KG Gas Loot

Please also refer to www.hairsaverplus.com/sparenone/kgswindle.htm

The unfolding details about the KG Gas pricing, supply and what not and the support Reliance gets from the Government is detrimental to the short and long terms interests of the Public, Corporate Government Practices and the Energy Security of the Country. The detailed analysis in the attachment will prove that both deserve severe reprimand

Reliance and Government of India vie with another to divert Public Attention from the real issues and paint it as a minor scuffle between Reliance and RNRL or NTPC. On the contrary, the available facts show that they are 'readily available, easy and convenient diversions'

a]  Reliance cost of Production of Gas is only 1.28 Dollars / mbtu according to Directorate General of Hydrocarbons, a Government of India dept. So, Gas can and should be made available at, say 2 Dollars or less per mbtu immediately. Why Sales price be 3.28 times the cost of Production ?

b] The Government was paying about 1.80 Dollars per mbtu to ONGC, till August 2009. ONGC makes 25% profit on Sales as per 08-09 Annual Report. Announcing 44% price increase ONGC from September, justifying 61% higher price of Reliance and pressurising Industries to Sign GSPA at 4.2 per mbtu are all suspect, arbitrary actions.

c] There is 18% deficit in Peak Time Power availability, 50% more than last year. Country is power deficient which is why Nuclear Treaty got signed in 2008. 13 Ultra Mega Power Projects are being planned and only 4 finalised now. Given these, endorsing Gas Sales at a skewed and partisan price will hit the GDP first.

d] Gas being an economical raw material for low cost Power, leaving the Natural Gas belonging to the Public, to the dictates of Reliance is dangerous. KG Gas fields should be Nationalised

d] Prime Minister and Finance Minister attended the meeting of the Planning Commission on 25-9-2009. After the meeting, Planning Commission conveyed to CNBC -TV19 / Media that 'Gas Prices of PSU units are artificially kept low. This is totally unwarranted comment and the intention is dubious

The detailed analysis, based on available facts, justifying the above points, are in the attachment to this note. Please do what you can in Public Interest.

Thank You

Sincerely yours,

Ranganathan

P.S: This write up may get further edited and updated. For the latest version, refer

http://www.hairsaverplus.com/sparenone/kgscam.htm

Explanatory Section: aid to grasp the muddle:

The Media reprinted the Statements of Reliance, GOI, RNRL, NTPC and others, without much scrutiny. Clarity was lacking with excess use of Abbreviations. Dollar and Indian Currency were intermixed too often to confuse a reader further. So, a summary of the some published details and expansions of abbreviations are provided first

Terms used in abbreviations / news reports -  their meanings / expanded forms

KG Gas Scam - Detailed Analysis

Why KG Gas is a Scam ?

The details made known to the Public so far through the Media by different entities makes one feel that KG Gas / Reliance and GOI PSC is a scam. Reliance claim to have spent 35000 Crores and further 10000 Crores earmarked for the next 13 years. It is way above the 2003 estimate, expenses accepted by the authorities / GOI but not at the right level to sanction, and total expenses have not been audited by CAG till date unlike with ONGC

Reliance has the first right to recover the Capital cost and operating expenses from the Generated Revenue. At 4.2 Dollars per mbtu which the Government endorses, the estimated share of Reliance is 24.2 Billions / 119040 Crores - about 3 times return on investment in 13 years.  Government share, including taxes and Royalty, is 17.8 Billion Dollars / 82560 Crores.

Reliance gets about 44% more than the Government. And Government is the authorised representative of the people, the real owners of the Gas.

To put it in Petroleum Minister's words, Contractor earns more than the owners. This is assuming that the Supreme Court would accept 4.2 Dollars price / mbtu, which is 3.28 times the cost of production of Gas. For Reliance it is win win deal. Public may have to suffer with less Power and higher fuel cost for all manufactured Goods, like Power, domestic gas, Fertilisers [163 Crores farmers ] and transportation charges.

This contents below will attempt to prove the above points with published facts.

Background details:

In 2003, the undivided Reliance Industries gets the right to look for Gas in the KG [ Krishna Godavari ] basin after signing a Production Sharing Contract [ PSC ] with the Government. The full details of the PSC remain secret. The terms quoted by RIL is disturbing.

In 2003, NTPC [ National Thermal Power Corporation] floated an international tender for 17 years gas supply.Reliance bid the lowest - 2.34 Dollars mmbtu - and NTPC gave it a letter of intent in June 2004.

RNRL also signed an agreement with Reliance, for supply of gas at the price quoted by Reliance to NTPC

Reliance has refused supply to both NTPC and RNRL, at the earlier negotiated / brokered prices.

