People's Democracy

KG Gas Price � Tale of Two Brothers

or a Corporate-Captive Govt?

Dipankar Mukherjee

THE country was witness to a sad spectacle of naked corporatisation of politics when the prime minister and his senior most colleague in the cabinet appealed to the heads of the two corporate groups, belonging to one family, to settle the KG basin natural gas price dispute between them in national interest. Since when has national interest become synonymous with corporate interest?

On one hand the government � though belatedly but rightly � asserted a couple of months back that natural gas is a national resource and an asset which is owned by the people of the country, and on the other hand the corporate siblings are being cajoled openly by ministers to amicably settle the issue between themselves. This is as though the entire issue is a family dispute with one brother asking for a price of 4.2 dollar/unit for three years and the other seeking a price of 2.34 dollar/unit on the basis of an offer given to a navaratna PSU NTPC in 2004 for a period of 17 years. Thanks to the media blitz by one brother or the other, the country is being misled, and the bourgeoisie  political parties by and large are maintaining silence because the pricing issue is sub-judice, reminding us of the title of the famous Marathi play � �Shantata! Court Chalu Ahe� (Silence! the Court is in session). But behind the tale of the two brothers and the judicial disputes lies a tale of major acts of omission and commission by both the UPA-I and UPA-II governments. The present government � for the sake of public probity � owes answers to the people of the country to the many questions arising out of its decision on pricing of KG D6 gas.

FIXATION OF GAS PRICE � ROLE OF THE GOVT

RIL�s KG D6 gas is vital for production of fertiliser and generation of power in the country. The price of 2.32 dollars per unit in 2004 meant delivered price of 2.97 dollars to NTPC, a PSU owned by the government. Pricing of 4.2 dollars per unit fixed by the government in September 2007 means a delivered price in the range of  5.3 dollars to 6.2 dollars per unit as per RIL and as per others 6.2 to 6.8 dollars per unit.  

How has the price of gas at 4.2 dollars per unit been arrived at? Read the statement of the petroleum minister in Rajya Sabha on August 06, 2009:

�Under the NELP PSC, it was the requirement that a price formula based on arm�s length basis be approved prior to sale of gas. The formula submitted by the Contractor of KG-D6 block was considered by the EGoM. It was subjected to further examination by a committee under the cabinet secretary and by chairman of Economic Advisory Council to prime minister. Having considered the Report, the EGoM approved the price formula in its meeting held on 12-09-2007.�

(NELP stands for  New Exploration Licensing Policy and PSC for Production Sharing Contract)

The contractor RIL�s formula was reportedly for 4.3 dollars per unit and EGoM approved 4.2 dollars per unit price instead. Factually, the committee of secretaries headed by the cabinet secretary deliberated on the issue in meetings held on June 29, 2007, July 02, 2007, July 06, 2007 and July 10, 2007. However, the petroleum in his statement in parliament did not reveal about the detailed representations made before the committee of secretaries by the ministry of fertilisers, government of India and NTPC, the largest public utility owned by the government of India.

WHAT THE MINISTER DID NOT TELL

The salient highlights of the presentation made by the secretary, ministry of fertilisers, before the committee of secretaries were:

�        Natural gas is a critical feedstock/fuel for production of urea and ammonia.

�        Feedstock price constitutes 65 per cent of the cost of production of the urea in the country. At the present level of production, every increase of US $1 in average feedstock price will lead to an increase in subsidy by Rs 2000 crore.

�        The affordable gas price for a fertiliser unit depends upon its vintage and efficiency. New plants, which will have high capital cost, cannot afford a gas price more than US $5 per unit (emphasis added).

�        Price discovery for gas cannot be done in fertiliser sector based on quotes from producers which operate in regulated environment. Further, the quote invited by RIL is only for 3 years, whereas long term commitment for both quantity and price would be necessary.

�        Gas prices need to be determined keeping in view affordability of new investment in fertiliser sector. Maximum price of affordability in fertiliser sector is a delivered price below US $5 per unit. Further, fertiliser sector needs a common delivered price across the country. The average gas price for fertiliser sector at present is US $3.973 per unit.

The ministry of fertilisers stated that they cannot afford a price of more than 5 dollars per unit. Yet, the EGoM fixes a price of more than 6 dollars per unit at delivery point! That too for five years! (Yes, a small grace of two years more than that offered by RIL). Is the national interest served by 5 years or 17 years Mr. Prime minister?

