Current Article : The Ambani Saga 2009

The latest Ambani Brothers Battle is becoming a politico-economical saga which has attracted the media world over. The fight for gas supplies between Mukesh Ambani’s Reliance Industries Ltd and Anil’s Reliance Natural Resources Ltd has also put the government on a defensive position. This is a complex issue which involves India’s Natural Gas Policy as well hinders the efforts to solve the country’s chronic energy shortage.

A. 2002: Discovery of Gas

  1. Natural gas was discovered in the Krishna Godavari basin off India’s eastern coast in 2002. Three companies – RIL, the state-owned Oil and Natural Gas Corporation (ONGC) and Gujarat State Petroleum Corporation (GSPC) -have discovered gas – and some oil- in three different blocks.
  2. These companies are investing $30bn to produce gas from the Krishna Godavari basin.
  3. RIL plans to spend $12 billion on producing and transporting the gas across the country while the state-owned ONGC has announced a $3 billion investment.
  4. The basin is likely to produce 120 million cubic metres per day (mcmd) of gas. This gas is four times more than , 30% cheaper than the gas India would have received through the much-delayed Iran-Pakistan-India pipeline.
  5. Once the entire gas comes on stream, it will have a huge impact on the country’s fertiliser and power companies.
  6. Two Ambani brothers had parted their ways exactly after 3 years.

B: NTPC & RIL

  1. In 2003, NTPC invited global firms to bid to supply it gas for its Kawas-Gandahar power plants for 17 years.
  2. RIL bid the lowest – $2.34 per mmbtu – and NTPC gave it a Letter of Intent in June 2004.
  3. The ongoing dispute is based upon the cotract of RIL-RNRL which was based on this rate since it was also signed in the same time period . The only difference was that the RNRL contract was for 28 mmscmd of gas while the NTPC one was for 12 mmscmd. (MMSCMD=Million Metric Standard Cubic Meter Per Day )
  4. RIL later objected to some of the clauses in the NTPC tender and refused to supply the gas. NTPC went to court against RIL.
  5. RNRL argues that since the contract was based on the NTPC one, it was an arms-length one. What is arms length? read at the end of this post

C: 2005-End of Family Feud-part 1

  1. The Reliance empire was divided between the two brothers in 2005 after a bitter seven-month feud.
  2. In a family pact vetted and supervised by the brothers’ mother in 2005, Mukesh Ambani’s Reliance Industries Limited (RIL) was to supply 28 million cubic meters of gas a day at $2.34 per million units (MMBTU) to Anil Ambani’s Reliance Natural Resources Limited (RNRL) for 17 years, for its Dadri power plant.

D:Price : The Bone of Contention

  1. The above price of $2.34 per million British Thermal Units was 44% lower than $4.20 per million units set by the government in 2006 for all buyers of gas from the basin.
  2. Anil Ambani has not accepted the higher selling price set by the government, citing the 2005 agreement with his elder brother.
  3. When RIL not supplying the gas, RNRL went to court against it for not implementing this part of a family MoU signed when the empire was being carved up between the two brothers.
  4. On 15 June, 2009 his company (RNRL) won a case in the Bombay High Court, asking his elder brother’s company to honour the family agreement.
  5. The Bombay high court has ruled that the family MoU does not violate the PSC – that is, the ministry could not cancel the RIL-RNRL agreement.

