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‘The fight is not just about gas, but about trust, values, commitment’

A day after he lashed out at the petroleum ministry and his elder brother Mukesh, Anil Ambani in an exclusive interview with Hindustan Times answered some hard questions. Excerpts:

india Updated: Jul 30, 2009 01:07 IST
Anupama Airy

A day after he lashed out at the petroleum ministry and his elder brother Mukesh, Anil Ambani in an exclusive interview with Hindustan Times answered some hard questions. Excerpts:

Is it gas? Is it market capitalisation? Is it wealth? Just what is this fight with your brother all about?

The fight is not just about gas but about the trust, values and commitment. That’s what the word ‘Reliance’ is all about. I don’t call my companies as Ambani Power or Ambani Natural Resources Ltd, but Reliance – which means trust. Unfortunately, my respected brother is not following the same.

Division of gas --- which the government said is a national asset ---between you and your bother under a private pact gives a sense that large corporations can bend rules and influence policy?http://www.hindustantimes.com/news/images/anilambani.jpg

I’m afraid facts are deliberately being twisted to suggest that the RIL-RNRL agreement, or the MOU, amounts to a private division of sovereign national assets. This bogey of sovereign ownership is being raised with the sole purpose of attempting to bail out RIL and help them renege on their contractual commitments.

As explained above, and as repeatedly affirmed by Government on the floor of Parliament, “as per the PSC (Production Sharing Contract), the contractor (RIL) is entitled to sell its participating share of gas in cost petroleum and profit petroleum.”

Our agreement only deals with that part of the gas which belongs to RIL and this is also what has been found by the Bombay High Court, so there is no question of private distribution of public property.

Can a private family MOU involve something that belongs in the public?

Firstly, our entitlement is based on a commercial agreement executed by RIL, duly authorised and approved by its Board of Directors, and which is part of the demerger scheme, approved by RIL’s over 20 lakh shareholders, and sanctioned by the Bombay High Court, after receiving the no-objection from the Central Government – it is not based merely on an ‘MOU.’

Secondly, we are not claiming any rights to ownership of the KG basin gas fields. Our claims to gas supply are based entirely on RIL’s lawful ownership and entitlement of a participating share in gas under the PSC, which it is free to sell, as confirmed repeatedly by the Government on the floor of Parliament.

Our claim is entirely in line with the Government’s own stand on the floor of Parliament - not once, but on at least 15 occasions.

To quote just one instance, on April 22, 2008, in specific reference to the RIL-RNRL dispute, the Government said to Parliament in a written answer -and I quote:

“As per the PSC (Production Sharing Contract), the contractor (RIL) is entitled to sell its participating share of gas in cost petroleum and profit petroleum.”

Accordingly, there is no question of some private document trying to take away something from the public domain.

The government says it was not aware of the gas division between you and Mukesh under the family MoU till the High Court’s June 15 judgement. Your comments.

I’m afraid this stand is contrary to facts on record. The Petroleum Ministry has been in possession of all relevant details of the RIL-RNRL gas supply agreement for at least three years, that is, since 2006, if not earlier.

In April 2006, RIL provided all details of the gas supply arrangements to the Petroleum Ministry –This is a matter of official record.

In June 2006, three years before the Mumbai high court delivered its judgment, we submitted full details of its gas supply agreement with RIL to the Petroleum Ministry - This again is a matter of official record.

The Bombay High Court Order of June 2007 outlined all terms of the gas supply agreement, including the initial supply of committed quantities of gas, and the sharing of Option gas.

Way back in September 2007, when the Empowered Group of Ministers (herein after referred to as Cabinet sub-group for convenience) met, it took note of the full details of the gas supply agreement between RIL and RNRL.

The Union Minister for Petroleum was an integral part of the Cabinet sub-group and represented the Petroleum Ministry’s point of view.

The Cabinet sub-group actually went further, and recognizing the rights of the parties, categorically recorded that its decisions were “without prejudice to the NTPC vs RIL & RNRL vs RIL cases which are sub-judice.”

