Reliance Gas Price issue and Mukesh Ambani FIR for dummies

KG BasinKG Basin has the country's largest gas reserves.

What is the Reliance Gas Price issue?

To put it in one line, it is an objection to higher pricing for natural gas which has little justification and has been brought about through unclear reasoning.

What is the complete story of Reliance Gas Scam?

After the Government of India opened up hydrocarbon exploration and prodution to private and foreign players in 1991, Reliance Industries got the rights to explore the D6 block as per NELP (New Exploration and Licening policy). Here, Reliance Industries discovered India’s biggest gas reserves in the Krishna Godavari basin near the Andhra coast and the site is called Dhirubai 6 (which is where the “KG D6 basin” come from, in news related with this subject). The size of the block is 7,645 square kilometers and is officially recorded as KG-DWN-98/1.

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 through an “addendum” in 2006 to $5.2 billion in the first phase and $3.3 billion in the second phase.

When Reliance Industries split between Mukesh Ambani and Anil Ambani, a secret pact between the Ambani brothers became public. Anil Ambani owned RNRL (Reliance Natural Resources Ltd) claimed it had rights to gas from Reliance KG basin for 17 years at $2.34 per mmBtu (million British thermal unit). The Supreme Court finally settled the matter by asserting that ‘the government owns the gas till it reaches its ultimate consumer and parties must restrict their negotiation within the conditions of the government policy’.

None of the ministries involved in the process, including the oil ministry, raised the point that the gas reserves belonged to the country and was not a property of the Ambani family. Even the Prime Minister, ManMohan Singh meekly requested the brothers to settle their differences in the interests of the country.

The CAG Draft Report on the audit of the Production Sharing Contracts for the on-shore and off-shore oil and gas blocks showed that the Directorate General of Hydrocarbons (DGH) allowed Reliance Industries and other private operators to “gold-plate” the capital costs and make huge profits using an “Investment Multiplier”, which meant that higher the capital cost, the larger the share of the profits of the private parties. If the cost is inflated enough and the supply of gas dwindles before it is recovered (the quantity cannot be ascertained, as the appraisal wasn’t done), the government profit will mostly be “thenga“, while Reliance “recovers” its invented investments.

Till the the capital costs are recovered, 90% of the petroleum/gas sold would be “cost” petroleum (covering Government royalty of 5%, operating costs, the costs of exploration, and the development cost of producing gas) and only 10% would be “profit” petroleum and Reliance gets the major share of the “profit” petroleum. The “Investment Multiplier” begins to increase (and thus the Government’s share) only after Reliance Industries has recovered most of its investment.

So increasing the profit share for private parties and decreasing government share was as simple as pouring in funds well beyond those stated in initial bid. Increasing capital costs helps Reliance retain a much larger share of the profits in the initial years, while the Government gets its share only in the last phase, when the production declines.

The capital costs in KG Basin D-6 Block went up from $2.4 billion in the initial contract to $8.5 billion. This is not possible without the government cronyism allowing it and there lies the  KG basin gas scam. In the case of KG D9 basin, the Management Committee in which the Government had 2 nominees allowed the inflation of contracts.

The CAG Draft Report also brought out that if the company did not develop certain areas within the contracted area within the stipulated time, 25% of the area outside that discovered in 2004 and 2004 should have been relinquished. Instead, the DGH and the Ministry of Petroleum allowed the whole area to be designated as “discovery area” in violation of the contract. Actual amount of gas available was obfuscated by digging inadequate wells, and moving directly to commercial production without intermediate appraisal.

Add to this the high price of Reliance gas — $4.2 per Million BTU (MBTU), fixed by the Empowered Group of Ministers headed by Pranab Mukherjee even when Reliance had admitted in Court that its production cost was $1.43 per MBTU and agreed to to supply gas at $2.34 to both NTPC and Anil Ambani Group, still making a profit of 50% (at this point, ONGC was supplying gas for half the price and gas production had not started in KG basin). Pranabda’s Empowered Group of Ministers let him renege on this and demand $4.2 per MBTU, because he could not now supply gas for less than the “mandated price” set by the government” (No gas was coming out of the KG Basin still). Ministers may be “Empowered”, but on behalf of whom were they acting?