Updates: (on October 15, 2009)

  1. June 19, 2009: Reliance Natural files caveat in apex court on gas price issue after Bombay High Court order upholds its position on the gas price in its dispute with Reliance Industries
  2. June 23, 2009: Reliance Natural invites Reliance Industries for talks on high court judgement, but Reliance Industries says it is studying the implication.
  3. July 1, 2009: Reliance Industries says it will appeal to the Supreme Court against high court ruling. Says supplies to Reliance Industries not possible at $2.34 per unit, as it is bound by government price of $4.20 per unit
  4. July 3, 2009: Reliance Natural moves Supreme Court to make gas supply from KGD6 binding on Reliance Industries.
  5. July 4, 2009: Reliance Industries moves apex court challenging high court orders saying the verdict erred in deciding the three terms – quantity, tenure and price of gas supply
  6. July 5, 2009: Reliance Industries makes government a party in its petition
  7. July 7, 2009: Apex court issues notice to Reliance Industries, Reliance Natural Resources and the government on cross-appeals
  8. July 17, 2009: Government asks court to make it a respondent
  9. July 18, 2009: The government files a petition wanting Ambani family pact that deals with gas supplies to be declared null and void
  10. July 19, 2009: Government says gas is its property
  11. July 20, 2009: Supreme Court calls for counter-replies and fixes Sep 1 as date of hearing
  12. July 22, 2009: Prime Minister’s Office wants oil ministry to explain why it has been accused by Anil Ambani group of siding with Reliance Industries over gas dispute
  13. July 28-Aug 3, 2009: Anil Ambani lashes out at oil ministry for allegedly favouring his elder brother. Matter also rocks parliament, where Samajwadi Party leader Mulayam Singh Yadav demands resignation of Petroleum Minister Murli Deora. But Deora says gas does not belong to either Mukesh or Ambani, but the government.
  14. Aug 4, 2009: Oil regulator rejects Anil Ambani group’s charges of acts of omission and commission in allowing capital expenditure of KGD6 gas to be hiked from $2.4 billion to $8.8 billion.
  15. Aug 28, 2009: Reliance Industries says NTPC was told gas price of $2.34 was subject to government approval. Apex court lists hearing for Oct 20
  16. Sep 14, 2009: Reliance Natural accuses Reliance Industries of charging illegal marketing margins
  17. Sep 15, 2009: Anil Ambani Group asks apex Court to make NTPC a party to dispute
  18. Sep 24, 2009: NTPC signs pact with Reliance Industries to buy a part of natural gas, other than the quantity under dispute, at $4.20 per unit.
  19. Oct 5, 2009: Reliance Industries says chairman Mukesh had signed pact on natural gas with Anil Ambani Group in personal capacity without approval from other board members
  20. Oct 9, 2009: Anil Ambani threatens to sue oil regulator saying he made false allegations against his group
  21. Oct 11, 2009: Anil Ambani says two brothers can still sit across the table and resolve matters amicably, but Reliance Industries says only court can settle matters now.

E: RIL & Government

  1. RIL got the right to look for gas in the KG Basin after signing a Production Sharing Contract with the government in year 2000.
  2. In this agreement , the government gets a share of RIL’s KG profits. Since profits are related to the price, the government says it has the right to vet each contract RIL signs to sell gas.
  3. The oil ministry of our country used this to reject the RIL-RNRL contract, saying it was not an arms-length one.
  4. RNRL argues the ministry’s role under the PSC is limited to ensuring it gets its fair share of profits – theoretically, RIL can give the gas away free as long as it gives the government its share of the profit, based on either the price fixed by the government or on a competitive arms-length bidding process.
  5. Anil Ambani recently criticised Petroleum Minister Murli Deora for allegedly siding with his elder brother.
  6. In return, Mr Deora has said gas is a national property and belongs to the people of India – “It really doesn’t belong to them [Mukesh and Anil Ambani].
  7. Oil Secretary R.S. Pandey, the top bureaucrat in the ministry, too said recently that “the government will protect its property at all costs.”

F : What is Govt.’s Stand ?

