTPC at $2.34/MMBtu for 17 years 

 80 % people live below the $2/day purchasing power parity threshold

Flaws Present

Justification for raising the price of gas from existing fields

Higher price = difficult horizons = approved & audited costs of exploration and production warrant it

Govt. should make public the exact amount of profit gas and profit oil it received from private producers since the New Exploration Licensing Policy was instituted.

Fiscal stability wont ever happen - subsidizing the purchase of gas for Power and Fertilizer sectors that use 75 % of available gas in India

Recommendations

Check on alleged creation of artificial scarcity of natural gas and for fixing prices.

Absence of evidence-based research backing key economic decisions is the true “economic reality” of India

Guarantee of raising price ($8.4/MMBtu) = raising investments

Long-term vision based on geopolitical developments in the Gas sector, where Canada and the U.S. are to become major LNG exporters

Thank You