So Reliance profits from every side

  • By over invoicing the capital costs paid to own affiliates without oversight, it makes substantial profits directly
  • By inflating project cost, it continues to get a larger share of profits for an additional time till the “investments” from are recovered.
  • Selling gas at multiple times the real cost (of which it retains a major chunk as “recovering investment”)

In the meanwhile, fuel prices influence every aspect of life in terms of affordability and they are set to rise AGAIN. For the common man, this basically means “khaya piya kuch nahi, glass toda barah anna” only to find out that the broken glass has been kept there to con people into paying for breaking it.

The open letter by Surya P Sethi to the prime minister on the Rangarajan formula doubling the price of KG basin gas minces no words.

The Comptroller and Auditor General’s findings and other independent reports reveal how crony capitalism benefited RIL. The pre-qualification norms were diluted to ensure RIL qualified. The claimed size of gas discoveries, the field development plans and the investment outlays proposed escaped rigorous due diligence. Above all, RIL’s commitments under the PSC and the field development plans were not enforced.

RIL’s clout was on full display when, despite serious objections from me and the then Cabinet Secretary, the 2007 Empowered Group of Ministers approved the price of $4.20 per million metric British Thermal Units (MMBTU) based on an RIL-crafted formula that was unique in the world for pricing natural gas. The $2.34/MMBTU bid by RIL, in a global tender, for the same gas was ignored. A sham price discovery exercise was permitted to justify the higher price that the approved formula delivered.

And Moily & Co have approved yet another price hike that doubles the price of gas from 1st April onwards. So, from $4.2 per unit, Reliance will sell for $8.4 per unit.

Why has Arvind Kejriwal filed an FIR against Mukesh Ambani?

Arvind Kejriwal cannot overrule the Central Government match fixing permissions and prices and such to suit their cronies (or is it puppet masters?), but he has done something that will add pressure to bring about accountability on thKG Basin gas price scam. He has filed an FIR for cheating against Mukesh Ambani, Moily and others for what is becoming known as the Mukesh Ambani gas scam. In particular, he is trying to stall the new price hike from April onwards.

Considering that the whole scam appears to be somewhat legal with “lapses”, it is unclear how he can win the case, particularly with the two biggest political parties and media out to defend Mukesh Ambani, but it will pave the way for more serious actions by forcing the issue into more attention.

A country cannot afford to abandon national interest in the energy sector so lightly and still expect to thrive.

Why is there so little clear information or discussion on the issue?

Ambani owns controlling shares in 27 media and news channels. Vajpayee’s son-in-law Ranjan Bhattacharya told Nira Radia (Radia tapes scandal) that Mukesh Ambani told him “Congress to ab apni dukaan hai.”. Mukesh Ambani and Narendra Modi hugged onstage in last year’s Vibrant Gujarat and Akash Ambani attended Modi’s rally in Mumbai. It is the Congress that has helped engineer the windfall in the first place. Not to mention when Arvind Kejriwal in November 2012 made these accusations, Mukesh Ambani lawyers sent notices to media organizations for airing them. What do you expect?

Please note that I am no economist, journalist, analyst or similar. I am a blogger with interest in issues of relevance to the common man of India and I seek information to understand what is happening. If there are any inaccuracies, please point them out in the comments and I will correct them.

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About the Author

Vidyut
Vidyut is a blogger on issues of National interest. Staunch advocate of rights, learning and freedoms. @Vidyut

15 Comments on "Reliance Gas Price issue and Mukesh Ambani FIR for dummies"

  1. Corruption Free | December 26, 2014 at 5:42 pm | Reply

    Let the price of oil and cooking gas which are below subsidy levels(there is no more need for subsidy as the international commercial prices are lower than subsidy levels), the benefits of which let it be passed on directly to the common man and let the bank account and aadhar card and other such harassment of the common man by the government be removed else let the government be removed and voted out forever.