This has been reiterated, reinforced and restated twice in the Cabinet sub-group meetings, in October 2008, and January 2009, as per the minutes filed by the Government in the Bombay High Court.

In other words, the Cabinet sub-group has consistently and rightly stated that its decisions would not affect the rights of RNRL & NTPC against RIL, and the Court’s decisions would be binding.

Through this entire period, the Petroleum Ministry was a party to, and concurred with, this decision, and did not make any attempt to question the corporate restructuring agreement between RIL and RNRL.

It is only now, after the adverse verdict of the Mumbai High Court against RIL, that the Petroleum Ministry has suddenly decided to intervene in this purely corporate dispute.

Apparently, the Petroleum ministry has used its discretion and not even thought it fit to take the approval, I am informed, of the Cabinet. This, remember, is a matter which involves two of India’s largest business houses, over 15 million shareholders, global implications for the energy business, and three unambiguous judgments of the Mumbai High Court.

Yet, the Petroleum Ministry has gone ahead and taken a stand which runs contrary to that of the Cabinet sub-group – apparently without even consulting it – even though that Group represented the broader, collective wisdom of several other ministers, including inter alia the ministers of finance, law, power and fertilizers.

Against government’s fixed price of $4.20 per unit, you are asking the gas for $2.34. Why should the law be different for different people?

The law is not different for different people. What is being deliberately twisted on facts is that as per the PSC, there is a clear distinction between the sale price of gas, which is to be fixed by the Contractor (RIL) – and the price to be adopted for determining the Government’s royalty and share of production, which is approved by the Government.

This is not our interpretation of some complex legalclauses – it is the view of the Government itself, repeatedly been affirmed on the floor of Parliament on a large number of occasions!

On 30 August 2007, the Government told Parliament in a written answer and I quote: “As per the PSC signed by the Government under the New Exploration Licensing Policy (NELP), the operators have the freedom to market the gas in the domestic market on an arms length basis. The government does not fix price of gas. The role of the government is to approve the valuation of gas for the purpose of determining government take.”

Again, replying to Question No 817 in Rajya Sabha on 27th Nov 2007), it was categorically stated: “[the] Government does not fix the price of gas.” The Bombay High Court too has simply upheld this legal position, and said that as long as the Government gets its royalty and share of production on the basis of the Government approved price for valuation, they have no concern with the sale price at which the Contractor (RIL) sells the gas.

To illustrate: The situation is similar to that of stamp duty on property transactions.

Just like stamp duty is based on the government’s reference rate and has no relationship to the actual sale orpurchase price, the government-approved price of gas is a reference rate that is used to calculate the government’s share of profit petroleum, but does not become the sale price.

It is just like when you buy a flat at a price of Rs 10 lakh, the Registrar of Properties may value the flat at Rs 20 lakh, and charge stamp duty on Rs 20 lakh.

But the Registrar does not go on to say that you must pay Rs 20 lakh to the seller – and the Registrar certainly does not go and file a case in the Supreme Court to make you pay Rs 20 lakh!

But this is exactly what the Petroleum Ministry’s stand means!

It has contended before the Supreme Court that it will not only value the gas, but also fix the gas sale price that RNRL must pay RIL, even though in Parliament it has repeatedly said that “Government does not fix the price of gas!”

Secondly, the price of US $2.34 was not decided by two brothers on the dinner table. Nor is it part of some private family arrangement.

The price of $2.34 was approved by RIL’s Board of Directors, nearly five years ago, and has been duly recorded in the commercial agreements signed by RIL as a properly constituted legal corporate entity, with allrelevant authorizations.

All these facts are recorded in the recent order of the Bombay high Court. The proposed gas supply arrangements were also part of the publicly disclosed and widely circulated demerger scheme:

Secondly, ours is not some arbitrary price that came from nowhere. This price was discovered in an international competitive bid floated by the government-owned NTPC in 2004, in which RIL voluntarily and unequivocally agreed to supply gas at $2.34; a price that was authorized by the RIL Board.

