AMBANI vs AMBANI

 

India’s billionaire Ambani brothers are at loggerheads again — this time over a rich gas field and the movie has taken a political twist with the exciting ‘entrée’ of the government at the climax making it a tri-party dispute. At stake is the price at which the big ‘bro’ Mukesh Ambani’s Reliance Industries Ltd (RIL) will sell gas from an offshore block in the vast Krishna-Godavari basin to Reliance Natural resources Limited (RNRL) a company owned by his younger brother Anil Ambani. It is not just a tussle between two privately-owned corporate entities but the manner in which the nation’s gas reserves are to be utilized.

The outcome of the battle would, to an extent, determine whether or not the forces of crony capitalism — epitomised by the infamous nexus between big business and politics — become stronger in a country where the nation’s scarce wealth has often been frittered away to favour powerful interest groups. In this sense, this is a case that would test the resolve of the Union government, in this specific instance the ministry of petroleum and natural gas (MoPNG) headed by Murli Deora, to act impartially and in a manner that benefits the country as a whole and not merely one particular private corporate group or the other.

The seeds of the latest battle between two of India’s biggest corporate names lie in a deal carving up the Reliance Empire after the 2002 death of their wheeler-dealer father Dhirubhai Ambani, who left no will. A brief chronology of events would place in perspective the current dispute.

1999: The MoPNG announces the New Exploration Licensing Policy (NELP) under which a consortium, comprising RIL and its partner Niko Resources Limited, becomes the successful bidder (contractor) for exploration block D-6 in the KG basin.

APRIL 2000: A production-sharing contract is signed between the MoPNG and the RIL-Niko Consortium.

JULY 2002: Mukesh and Anil’s visionary father Dhirubhai Ambani dies.

OCTOBER 2002: Gas is discovered in the KG-D-6 block.

NOVEMBER 2004 – JUNE 2005: The Ambani brothers fight a bitter battle in public. Their mother Kokilaben issues press statement regarding family division. Also, the MoU was signed between Ambani brothers saying RIL will supply 28 mmscmd gas to RNRL at $2.34/mBtu.

2006: RIL applies to the MoPNG for approval of a gas price of $2.34 for sale of 28 mscmd (million standard cubic metres a day) to RNRL for a period of 17 years. MoPNG refuses to approve the price and a legal battle breaks out.

SEPTEMBER 2007: An empowered group of ministers headed by Pranab Mukherejee (then the external affairs minister) approves a gas pricing formula mooted by RIL fixing the price of gas at $4.21 per mBtu.

MARCH 2009: MoPNG finalises gas allocation from KG-D-6 for fertiliser and power companies.

JUNE 2009: The Bombay high court rules in favour of RIL supplying gas to RNRL as per the original terms of the contract and urges the two companies headed by the brothers to arrive at a “suitable arrangement” or to turn to their mother Kokilaben for arbitration. Both companies file cross appeals in the Supreme Court.

JULY 2009: Government seeks to become party in the case too. It moved a special leave petition (SLP) in the Supreme Court to annul the gas supply deal between warring brothers Mukesh and Anil Ambani.

Petroleum minister Murli Deora took a stand that the gas does not belong to either of the two Ambani brothers but to the Government of India. The minister would have been more accurate if he had stated that the gas belongs to the people of India. The question, therefore, arises as to whether the government is indeed acting on behalf of the people of the country and as a custodian of national resources or as a partisan player?The government’s petition seems to imply that the government knew little about the gas deal entered into by the two brothers when the Reliance Empire was carved up in 2005. It also seems to suggest that oil and gas exploration contractors under the New Exploration Licensing Policy (NELP) cannot price their products as they deemed fit.

The first claim in the petition is that it did not know that its contractor Reliance Industries Ltd (RIL) had promised a substantial amount of gas to prospective customers without its permission. According to this argument, contractors are not allowed to enter into supply contracts without first getting the recipient, the quantity and the prices approved by the government. The government says it later discovered that its contractor (RIL) had entered into contracts outside this framework. It also adds that it learnt of the gas deal between RIL and Anil group only when the high court alluded to it in its judgment last month. This is why it did not object to the deal earlier.  This argument is dubious on two counts. First, RIL signed a letter of intent to sell gas to the state-owned National Thermal Power Corporation (NTPC) way back in 2004 on the basis of global bids. It did not seek any approval from the government about the customer, the price or the quantity, nor did the government oppose the deal. The second point on which the government’s argument fails goes back to 2006, when the government had given a no-objection certificate to the RIL demerger agreement. The agreement clearly spelt out that around 28 million cubic metres (35% of RIL’s production) would be sold to the Anil group at the same prices as that given to NTPC.

Another defective argument the centre has used is that under NELP, contractors do not have the freedom to choose their customers or the prices. Therefore, RIL cannot sell gas at $2.34 per million British thermal units (about 1,000 cubic feet), since that price was “not approved” by the government.This argument too fails to hold water in the light of government’s own documents. For example, the petroleum ministry’s website says “Government have also offered blocks under New Exploration Licensing Policy (NELP) to private and public sector companies with the right to market gas at market-determined prices.The NELP notification in the Gazette of India dated February 25, 1999, says the government has framed the policy to “attract private investment in the oil and gas sector… in keeping with the liberalized policy of the government.”The fourth highlight of the new policy, according to the Gazette, would be “freedom to the contractors for marketing of crude oil and gas in the domestic market.” Indeed, the government’s change of stance on the issue of marketing freedom has seen many companies who invested under NELP to come out with dire warnings.The decision of the highest court of the land would go far beyond the contractual dispute between the two companies and determine the fate and financial fortunes of several fertiliser and power companies, including the National Thermal Power Corporation (NTPC).

The court’s decision may set an important precedent on the role of the government in fixing the prices of the country’s natural resources like gas and decide the extent to which private operators can sell these resources at prices that are above or below the price levels fixed. The court has to interpret the significance of a production-sharing contract between the government (in this case, the MoPNG) which is supposed to be the custodian of all natural resources in the country and a private operator (RIL) that has been granted permission to extract that resource.


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