    Natural Gas Price 3.15 USD/mmBTU (2.58 EUR/mmBTU) 24 Dec 2014, which is very much lower than what is set by government of India reported the paragraph below.( International price of gas gathered from www dot infomine dot com)

    The government has reworked the gas pricing formula approved by the previous Congress-led government and restricted the rise in local gas prices to $5.61 per mmBtu from Nov. 1. The prices will be revised after every six months. (price of gas gathered about the present government in India 2014 from in dot reuters dot com)

  2. Not every gas supplier gets the new price. Only reliance and some more gets new price. See very useful link here http://www.frontline.in/columns/C_P_Chandrasekhar/cost-of-reliance-on-gas/article4840199.ece

    Some gas producers price is fixed for ever in their original agreements, reliance gas price floating, of course, upwards guaranteed by our loyal govt. to reliance.

  3. You have said that RIL bid at the rate of $2.34 per mmBtu for a global tender. Can you give me the details or any possible source?

  4. Hi guys there is a person who fought against KG scandal Y S Raja Sekhar Reddy and he was finally killed in helicopter crash. There is a rumor that Reliane got him killed.

  5. I think the blog here lacks data. ONGC does not do much to explore the resources and hence we need private participation. It should be noted that the KG D-6 is one such an offshore and a difficult exploration / development. It was a part of NELP bid process. The interest in NELP rounds has dwindled due to type of resources. Hence production sharing mechanism was discovered. IT clearly says “Arm’s length” pricing should be adopted. The current prcing formula is better than Asian benchmark JCC pricing which would result in 11-16 USD/mmbtu. Mr. kejriwal should have created a ruccus then not now.

    If RIL was making windfall profit it would have shown in the share prices. Which has not happend. Please do not reply on illogical arguments

  6. Kejriwal has got guts. These are the things everyone discusses and everyone knows. But no one wants to say them aloud. I mean come on, Coca-Cola blatantly violated the MRTP laws and shut down the thumbs up, campa-cola and others before buying them. Reliance also works by killing small-scale industries and creating a monopoly in that sector in which it is. All the while our forefathers precognised such malpratices in advance and created laws and bodies like MRTP. I mean, everytime I open a can of coca-cola, I know that it thrived by killing indian competitors unfairly and thus harmed india, and I still drink it. Younger generation which did not witness that price war can still drink it with clear conscience.

    • Do you have any knowledge of the oil and gas industry? Check the renting cost of a drilling rig for 1 day and you will understand. Also learn about probability of geological inaccuracies in Deep water offshore explorations. All calculations were done then. In this industry, things change everyday. what seems like a billion dollars can become nil just because sand is coming. there are problems which are impossible to determine and most of them are unsolvable. So all that CAPEX you invested initially goes to vain. India needs such investments in this sector if it dreams of energy independence. Its no one’s fault, just that most people are ignorant of the mechanics of this industry.

  7. Amazing article. Thanks.

  8. Needed – some Simple Answers !

    This is with reference to the controversy surrounding the pricing of KG-6 gas of Reliance , which started with $ 2.4 , is currently $ 4.2 and slated to rise to $ 8.4 / unit , from April 2014

    Writing in yesterday’s Times of India , ( Swaminomics ) , eminent economist , Swaminathan Anklesaria Aiyar , made following points :

    > Reliance ( KG – 6 ) accounts for only 10 % of the gas production in our
    country . Balance 90 % is by Public Sector Companies such as ONGC etc

    > Hence , any increase in selling price will mostly benefit government itself
    ( Any idea , what will government do with this windfall ? )

    > Price – hike envisaged is recommended by a committee headed by Mr C
    Rangrajan ( – implying , infallible / sacrosanct ? )

    > By introducing price control on gas , ” India’s name is mud globally , and
    top exploration companies now avoid India ”

    > An economic rule of thumb is that ” traded Commodities ” should be
    priced on par with the import price ( my question : irrespective of the
    actual cost of production in India ? )

    The Rangrajan price of $ 8 / unit , is well below the import price

    Not being an economist , I am confused !

    May be Mr Aiyar can dispel my following doubts :

    # By taking out of our own soil ( or sea ) , does gas become a ” traded
    commodity ” ? – even if entirely sold in India ?