RNRL’s gas supply agreement with RIL, finalized at the same time as the RIL-NTPC agreement, was based on this competitive arm’s length price, discovered through a full-fledged competitive global bid.

Unfortunately, the later price discovery of $4.20 by RIL (for valuation purposes) is completely flawed. The formulawas never approved by the Petroleum Ministry prior to the orchestrated tender by RIL where participants were invited to bid on a nominated basis.

The formula as constructed is not rational, and does not pass on real benefit to the consumer, even if the crude price was to drop 50% from US$ 60 to US$ 30!

Moreover, the price has been decided for only five years, and It is unlikely that any new investments in greenfield power projects would materialize on the basis of a five year contract and, more importantly, on a very high gas price.

NTPC, the largest and most experienced power utility in India, with all its financial strengths has not gone ahead with the construction of 2600-MW Kawas and Gandhar expansion projects as it does not have assured gas supply contract and is finding it unviable to accept gas at a delivered price of nearly $7 per mmbtu (including the transportation costs).

Any price for valuation determined for a short-term commitment of 5 years based on needs of plants sitting idle, and desperate for gas at any price, cannot have any relevance for long-term, fixed price, seventeen-year gas supply contracts on take-or-pay basis, for setting up greenfield power and fertilizer projects involving investments of tens of thousands of crores. Lastly, we are all for the price of $ 2.34 (or lower) being applied to all gas customers in this country, as that is our best public and national interest – we are not looking for any preferential benefit!

When will your dream power project Dadri (10,000 mw) finally see the light of the day?

It is undoubtedly frustrating – but my respected late father, my only guru, taught me – by lesson and example – not to be daunted by adversity, but to diligently pursue my karma, and leave the results in God’s hands. I have full faith in the judicial processes of our country, and will pursue all legal remedies to implement our plans

It is not the petroleum ministry alone. Even the user industry including power and fertiliser as also the chief minister of Andhra Pradesh, YSR Reddy has sought the intervention of the government in the matter. You think you are becoming part of a larger conspiracy. Even on the High Court’s suggestion that your mother can step in to resolve the dispute, Mr. Reddy has even said that this cannot be resolved by her and the government should step in.

There is no larger conspiracy. RIL is simply trying to dishonorably wriggle out of its solemn commitments to supply gas to RNRL and Government owned NTPC at the pre-agreed price determined as part of an international competitive bid.

I am more than happy for any other arm of the Government, to independently examine all issues, and the matter is anyway already before the hon’ble Supreme Court.

Have you heard anything from the PMO so far on the issues raised by you?

I read in the media that the Hon’ble Prime Minister has sought clarifications from the Oil Ministry.

Do you agree that disputes like this also hold the risk of dissuading future investments in country’s exploration sector?

The Petroleum Ministry’s stance is, in effect, that it will solely decide: who should sell gas --- to whom, --- at what price --- and in what quantity, --- and without any heed to commercial considerations or contractual provisions! In complete reversal to the entire direction of economic reforms, being implemented by our respected Prime Minister, Dr. Manmohan Singh, the Petroleum Ministry is regrettably pursuing a different path, seeking perhaps a return to the command-control elements of the dismantled ‘license-permit-raj’! Through its intervention, the Ministry is aiming to re-write the PSC after nearly 10 years, and also seeking to cancel a contract between third party corporate entities!

What then is the sanctity of a contract, which is the fundamental cornerstone of any law-abiding, market-driven economy? And will this not set a precedent, allowing any Ministry to alter any contracts in the future at will?

Clearly, the Petroleum Ministry’s unfortunate intervention in a corporate commercial dispute in this manner, if permitted to continue, will erode investor confidence, and thwart the government’s efforts to attract investments into India.

This will also naturally have adverse policy implications for private investments in all natural resources, which are subject to similar considerations.

RIL says the gas is being sought by your company for trading as the power project for which it was allocated does not exist. They have also said that your company wants to buy gas at $2.34 and sell it at a higher price to make margins. Your take on this issue.

RIL has created a situation where our power plants stand delayed by over 3 years, only because of the wrongful conduct of RIL, and its refusal to execute a workable and bankable gas supply agreement.