Highlights of the presentation of the chairman and managing director, NTPC before the same committee were:

�        The pricing of gas produced and consumed for essential infrastructure in the country should not be linked with international indexing i.e. crude oil, liquid fuel, LNG, etc. Any decision to maximise only revenue will result in:

o       Higher fiscal/ revenue deficit for the state/ central governments in meeting higher subsidies for power and fertiliser;

o       Increase in the price of power (an essential input cost);

o       Multiplier effect fuelling inflation with resultant effect on the economy;

�        NTPC tender for procurement of gas through international competitive bidding was a deal at arms-length and that this contract was concluded in the free open market without distress sale of gas whereas the gas price/formula now presented by the contractor to ministry of petroleum and natural gas is distorted, not presenting a true market discovered price.

�        It was pointed that there was need to have an independent regulatory commission to decide the price of the gas on similar lines as of the power regulator.

�        NTPC-RIL Gas Contract which is now sub-judice, has been arrived through a transparent bidding process with competition from domestic as well as international gas suppliers and therefore the present gas pricing exercise of the government should not in any way jeopardise NTPC�s interests.

But the government does just the opposite. It fixes a price linked to crude oil price of 60 dollars per barrel and fixes a price of 4.2 dollars per unit jeopardising NTPC�s interest, forcing the NTPC to now approach Supreme Court on September 5, 2009 seeking redressal. The NTPC�s petition to the Supreme Court states �RIL is seeking to wriggle out of and avoid the Gas Sale and Purchase Agreement (GSPA) on one pretext or the other....RIL is seeking to cite the current government and its decision at EGoM to be the chief cause of RIL�s inability to perform the GSPA�. GSPA means KG basin gas at a price of 2.34 dollars per unit for 17 years for 2600 MW power as against EGoM�s decision of approving a price of 4.2 dollars per unit for 5 years! What is in the national interest Mr Prime Minister? Giving scope to RIL to wriggle out of GSPA in spite of what the chairman and managing director of NTPC, T Sankaralingam wrote to EGoM chairman vide his letter 01/CMD/PES/633 dated August 24, 2007:

�In continuation of the presentation I made on the gas pricing issue of Reliance Industries Limited for KG basin gas with particular reference to NTPC contract, I would like to convey that implication of price differential between gas price delivered as per NTPC contract and RIL�s proposed price, will be of the order of Rs 24,000 crore for the quantity contracted by NTPC during the contract period of 17 years....I would once again request that NTPC�s right under the contract with RIL is not jeopardised in any manner while the government takes a view on the price proposed by RIL.�

But then who bothers about a CMD of a largest public utility owned by the government of India! CMDs of RIL and RNRL can always have ready access and response to their grievances from the prime minister. For a CMD of a navaratna PSU, such access is not available even with his own minister! That is why the union power minister Sushil Kumar Shinde goes on parroting �NTPC-RIL case is a dispute between two commercial companies which is sub judice�. �Power minister does not want to interfere in the family dispute which is sub judice� etc, etc. But then, the Rs 24,000 crore extra cost incurred by the NTPC due to this price fixation will not be paid by RIL or RNRL but either by the consumers or by the state government/central government as subsidy. For example, the power generation tariff quoted for Ultra Mega Power Project (5 X 800 MW) is Rs 1.196 per unit for indigenous coal and the generation tariff of the same based on imported coal is Rs 2.26 per unit. Compared to that, even at the present administered price of 1.83 dollars per unit supplied by public sector gas producers like ONGC and OIL, the power generation cost is estimated to be Rs 1.72 per unit at 80 per cent Plant Load Factor, which constitutes 0.76 paise fuel (gas) cost. Imagine what would be the power tariff if gas price becomes more than three times the administered price, as per the decision of EGoM! Even imported coal will be a cheaper option than KG basin gas for power production in large plants.

Therefore, it is not a question between RIL and RNRL or RIL and NTPC but a part of an overall integrated energy policy for giving cheaper power to the people. The financial impact of Rs 24,000 crore on NTPC will increase substantially for the whole power sector as the Integrated Energy Policy of the government envisages a growth in the share of gas-based power generating capacity from 10 per cent in 2007-2008 to 16 per cent in 2031-32.

What will be the overall power tariff implication on a national scale with EGoM�s approved gas price?

WHAT DID THE COMMITTEE OF SECRETARIES SAY?