    # Is KG-6 gas a ” Natural Resource ” which belongs to the Nation – and
    not to Reliance ?

    # Is Reliance the ” Owner ” of the gas or a mere ” Contractor ” ?

    # Would Mr Aiyar , want the Central Government to extend the same logic
    to other ” Natural Resources ” ( belonging to the country ) , being dug
    out from the earth ( by private companies ) , such as :

    * Oil / Coal / Shale Gas etc ( Fossil Fuels )

    * Ores of Iron / Copper / Zinc / Aluminum etc

    * Trees ( timber ) that grow in our jungles

    * Any number of minor minerals / chemicals

    Should these too , be treated as ” Traded Commodities ” , whose local
    selling prices must be same as Imported prices ?

    # What about the air / wind that flows freely over our land ?

    Does it belong to the Nation or not ?

    Or , does it belong to the Companies setting up WIND FARMS , to
    generate electricity ?

    Should such power be ” Price Controlled ” or not ?

    # What about the Sunshine that falls on our vast land ?

    Who does it belong to ? To our government or to the companies setting
    up mega Solar Power Projects ?

    Should there be a price control on such power – produced , using a National Resource ?

    # What about the hydro – power generated by private sector companies
    from the water flowing in our Country’s rivers ?

    Does – or does not – that water belong to the Nation ?

    Should not such power be price – controlled ?

    # Tomorrow , if a private sector company ( or a consortium of Indian
    Companies , in joint venture with foreign companies ) , invest Rs 1 Lakh
    Crores , to build the 22 Km long Kalpsar Dam across the Bay of Cambay
    in Gujarat , and generate 10,000 MW of power from Oceanic Tides , –
    can they be allowed to set any selling price ? International price ?

    I suppose , it would be next to impossible for them to ” Export ” such
    power beyond the shores of India !

    # Incidentally , what about the Airwaves ( the 2G / 3G Spectrum ) ?

    Is that also a Natural Resource which belongs to the Nation ?

    Having ” licensed ” it from the Central Government , can Mobile
    Phone companies , set any selling prices for their services ?

    # In ALL of the above – mentioned cases , should Central Government
    carefully calculate / frequently audit , the ” Cost of Production ” ? Then
    link the ” Local / Domestic , Selling Prices ” to such ” Cost of Production ”
    allowing certain pre-determined ” Return on Investment ” ?

    # Even as we agree that ” Export prices ” of gas are governed by prevailing
    international prices , how come the ” Domestic Prices ” of gas are vastly
    different in different countries , ranging from under $ 1 to $ 5 / unit ?

    Does this itself , not prove that , in each country , domestic prices are
    linked to their own local ” Cost of Production ” ?

    # Very often , have we not exported , food grains , at ” Below the Cost ” ?

    Mr AIYAR ,

    You will be doing a great service to millions of ignoramus like me , by offering your own ” Views ” on the points raised above

    And , I suppose , since the fall in production from KG – 6 , is purely and entirely , due to ” Technically Sound ” reasons , raising of the selling price to
    $ 8 ( or even $ 16 / – ! ) , won’t result in any increase in production !

    Time alone will tell !

    * hemen parekh ( 17 Feb 2014 / Mumbai )

  9. The real culprit is Rangarajan Committee,EGOW AND DGH.

  10. All said and done all this reminds me of how big Corporates and Medoa controlled the USA. This is simply History repeating itself. As for the Ambani tamasha they have effectively plumbed the weakness on our political system. The Democratic process we have in India is proven to be a failure as everyone thinks the meaning of “freedom” is a liscence to do as one pleases. This is on essence the whole problem and simplistic as it appears needs to be done away with . In that Kegriwal has always been correct. Cheers.

    • Ambani has become ROCKFELLER of India, who want to control everything from oil to gas, retail to communication, Plastics to power.

      WELCOME TO INDIA- THE ROCKFELLERS

  11. My vote goes to the man who wants to fight the corporates. And it’s not Ambani alone that’s bank rolling modi, the same group that runs/ruins america is now setting it’s eyes on the 2nd biggest slave labour force in the world, after China – India

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