Ambani brothers' dispute: Will India be taken for a ride?

How will you react if someone sells your valuable property without your approval and pockets the profit giving only a small share to you? This is exactly what is happening with the Ambani brothers’ dispute in simple terms. The dispute involves the huge gas reserves of as much as 40 trillion cubic ft discovered in 2002 in block KG-D6 of the Krishna Godavari basin.

Public debate should have concentrated on the important subject of how the wealth from these gas reserves should be shared between the investors and the country. Instead, the media has been diverting the public attention to sensational topics of family disputes, possible partisanship by the ruling and opposition parties, etc. In the bargain, national interest has been given a low priority.

All the controversy and confusion comes from a lack of knowledge of underlying production sharing contract (PSC) signed by Mukesh’s Reliance Industry Ltd (RIL) with Indian government. It is the PSC which provides the legal framework for exploration, development and production of gas reserves. PSC was used for the first time by Indonesia. It is a legal framework used by several countries for oil and gas exploration and development investment projects.

A well negotiated PSC provides protection against the oil companies from ‘gold plating’ the investment. PSC provides for a coordination committee consisting of the representatives from the government and investors to approve all the major decisions. It also provides checks against selling oil and gas below the ‘market prices’.

Once the investment of the investors are recovered and also when their return exceeds some benchmarks, the government gets a larger share of the so called ‘profit oil and gas’. The most important factor to be monitored for ensuring the states’ share of the profits in any PSC is the prices for oil and gas. Since there are no well-defined benchmarks for deciding the market prices for oil and gas, there is a lot of judgment involved to assess their authenticity. This is precisely where Ambani brothers’ dispute can result in huge losses to the nation if the government does not act diligently.

Despite recommendations by several high-powered committees, the government has not liberalised the Indian gas market. Gas prices are fixed on an arbitrary basis by the bureaucrats in the petroleum ministry without allowing the market to decide. Even when India was paying international price to import LNG as high as $12/ million British thermal unit (mmbtu) in 2008, the government owned gas production was sold at a throwaway price of less than $2/mmbtu.

Two important lessons that have been learnt by oil companies are never to sell gas at fixed prices on a long term basis and also that gas prices move in sympathy with oil prices. Looks like these lessons have been forgotten or ignored both by the Ambani brothers and the government officials. Is it deliberate? Or is it out of ignorance?

Depending upon the crude oil prices in the next 20 years and also the relationship between crude oil and gas prices, total profits generated over a period of 20 years could be between $48 billion and $156 billion. Usually the government share of these profits is about 70 per cent. Thus the government share can vary between $34 billion and $ 109 billion from the KG reserves.

Imprudent

For example if the average crude oil price were to be about $100 per barrel, then crude oil equivalent gas price would be $16.7 per mmbtu. On the other hand if oil prices were to be $50/b, and gas prices are discounted as much as 30 per cent in relation to oil prices, then the gas prices could be $5.83. When the gas prices can vary over such a wide range (perhaps even more) it is not prudent to sign a fixed price contract.

If the government were ‘forced’ to accept a lower price that Anile Ambani’s Reliance Natural Resources (RNRL) is arguing for, then profits would be just $13 billion. Thus what is at stake are billions of dollars depending upon how PSC terms are implemented. I am presuming that Reliance PSC has no hidden sweetheart deals. This is a big assumption.

Since PSCs have commercially sensitive terms, public do not have access to them even under RTI.

When the partition of assets took place between the brothers, Mukesh Ambani’s RIL agreed to sell 6.1 tcf to RNR at a fixed price of $2.34/mmbtu as per the recent high court ruling. Such a sale is in total contravention to PSC and the government need not accept it.

In any PSC there are terms that force any investor to sell gas at ‘arms length’ market price. A negotiated price between two brothers does not meet that criterion. Let us assume that the brothers were on good terms and they had negotiated, say, a price of $1 per mmbtu should the government accept it? It is possible that as per the mutual contract between the brothers, RIL may have to pay any price difference between what RNRL may have to pay to buy the contracted quantity of gas and $2.34 mmbtu. But this need not concern the Indian government.

Indian government should consider taking RIL to court for violating the basic terms of PSC (not trying to get the arms length market price) and try to null and void the original contract itself to safeguard the national interest. If brothers were on good terms, no one would have found out about this sweetheart deal. Just like the high court ruled without taking into consideration the PSC terms and ruled in favour of RNR and forced the price of $2.34 on gas sales, the Supreme Court may also do the same.

To avoid such an eventuality, the government should be a party to this dispute. In fact the government should have acted soon after it came to know the partition terms between the brothers and asked RIL for clarification. Are there any public spirited whistleblowers who can expose the KG-D6 details so that national interests, which are obviously in jeopardy, are truly safeguarded?

(The writer is an internationally known energy expert)