We are firmly and fully committed to set up 8,000 MW gas based power projects with an investment of over Rs 40,000 crore, which can come up within 24 month once a bankable gas supply agreement is secured.

We have already made our position clear that while RIL cannot be permitted to benefit in the intervening period from its own wrongful conduct, yet we will ensure there is no disruption of gas supply to existing gas customers as decided by the GovernmentThis is a pure commercial issue between RIL and RNRL relating to the treatment of the price differential in the intervening period, occasioned entirely by RIL’s wrongful conduct, and does not amount to trading in gas to make margins by any stretch of the imagination

Are you exploring other sources of gas as well? Any plans of developing more gas based power projects.

Gas production in the country will soon double to over 200 million cubic meters of gas per day, based on further production from RIL’s KG-D6 fields alone.

In addition, there will be production from gas reserves already found by various other players. Besides, RIL has so far reportedly explored only 4% of its total fields in KG-D6. The balance 96% area is still to be explored, and given past finds, it is only reasonable to expect similar huge discoveries of reserves in the future.

India will soon be a gas surplus nation. In this situation, we firmly believe gas prices will come down sharply, and wewill examine opportunities to develop other gas-based projects as well.

Gas prices in the international market have already crashed by 80% in the last few months.

In the Middle East, gas prices are currently ruling at $1.5, or just under one-fourth of the delivered price in India.

India now has among the highest short-term gas prices in the world, nearly 30 per cent higher than even in UK and the US, where short term prices are currently hovering around $3.5.

In our view, it would be against public interest to price gas in India for any user above $1.50. Natural gas should in fact be priced substantially lower than $2.00 for all power and fertiliser customers

Last but not the least, have you attempted to settle the matter with RIL separately through talks? Have there been any discussions on this recently? Or is it that you have tried and got no response I have, at every stage, made sincere efforts to amicably resolve all issues, but to no avail. To give you just one example, I offered to personally meet at a time and place of the Bombay High Court’s direction, at an hour’s notice, and sit across a table with my respected elder brother to amicable resolve all issues. Unfortunately, RIL’s counsel informed the Court that it was not convenient for my brother to participate in any such discussions.

Last month, we addressed several letters to RIL to meet and arrive at a workable agreement after the High Court Judgment. RIL refused to cooperate, and instead sent us a letter on July 1, declining to participate in any such discussions. Thereafter, they unilaterally decided to proceed to the Supreme Court.

My respected elder brother has already made it amply clear; both within the family, and externally, that he does not visualize any further role for my respected mother in resolving this matter or any other matter.

How do you think this battle can be a win-win for both sides?

If both sides commit to bilaterally resolve all issues in a fair and honest manner, with due regard to commitments made in the past, we will not need the Courts, and it can be a win-win situation.

Can we hope to see the two brothers coming on the same platform to address this dispute and also the larger issues?

I have already spoken to my elder brother personally and requested him, in the interests of over 8 million shareholders of my companies, to arrive at a fair and amicable solution. Suffice it to say, I was disappointed at the outcome, though I will keep trying at all times – maybe, I will have to learn the art of clapping with one hand.’

In your speech at the AGM yesterday, you made certain comment about Reliance Gas Transportation and Infrastructure Ltd. Please clarify how you are concerned with the same?

Firstly, all pipeline networks in India are operating on a cost plus basis. Accordingly, end users like us, in powerand fertilizers, are ultimately paying for the pipeline network, and we are naturally concerned about costs of the same.

To my mind, there is a strong case to revisit the issue of transportation costs for KG-D6 gas, probably the highest in the world, by the PNGRB, the pipeline regulator. Presently, these are pegged at a prohibitive USD 1.25, or 30 per cent of the base gas price.

Further, with new tax breaks recently announced, the entire cost of setting up the gas pipeline network has been allowed to be written off in the very first year –a special and unique benefit not given to any other capital intensive sector. It is only fair that the benefits of these tax breaks be passed on, and gas transportation costs be brought down to near zero. I expressed the hope that the regulators in gas and power sectors such as PNGRB, CERC and SERC, would examine this aspect more carefully.