Were the above issues not considered by the committee of secretaries headed by the cabinet secretary? Yes, they did consider them and the cabinet secretary did give a report. What did it conclude or recommend? That is not in public domain. But as per available information, some of the conclusions of the report of the cabinet secretary were:

�        While the court cases between RIL on the one hand and RNRL and NTPC on the other hand place no bar against the government approving the RIL formula, it may not be prudent to do so at this stage.

�        The RIL formula may be taken up for approval only after a policy is put in place. Prima facie, the formula appears to suffer from several infirmities in respect of the formula employed and the bidding process.

�        Ministry of petroleum and natural gas must come forward with legislative changes delegating or assigning the role of approval of the formula or basis for gas pricing under the PSC to the Petroleum & Natural Gas Regulatory Board or any other regulator in consultation with ministry of law. In this regard, it may be necessary to carry out amendments in the Petroleum & Natural Gas Regulatory Board Act which may also be examined. This should be done within a time frame of not more than 2 months.

�        The accountability of Management Committee mechanism for approval of various issues needs to be enhanced. For this purpose, ministry of petroleum and natural gas would draw up guidelines and mechanisms with the approval of the government as large amounts of government revenue in profit share are involved. Effective audit mechanisms through C&AG or other reputed agencies would be put in place. It is noted here that under Article 25.5, �The government shall have the right to audit the accounting records of the contractor in respect of petroleum operations in the accounting procedure.� The government must, in consultation with the C&AG, appoint an international auditor who has sufficient experience in the field of oil exploration and production.

�        There has also been some controversy as to whether the government�s share of profit petroleum should be taken in cash or in kind. The option is given in Article 16.4, which states, �The government shall have the option to take its entitlement to profit petroleum either in cash or in kind in any year.�

The common points in the presentations by the ministry of fertilisers, NTPC and the report of the cabinet secretary are:

�        RIL price formula is flawed.

�        A delivery price beyond 5 dollars per unit will be prohibitive for fertiliser sector and every increase of 1 dollar will involve additional Rs 2000 crore subsidy.

�        Delivery price beyond 2.34 dollars per unit will be prohibitive for power sector.

�        Pricing should be fixed by PNGRB after amendment in the Act.

�        It was not prudent to fix a price which will jeopardise the NTPC�s case wherein price of 2.34 dollars per unit was arrived at after International Competitive Bidding.

�        RIL�s capital cost for KG D6 basin should be checked by C&AG or by an audit group appointed by C&AG.

UNANSWERED QUESTIONS?

The EGoM and the government obviously ignored the above points and fixed on September 12,  2007 a price of 4.2 dollars per unit. The basic question is - On whose advice did the EGoM and the government fix the price? In the parliamentary system a minister is responsible to parliament and he normally relies on his principal officials although it is for him to accept or reject their advice. A minister is not supposed to have the techno-economical expertise to fix a price on his own. That holds good for the group of ministers and the cabinet also. Even when the committee of secretaries did not feel it prudent to fix a price and desired the same to be carried out by PNGRB (the Act could be amended within two  months), what was the tearing hurry which prompted the government to fix the price which meant higher power tariff and higher fertiliser subsidy at national level and weakening of the NTPC case in the court? Why did the government take two years till date to initiate C&AG audit instead of completing the same before fixing the price? Why were not the state governments consulted keeping in view that power and fertiliser are two basic inputs for agriculture and gas pricing has a major impact on the same. As a matter of fact the late Andhra Pradesh chief minister, whose death is being mourned all over the country, did raise some of the above issues vide his letters dated June 16, 20 and 29^, 2007.

WHO IS ACCOUNTABLE?

Are the above issues � still unanswered by the government � negotiable between the two brothers? Will the national policy of pricing of energy source like gas in line with Integrated Energy Policy of the government be determined in a court of law with the executive seeking an out-of-court settlement between the brothers? The EGoM constituted by the prime minister fixed a gas price which had far reaching implications on national energy sector in financial and economic terms. This was an executive decision and the executive is accountable to parliament to clear the cloud of suspicion hovering around the hasty decision taken by the government ignoring the advice of government agencies and wings like NTPC, ministry of fertilisers, committee of secretaries and without consultation with C&AG, PNGRB and state governments. Did the government surrender to or collude with corporate interest? Prime minister must clarify on behalf of EGoM the brazen acts of omission and commission of the government. This is beyond the realm of settlement between the feuding corporate siblings and lies within the domain of parliament. The government cannot abdicate its responsibility to the corporates. People will not tolerate corporatisation of politics to this level.