Ambani versus Ambani...it is all about money

Gas spews mistrust in business

Ambani versus Ambani...it is all about money


When the Ambanis do something it always assumes  gigantic proportions, be it petroleum refining, production of petrochemicals,  generation of power,  telecommunication or, for that matter, a family fight between the two brothers — Mukesh and Anil.
  
The simmering two-year legal battle between the brothers over Mukesh’s Reliance Industries Ltd’s (RIL) contractual obligation to sell natural gas from the Krishna Godavari (KG) basin in Andhra Pradesh to the younger brother Anil’s Reliance Natural Resources Ltd (RNRL) has now reached New Delhi.

After the Bombay High Court asked RIL to sell gas to RNRL at a contractual price of $2.34 per million British thermal units (mBtu) for 17 years, Mukesh filed an  appeal to the Supreme Court against the ruling. Since then almost every day Anil has attacked his elder brother of wrong doing.

The genesis

Though the Supreme Court will now hear the case from September 1, 2009, it is unlikely to get resolved soon. At the core of the dispute is how valid is a family assets separation pact reached between the two brothers in 2006 in deciding the price of gas in which the government too has a share. Mukesh’s RIL won the gas fields under a production sharing contract (PSC) and KG basin is considered as one of the biggest discoveries made in Asia in recent years. When Anil wanted a part of the gas for a new gas-based power plant under RNRL, as a part of the business split arrangement, it was decided that he will get 28 million standard cubic metres a day (mscmd) of gas at a price of $2.34 per million  British thermal units (mBtu) for 17 years.

But afterwards, Mukesh did not honour the agreement on the ground that the PSC clause in the development plan for KG basin runs for only 12 years ending 2020, so RIL cannot ensure supply to RNRL for 17 years.  “Such allocation of gas to RNRL for a term of 17 years is in contravention of the gas utilisation policy of the government,” said a RIL petition.  
 
The NTPC angle

Interestingly, RIL is fighting another case with the state-run NTPC which is also on a contract for a 17-year duration.  NTPC contends that it is not a nominee in the disputed contract for gas supply, besides it had issued a global tender and RIL won the bid and as such NTPC is entitled to the agreed 12 mscmd of gas at the  price of $2.34 per mBtu in accordance with the agreement. Petroleum Minister Murli Deora — who was the friend ofthe  late Dhirubhai — too is not happy with the price at which RIL had agreed to sell gas to Anil’s power company. 

His ministry has filed a separate case in the Supreme Court against the contract reached bythe  brothers. (See  accompanying story). Analysts also say that since gas prices can vary widely it was not at all prudent to sign a long term fixed price contract. However, the younger Ambani is not claiming any rights to ownership of the KG basin gas fields. “All our claims for gas supply, initial and future, are purely from RIL’s lawful ownership and entitlement of production under the PSC,” said he.  As per the PSC signed by the government operators have the freedom to market the gas in the domestic market on an armlength basis. Stating this in the Parliament on August 30, 2007, the government said it does not fix the price of gas and its role is to approve the valuation of gas for the purpose of determining the government’s take, Anil claimed.

The Bombay High Court also upheld Anil’s legal position saying—as long as the centre  gets its royalty and share or production on the basis of government approved price for valuation, it has no concern with the sale price at which the contractor sells the gas. Also, Anil asserts that supply of gas by RIL to RNRL was an integral part of the corporate restructuring of the group in 2006.

Anil clarified that there was no question of the sale price between RIL and RNRL being subject to government approval. But the government can attach a price to gas only to determine  royalty and share of production that required its final nod. Besides, the sale price between RIL and RNRL for supply of gas — with a binding commercial agreement — was based on the price arrived at through a global competitive bidding process undertaken by NTPC.  Anil claimed that the Dadri power plant was delayed only because of the wrongful conduct of RIL for its refusal to execute a workable and bankable gas supply agreement.