  1. According to the production-sharing contract (PSC) signed in 2000 between the government and the contractor, gas to be produced from KG D-6 fields is to be utilized in accordance with the Gas Utilization Policy to be approved by the government.
  2. An Empowered Group of Ministers (EGoM) was constituted in this regard.
  3. On the EGoM level , the Government decided by way of a Gas Utilization Policy, that out of the initial production, 15 mmscmd will go to existing urea plants, 18 mmscmd to existing power plants, 3 mmscmd to existing LPG plants and remaining 5 mmscmd for city gas distribution projects.
  4. The EGoM has further decided that, if any gas remains un-utilized against this allocation, it will be allocated to existing gas-based steel plants and existing gas-based power plants, including captive power plants.
  5. The gas production began on 1st April 2009. Presently, around 31 mmscmd of gas is being produced. Within a year, it is expected to go up to 80 mmscmd. As far as power sector is concerned, 18 mmscmd has been allocated to various existing plants to improve their Plant Load Factor (PLF).
  6. It may be noted that no gas has been allocated to any plant, which is not existing or functional.
  7. As far as NTPC is concerned, the government has allocated gas to it. Out of 18 mmscmd for power sector, 2.67 mmscmd gas has been allocated to NTPC plants. Another 2.7 mmscmd has been allocated to RGPPL in which NTPC has 28 percent stake.
  8. Now the Govt. says that RNRL’s Dadri power plant was considered by the EGoM. This plant is neither installed nor functional.
  9. There are many other plants which are in the process of being set up in different parts of the country.
  10. However the Govt. says that it will allocate gas to Dadri plant subject to availability and that Dadri plant will be treated on the same footing as other similar plants placed under similar circumstances. This was decided by EGoM on January 8,2009.
  11. However, the final order dated 15.06.2009 of the Division Bench of the Hon’ble Bombay High Court has implications on the government’s rights to formulate and implement the Gas Utilization policy under the production sharing contract.

Mukesh Ambani has appealed against the judgement in the Supreme Court – the court will hear the dispute on 1 September.

G: About Energy needs of India:

  1. India is Asia’s third largest oil importer. The production of Gas from the Godavari Basin will have huge impact on India’s energy requirements.
  2. India can easily save at least $20 billion off its oil import bill which was $80 billion in 2008.
  3. Besides the Power and fertiliser plants which consume 70% of the available gas in India are in the optimism that the Krishna Godavari basin gas will help them operate at full capacity.
  4. Currently, they mostly operate at 50-60% of their capacity because of inadequate gas.
  5. The need of the fertilizer plants in India is 41 mcmd of gas, but gets only 28 mcmd. The industry hopes to increase capacity to 22 million tonnes in two years from the current 20 million tonnes once more gas becomes available.
  6. Once the gas from Krishna Godavari basin begins to flow – possibly after 2013 – it can add at least 10,000MW to India’s power output which is 50 % of India’s total power deficit on current date.

H . About Reliance Natural Resources Limited:

  1. Reliance Natural Resources Limited (the “Gas Based Energy Resulting Company”) was originally incorporated on the March 24, 2000, under the Companies Act, 1956 as Reliance Platforms Communications.Com Private Limited.
  2. The status of the Company changed from private limited to public limited on July 25, 2005. The name has since been changed to its present name, viz. Reliance Natural Resources Limited under Fresh Certificate of Incorporation consequent on change of name dated January 9, 2006.

I : Arm’s Length Principle
The arm’s length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing. It is used specifically in contract law to arrange an equitable agreement that will stand up to legal scrutiny, even though the parties may have shared interests (e.g., employer-employee) or are too closely related to be seen as completely independent (e.g., the parties have familial ties).

A simple example is the sale of real property from parents to children. The parents might wish to sell the property to their children at a price below market value, but such a transaction might later be classified by a court as a gift rather than a bona fide sale, which could have tax and other legal consequences. To avoid such a classification, the parties need to show that the transaction was conducted no differently than it would have been for an arbitrary third party. This can be done, for example, by hiring a disinterested third party such as an appraiser or broker, who can offer a professional opinion that the sale price is appropriate and reflects the true value of the property.

with inputs from wikipedia, BBC, Hindustan Times, Financial Standard, Lok Sabha

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Comments

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