The UPA Government has reduced itself to a pendulum that swings between free market and administered market. It has thus pushed the investors and the economy into fathomless uncertainty and the aam aadmi into a perpetual spin.
This situation is exemplified by unfolding drama over marketing and pricing of natural gas flowing from deep-sea field named KG-D6 located in Krishna Godavari (KG) basin off the Andhra Pradesh coast.
UPA first relied on the market mantra. It deliberately frittered away an opportunity to allocate this gas to city distribution projects that provide piped gas as kitchen and as Compressed Natural Gas (CNG) as transport fuel as well as allocate gas to small industries across the country.
After it first came to power in mid-2004 with aam aadmi as its mascot, the UPA Government clearly knew that KG-D6 had the potential to double India’s gas production. It knew that it could allocate this gas to city gas projects, fertiliser plants and medium and small industries to promote economic growth with equity.
UPA, however, affirmed its faith in the market economy by disbanding an inter-ministerial committee named the Gas Linkage Committee (GLC) in 2005. GLC allocated gas to prospective users in 2005 under the chairmanship of Petroleum and Natural Gas (P&NG) Secretary.
This action was, in sharp contrast to the approach followed by the BJP-led NDA government that maintained tight balance between enlightened regulation and free market mechanism.
Prior to exit, NDA Government, for instance, allocated gas to six city gas distribution projects as recommended by GLC. An official release dated January 23, 2004 had thus said: “This decision will help supply of Compressed Natural Gas (CNG) to transport sector on priority as indicated by the Hon’ble Supreme Court and also Piped Natural Gas (PNG) to households, commercial and industrial units in and around the cities which is expected to lead to significant improvement in the ambient air quality of these cities.”
UPA also did not do anything when differences between Ambani brothers led to the division of RIL’s businesses in accordance with all statutory requirements. It also twiddled its thumbs when Reliance Natural Resources Limited (RNRL) disclosed the broad contours of the gas market share agreement between the two brothers after its demerger from RIL.
The gas supply aspects of the Ambani family agreement was given concrete shape through the Gas Supply Master Agreement (GSMA) which RIL signed with RNRL on January 12, 2006. The agreement itself is a subject matter of litigation.
In its information memorandum (IM) dated Februrary 25, 2006 filed with the stock exchanges, RNRL disclosed that RIL had agreed to supply 28 Million Standard Cubic Metres Per Day (MSCMPD) from KG basin at a price no greater than the price to be charged from NTPC under a letter of intent which did not fructify into a contract. This led NTPC into a suing RIL in the Mumbai High Court.
In the case of NTPC, RIL had emerged as the winning bidder for supply of 12 MSCMPD over a period 17 years with a base price of $ 2.34/ Million British Thermal Units (MBTU) in mid-2004.
RIL is required to supply an additional 12 MSCMPD to RNRL at the same price and for same duration in case NTPC deal does not materialise. RIL has thus committed supply of base volume to 40 MSCMPD of gas to RNRL.
RNRL’s IM said: “Thereafter, from the entire future reserves of RIL (including new discoveries of gas from new explorations, and/or bids as may be submitted from time to time) Reliance-ADAG will have the first option to get 40 per cent quantity of gas (option volume gas). This is to ensure that over 20 lakh shareholders of the company continue to benefit from RIL’s gas finds.” (Reliance-ADAG is the name for the demerged businesses of RIL that later constituted Anil Dhirubhai Ambani Group of which RNRL is part.)
The UPA claims that it learnt about this perpetual gas supply arrangement between RIL and RNRL only after the Mumbai High Court’ verdict on June 15, 2009, directing RIL to enter into “suitable arrangement” for supply of gas to RNRL within one month.
As stated by P&NG Secretary RS Pandey on July 20, the Government decided to move the Supreme Court only after “for it first came” it came to know of the gas supply arrangement beyond 40 MSCMPD. This “private agreement” was a threat to the country’s industrial development, he added.
This claim only confirms the charge that UPA Government had blind faith in the free market mechanism. This claim cannot overshadow the fact that this arrangement was arrived at within the framework of NELP that grants full freedom to operators to market gas.
In any case, ignorance of vital information available in the public domain is no excuse for guardians of public interest just as ignorance of law is no excuse for all.
The Government last month claimed sovereign rights over the KG-D6 gas in its Special Leave Petition (SLP) before the Supreme Court to annul the gas market share agreement between the two brothers. It has also reportedly articulated its constitutional obligation to promote industrial development through gas allocations in its submissions in the related SLP case of gas dispute between Ambani brothers. It has articulated its stance also through Press statements.