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.  [ Business Standard, 7-8-2009 ] The present Mukesh Ambani led Reliance has challenged this in the Supreme Court.

Life term of the Field is taken as 13 years for valuing the Income generation and Profits. Reliance commits for 17 years supply of Gas to NTPC and RNRL. How and why ? Nobody asked, nobody knows !

Reliance gets the first right to take out its overblown 9.5 Billion Dollars planned investment and operating costs - They would get back only 24.8 Billion in 13 years - 2.6 times the investment, which as of date, unscrutinsed.

Reliance, instead of 2003-04, the time they quoted to NTPC, ascertains the market price for Gas in 2007 as 4.3 Dollars per mbtu.  Government, instead of questioning this practice, constitutes a EGoM. Surprisingly, they endorse the price of 4.2 ! Government, on occasions, taken extra pains to emphasise this pricing method as scientific and sacrosanct. Why ? Nobody asks ? Can Sugar Industry insist on parity and equality before Law, refuse Levy Sugar Supply and sell Sugar at, say Rs 50 / kg, if Gas can be supplied 3.28 times the cost of Production.

Public Interest / welfare of the People versus Reliance and Government of India

Long Term National Interest / Public welfare compromised / undermined

Public Need Electric Power at economical rates

Gas is a non polluting, near completely burnable, clean and cheap fuel for the Production of Electricity

India has a population of over 100 Crores. We need adequate Electric Power in villages and towns for the houses, shops and to produce goods for these 100 plus crores People in Small as well as Large scale Industries. KG Gas can be as an alternate to LPG. It can run Auto Rickshaws and Buses.

Country needs more Power Badly - Government cries / tries for raw material

The Congress led Government of Mr. Manmohan Singh, signed a Nuclear Treaty with America, despite some feared and undisclosed suspect clauses. As per recollection, the cost of Production, with Nuclear source, was quoted to be under Rs 6 per unit.

Power Shortage - 2009 deterioration

Shortage of peak time power in the country is estimated to be as high as 18.1 percent in the current year compared to 12% in the last fiscal. [ Business Standard, 12-9-2009].

Government plans to award 13 Ultra Mega Power Project of 4000 Mw each to narrow the Gap between Supply and Demand - Impressive to read. Only 4 have been decided till date.

We have a Central Electricity Regulatory Commission [ CERC ]. It is a unit of the Central Government. It has the power, under subsection 1 of section 62 of the Electricity Act of 2003 to fix the minimum and maximum ceiling of tariff for sales and purchase of Electricity in the country for a period of maximum 1 year. In the power exchanges, power price shot upto Rs 14.5 per unit in August 2009. Because of shortage, prices shoot up. CERC has now fixed, for 45 days, the maximum price at 8 and minimum price at 3 per unit.

Bring down the Power Cost with immediate effect and GDP can go up

If Gas is bought by NTPC from Reliance at 4.2 Dollars per mbtu, as Reliance wants and Government pressurises them,  the cost of Production will be Rs 3 / unit. This has been worked out by Mr. Prasad, Reliance Director ]

Let us turn that around. Gas, the basic raw material, accounts for 70% of the cost. Imagine a  Price of 2 Dollars per mbtu. NTPC can produce power at about Rs 1.5 / unit, if Mr. Prasad meant what he said on 7-9-2009

At such Economical Rate,

The Public and the Nation benefits immediately, without any major drawbacks, with a Natural Resource, which belongs to the People of this Country.

Forget about GDP hovering between 5.5 to 6% in the current Financial Year. Forget about likely Inflation figure of 10% by March 2010.  We can, without any other major effort, shoot up the GDP by 1% even in this Economic Downturn. That progress and confidence can accelerate the Country forward with its own momentum

Will these be possible, if Gas, is priced at a very high rate ? Doubtful. Government, by its action, undermines / shakes the stated Priority for Power

And the Scam / Tragic Reality

Government committed blunders in signing a poorly thought out Production Sharing Contract. Reliance, like a mercenary, is using every loop hole, to earn 3.2 times return on Investment in 13 years

Gas is being misused to make Reliance a dominant and Monopolistic Supplier  [ Should Government go out of the way to create a dominant / monopolistic supplier ?  Plastic Industry suffers due to Reliance's Monopolistic indulgences, as per feedback from users over years ]

Hence, the Fight is now between the Public versus Reliance and Government combine

This write up will now attempt to prove that Reliance and Government of India are guilty of causing damage to the Society with their wayward actions. The major points are covered first and minor / secondary points, at the end.  While it has clarity to some issues, it is not perfect and there is some overlap. It is partly unavoidable. Some readers can do a better job

 

Reliance Usurps, Government Dithers: And the Public Pays. Who cares ?