Secondly, as many of the persons at the AGM were also shareholders of RIL, just like me, I simply pointed out that we should all note that the gas transportation company is no longer owned by RIL, but by RIL’s promoters. In 2005, when I was the vice-chairman and managing director of RIL, RGTIL was a 100 per cent subsidiary of RIL. But soon after I resigned, it ceased to be a subsidiary; having been sold to the promoters of RIL for a princely sum of Rs 5 lakhs, and turned into a privately held company.

You also made comments at the AGM yesterday regarding the capex incurred by RIL on the KG-D6 gas fields. How is RNRL concerned with the same?

The reality is that not just RNRL but the Government of India and all of us – a billion Indians – need to be concerned with the same – and this is no exaggeration.

The reason is that, based on the way the PSC is structured, all of us who buy gas from RIL are effectively paying for the entire capital expenditure – the power consumers, the fertilizers end-users, the common man buying any and all products that uses petrochemicals, steel, etc. which have used gas as an input, and so on.

Secondly, because of the way the PSC is structured, RIL is entitled to first recover its entire capital expenditure from the revenues from sale of gas, before even the Government gets any meaningful share. Accordingly, the more RIL claims to have spent on capital expenditure: --- the more we have to pay for gas, --- the less the Government gets as its share from the revenues --- and the more delayed is the timing when the government gets its revenues.

Clearly, this mechanism embedded in the PSC requires complete transparency and independent validation of the capital expenditure claims of RIL – because all of us are paying for it! Most of us are aware that each expenditure of Rs 150 crore or more made by the any arm of the government goes to the Cabinet Committee of Economic Affairs for approval.

I am deeply concerned that, on the other hand, RIL’s capital expenditure of nearly Rs 45,000 crore on KG-D6 - as confirmed in Parliament by the Petroleum Minister just yesterday, and which is nearly 33 percent of India’s total defence budget - was cleared by a management committee of just four persons, comprising one junior official each from the Petroleum Ministry and Director General of Hydro Carbons, and two representatives of the Contractor (RIL) – talk about conflict of interest!

As per records, the budgeted expenditure of RIL for peak production of 40 mmscmd in 2004 was only Rs 12,000 crore, which, according to most experts, should not reasonably have exceeded Rs 20,000 crore or so when the production was doubled to 80 mmscmd – especially given RIL’s known competitiveness and project execution strengths.

However, it has surprised independent observers that RIL’s capital expenditure has actually gone up by Rs 25,000 crore to a staggering Rs 45,000 crore!

Expert analysis shows that if – and I say, if - this was gold-plating of costs, the government could have lost upwards of Rs 30,000 crore Given the incredibly high stakes involved, and the fact that each and everyone of us is ultimately paying for RIL’s capital expenditure, I have expressed the sincere hope that some of our esteemed public accountability bodies like Comptroller and Auditor General (CAG) and Central Vigilance Commission (CVC) will examine all relevant facts, and take appropriate action, if – and again, I say, if - indeed they find that the capex has been over-stated, and as a result huge losses caused to the public exchequer and all end-users of the gas produced from KG-D6.

Shouldn’t the Petroleum Ministry rightly be concerned about getting higher prices for gas, as the Government gets a major share of the revenues from sale of gas?

I wish it were so! As per the terms of the PSC, if RIL gets a higher sale price from us based on the price the Petroleum Ministry wants to fix for the first few years, 99% of all revenues and profits will go to RIL, and only a measly 1% will accrue to the Government!

In other words, of the initial revenue of Rs 50,000 crore, RIL gets almost all, i.e. Rs 49,500 crore vs. the government’s Rs 500 crore only. Just makes you wonder why the Petroleum Ministry is pushing so hard for higher gas prices, when 99% gains will go to RIL!

Also, I am concerned that the Petroleum Ministry is apparently acting as if the only priority for economic growth is to maximize gas prices! We have to balance overall priorities to accelerate the country’s economic growth.