The Ambanis: Private Plunder of Public Resources
The ongoing Ambani brothers’ case before Bombay High Court and now in Supreme Court has brought to fore the spectre of loot of our natural resources (land, water, mines) by tiny elite hand in glove with corrupt politicians.
The roles of regulators, executives and government officials have been most shameful, with the highest authorities pleading with both brothers to settle the dispute between them in “national interest”. It seems as though the government is ready to accept and make into policy whatever is acceptable to the two brothers as a compromise formula.
For a backgrounder, the private sector was invited into the oil and gas exploration sector in 1997 under the New Exploration Licencing Policy (NELP). It was said that India faced a long term shortage of oil and gas and as the industrial growth gathered pace shortages would be more acute. Since exploration is a highly capital intensive business and the government did not have enough resources and expertise, roping in the private sector would help in increasing domestic production and the much needed energy security. Under NELP various private sector as well as public sector companies were invited to quote for the blocks.
As oil and gas is a national resource, the bidding companies were required to be “operators” of the field, who would share the produce with the government in a specific manner laid out in a “Production Sharing Agreement” (PSA). Under PSAs an operator is entitled to recover “cost petroleum” in the initial phase. Once the costs were recovered “profit petroleum” is shared by the operator with the government. The “Cost Petroleum” covers all the costs of exploration of the block, the capital cost of producing gas and the operating costs of the plant.
The loot started when in the second round of bidding Reliance Industries Ltd (RIL) got some blocks in the rich Krishna Godavari basin and struck gas over there. Under PSAs of 2000, RIL as an operator was entitled to recover “cost petroleum” in the initial phase.
Once the PSA was signed, to retain ever-higher amounts of revenues out of sale of gas towards “cost petroleum”, RIL claimed an increase in its capital cost from $2.47 billion for a production of 40 Metric Standard Cubic Meter Per Day (mmscmd) to $8.83 billion for a production of 80 mmscms, i.e., almost 4 fold increase in capital cost for a double increase in capacity. RIL has also not provided accounts to the Comptroller and Auditor General about the capital expenditure incurred by it in developing the fields.
The Directorate General of Hydrocarbons (DGHC), which is a regulatory authority in this area, whose approval is required for such increases, approved increase in capital cost in a matter of just two months. Such exorbitant increases, instead of raising hackles of the government, had the opposite effect. The Empowered Group of Ministers (EGoM) which was set up to recommend the price of gas, went ahead and recommended a highly inflated gas price: instead of $2.34 it recommended $4.20. No one knows the basis on which this price was calculated. To cap it, the price was fixed in dollars even though all costs are incurred in Rupees, i.e., the gas was produced in India and sold to Indian concerns. This prompted EGoM to fix gas price to drop only if the crude price goes below $25 to the barrel in the international market.
This position of the government has effectively helped RIL in reneging on its 2004 contract with NTPC for supply of 12 Million mmscmd gas for its Kawas and Gandhar plants, for which Reliance quoted a price of $2.34 per million BTU and won the tender. In the court also the government has not supported its own PSU, by declaring that it is a commercial dispute in which government has no role to play.
Official patronage did not end here. The Finance Minister, Mr. Pranab Mukherjee, inserted Section 35AD in the Finance Act, 2009 to allow 100 per cent tax exemption on the entire capital expenditure incurred on setting up and operating natural gas or crude oil pipelines cold chains, agricultural warehouses. However, the minister’s benevolence has helped one company, Reliance Gas Transportation Infrastructure Limited (RGTIL), more than anyone else -- to the tune of Rs 20,000 crore. And, as the Statesmen reported on 19 September 2009, although RGTIL is apparently a subsidiary of RIL which is a public limited company, it is actually owned by private investment companies of Mr. Mukesh Ambani.(http://thestatesman.net/page.news.php?clid=1&theme=&usrsess=1&id=269026) Thus at the end of the day the huge benefit accrues not even to a group of shareholders, but to one individual.
Not only that, the government has turned a blind eye to the virtual monopoly in distribution. The same company is a major producer of gas as well as transporter and distributor of gas. This allows it to dictate all consumers by charging arbitrary transportation and distribution costs. Natural resources are thus being exploited for the benefit of a few and the end consumer is being deprived.
The role of corporate media has generally been most shameful. Barring some notable exceptions, they are either silent about this loot or are at best mouthing platitudes like having a gas policy and the like. Meanwhile, private plunder of public resources goes on with full official support.