India Inc surprised

Industry observers are intrigued over the present enthusiasm of  Deora in the raging dispute, when his ministry was in possession of all the relevant details of the RIL- RNRL gas supply agreement for at least three years (since 2006) if not earlier. They ask—what kept him (Deora) busy from protecting the national interest (gas) earlier?

Many believe that RIL appears to be trying every trick in the book and some from outside, to back out of its contractual obligations with RNRL and the state-run NTPC. And Mukesh’s contention that selling gas to RNRL will expose RIL to the risk of breaching the provisions of its production-sharing contract with the government does not appear very sound. 

In the above context, a technical expert in the oil ministry maintained that the PSC has already been violated by RIL when a family pact was signed for the division of gas without the approval of the government. The PSC states that the contract can be terminated if the contractor or a party comprising the contractor “has knowingly submitted any false statement to the government in any manner which was a material consideration in the execution of this contract.” It is also surprising why the government, whose power ministry, is also an interested stakeholder, remaineda mute  spectator to the whole battle even though its state-run NTPC has been in courts against RIL for differences over a fuel supply contract.  On the recommendations of an empowered Group of Ministers (eGoM) led by the current Finance Minister Pranab Mukherjee, had recommended the price of natural gas from the Krishna Godavari basin at $4.21 per unit.

Questionable move

But once the case moved to the Supreme Court the Ministry of Petroleum and Natural gas has joined the dispute as part owner of the gas, and has called for the family pact to be declared null and void. This stand has been contested by RNRL.

Incidentally, the government’s stance in the name of protecting national interests that it wants one price for all is not above-board either. Agreed, the very concept of one price for all by the government is laudable but should it be at its own expense, with the public sector NTPC to bear the brunt of higher gas price of $4.21per mBtu for their power projects despite having a binding contract with RIL for supply of gas at the price of $2.34 per mBtu.  

Raising his voice passionately to make his point at the Reliance Capital AGM, Anil said,
“There is a need for the government to revisit the issue of price point and the price should not be more than $1.5.” As such, if the government is keen on protecting its interest in general and NTPC in particular, a single price of $1.5 should augur well for both power and fertilizer companies too.

Wider ramification

Even as the Ambani brothers have marshalled all the arsenals at their disposal to wage the slugfest, whose impact will not be confined to specific stakeholders alone, it is bound to have repercussions on the country.  Simply put, this feud could discourage investment in the country’s energy sector as India scrambles to shore up its energy security. 

Secondly, it also tests governance standards for a nation that ranks a lowly 180 when it comes to enforcing contracts on the World Bank’s index on ease of doing business.

Meanwhile, all parties have stepped on gas.  In the sense, they have  filed their respective affidavits and stated their positions in the Supreme Court, which is to constitute 3-judge bench first and then announce the  date of hearing arguments as  September 1, 2009.  

In Mumbai too, the Bombay High Court allowed RIL to amend its plea in its suit against NTPC relating to the gas supply agreement.

Stand taken

Through the proposed amendment, RIL wants to bring on record the affidavit filed by the Centre in the RIL-RNRL case in the HC last year and to take a stand that RIL’s bid for NTPC tender stands frustrated due to the government’s policy, while the HC has given NTPC four weeks time to appeal in the Supreme Court. Even as the verdict of the proposed 3-judge bench to be set up is miles away, what is at stake for RIL, RNRL and other stake holders besides the country as a whole?  The Government’s stance clearly supports RIL by default, if not by design. For one, its stance of one price for all at the existing price point would be a disaster for both RNRL and NTPC but for RIL,  it will bring  huge profits.

Secondly, the government’s rhetoric is very eloquent in saying that it would pull up RIL for the PSC violation but so far no visible signs of any action being initiated .  If it does take action and cancels the contract of RIL, then the $20 billion investment made by Mukesh’s  flagship company will be in jeopardy. 

RNRL, on the other hand, will become a shell company if it does not get its entitlement of gas supply from RIL. Similarly, NTPC’s Kawas and Gandhar power plants will have a newer problem as it will have to start scouting for fresh source of gas supply to run their plants.

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