Even as the Apex Court is yet to hear the Government’s SLP, the Government has given a new twist to free market versus administered market turmoil.
The P&NG Ministry claimed on August 8 that there would be no change in the terms of conditions of Production Sharing Contracts (PSCs) that it signs with winning bidders. The bidders are selected through tendering competitions that have been organised under NELP. It has clarified this during the road-show for the 8th round of global competition under NELP, held in Mumbai. The model PSC provides that “the contractor shall have the freedom to market the gas and sell its entitlement.”
In the meanwhile, UPA is sitting tight over the Tariff Commission-recommended hike in the administered price of gas produced by Oil and Natural Gas Commission (ONGC) and Oil India Limited (OIL). The Government controls the price of this gas that flows from the fields which the Government handed them on platter to these PSUs in the pre-NELP era.
Industry sources say that the Government must give up this blow hot-blow-cold approach towards pricing and marketing of natural gas. It must now make a choice between free market economy and controlled economy now that the entire policy framework is flux.
Both the systems have their pros and cons.
If experience is any guide and if one goes by recommendations of recent expert committees, the Government can avoid all conflicts over pricing and marketing of gas through enlightened regulation that periodically requires modifications under the directives of Supreme and high courts (See Inset on Gas allocations).
The frequent disputes over price and gas allocations between various stakeholders result in avoidable waste of time of judicial and arbitration system.
To cite just one example of absurdity of free market mechanism, Gujarat Gas Company Limited (GCCL) increased the gas price to Gujarat Flourochemicals Limited (GFL) from $4.6.MMBTU to $24.62/MMBTU for supplies made during April 2008 to January 2009.
GFL disputed this and took the price dispute to an arbitration panel. In the meanwhile, it made alternate arrangement for supply of gas from two sources at a price of $4.81 and $5.75 respectively.
Compare this with distress sale price of $ 2.34 that RIL ended up quoted in bidding competition against multinationals for supply of domestic gas or imported Liquefied Natural Gas (LNG) to NTPC in 2004. RIL did this because the Government had abdicated its responsibility of allocating gas to prospective consumers.
Had GLC been there and had the Government made public its gas allocation and pricing policy in the same as national mineral policy or national telecom policy, RIL would not have blundered. RIL mistake becomes more glaring if takes into the fact that this was the only successful of the four bidding competition organised by NTPC for supply of gas/LNG.
It is here pertinent to recall the recommendations of Expert Committee on Integrated Energy Policy (IEP) that forms the basis of Cabinet approval for IEP in December 2008.
In its report submitted in August 2006, IEP Committee said “As long as there is shortage of gas in the country and the two major users gas, namely fertiliser and power, work in a regulated cost plus environment, a competitive market determined price would be highly distorted.”
It recommended that the “price of domestic gas and its allocation should be independently regulated on a cost plus basis including reasonable returns.”
Why has the Cabinet-constituted IEP monitoring committee headed by Cabinet Secretary not acted on this recommendation and transferred the function of gas pricing and allocations to Petroleum and Natural Gas Regulatory Board?
Instead of doing that the Government embarked on a different ball game in the brewing gas disputes between Ambani brothers. It first constituted an expert committee to recommend gas pricing mechanism for gas produced under NELP-centric PSCs, though there was no need for such an initiative.
Then it constituted an Empowered Group of Ministers (EGoM) under under the chairmanship of Pranab Mukherjee. EGoM has performed the role of gas pricing authority and disbanded GLC.
It thus recommended a gas price of $4.2m for RIL gas from KG basin in September 2007. It also laid a broad framework for allocation of gas to different sectors from KG-D6 field whose projected peak output of 80 MMSCMD is expected in 2012. The field started commercial production of gas in April 2009.
It has given top priority to allocation of fertilizers and power plants that work at sub-optimal capacity due to chronic gas shortages. This has resulted in immediate spurt in production of urea and power, thereby belatedly benefiting aam aadmi.
Ironically, it is Press note dated June 25, 2008 announcing EGoM’s decisions on KG gas allocations that constitute the gas utilisation policy as can be accessed on P&NG Ministry’s website.
This does not mean the Government framed such a policy only in 2008. It had framed gas use policy way back in the early eighties. Even in 1990, it prepared a comprehensive note on Gas Use Policy but never made it public as a formal policy document for reference.
This shows that P&NG must come clean on gas pricing and allocations to reduce its vulnerability to allegations that it is favouring Mukesh Ambani in the gas battle with younger brother Anil Ambani.