 

If Reliance offers to sell Gas to NTPC without ownership or power of attorney from the owner,   it is ILLEGAL.  If Government's sanction was required for the Price, allocation and what not, as Reliance now shouts and the Petroleum Ministry echoes that blindly,

Why did Reliance participate in the tender without prior approval ? Let them pay the penalty for their wanton lapse. This is not a justifiable reason by any stretch of imagination

Petroleum Ministry as well as Reliance now say that Reliance was only a contractor for the exploration. If we accept that for a Minute, Reliance Offer of Gas to NTPC at the above stated price, was approved by the Government by efflux of Time / its very act of having dozed for all these years

The Rich and the Government earns more every year. Who Pays ? The Public

The indirect Tax collection of the Government is now 270,000 Crores per year. It is 750 Crores per day. We all pay tax on Match box and vegetables too if you think about. If we take 100 Crores as the population, the  annual cost, is Rs 2700 for every Indian.

We have the right to ask the Government for accountability. Unless cornered, Government will not give a categorical answer is of course, a perpetual reality. This page is about the potential scam, Reliance is attempting to thrust on the Public, with unspoken but blatantly evident, Government support

Points against the Government of India and Reliance

1] Price: Questionable / nauseating Standards

a] Public cannot and should not tolerate a price of 4.2 Dollars per mbtu, as Gas belongs to them and costs the Contractor, only 1.28 Dollars to bring it out. In a basic essential commodity which is required for producing another essential commodity like Power, needed by entire Population, the Sales Price cannot be 3.2 times the cost of Production.

b] Pricing Method should be uniform for all and above Board and not arbitrary / whimsical

Government was paying ONGC less than 2 Dollars per mbtu till Aug 2009. Now it may be raised to 2.6 Dollars per mbtu.  Differential Pricing /  unexplainable partisan approach  deserves unequivocal condemnation. Why should Government make its own offspring, ONGC, an Orphan now ?

c] Basis of fixing the Price of Gas is a Manipulation of Reliance / Timing is debatable

Reliance quoted a price of 2.34 Dollars per mbtu to NTPC in 2004. It knew / estimated the cost, expenses, profit margins, likely liabilities and what not and then quoted the Price. Only in 2009, it started the Production.

In 2007, 2 years ahead of Production, it seeks the likely buyers for 'their price bids' - just when the Oil prices were shooting through the Roof.

Should they not have asked for Price Bids when they were ready for the Supply in 2009 ? Did the PSC allow for 'Market Prices' ?  In America, the price for Gas, is below 3 Dollars per mbtu. In Saudi Arabia, Oil / Petrol is nearly free. They produce crude in abundance. Likewise, we now produce Gas. When all and sundry talk about Market Prices, why ignore Saudi ? Is it not part of the globe that we live

It is a pity that the EGoM accepts the 'time and the bids', shows its prowess and tweaks it to 4.2 Dollars. [ Enlightened and not 'Empowered Ministers' was the need. The start itself was bad ] The Ministers should have questioned the Timing then. Instead, the whole government clings to that unwarranted blunder and shout that manipulated Price as something scientific and sacrosanct

Gas was discovered in 2003. It is underneath the Earth in shallow waters. The gas would lie there, if not extracted for years. If extracted, cost would not go up due to inflation. Corruption is beyond the subject of this analysis. Is Reliance supplying a special, super quality gas in 2009 ? No

In August 2009, as per Bloomberg.com, the price was 2.61 Dollars / mbtu. Reliance and Government should accept this price, as the 'price' relevant and prevailing at the time of supply.

d] Price has been predetermined

The Seller quoted 2.34 to NTPC. That is the only relevant year. If 2007 or 2009 is accepted as the base, Government is confirming that RIL had the right to decide a Market Oriented Price

And they are shouting / shouted to the contrary all along. That is cheapness

Prasad / Reliance: 'we get a base price of Dollar 2.50, if the crude falls to 25 barrels per barrel. Our price changes when crude price varies between 25 to 60 Dollars, at which stage, it is capped. There is a floor and cap'.

Either Reliance or Government is lying, when they say that the Gas Price was not fixed. Who ?

Cash Gift to Reliance: Against Reliance quoted price of 2.34, Government commit, if Prasad, speaks the truth and nothing but the Truth, a base price of 2.5, a higher price by 0.16 Dollars per mbtu. What does it amount to,  for the now stated Reserve of 10 TCF in KG basin ? At, 4.2 per mbtu,

it means, 1.6 Billion Dollars / 7680 Crores extra. Gift or ?

e] Gas Price comparisons - January 2005:   Hindu's business Line,  Saturday, Jan 08, 2005 

Indo Iranian deal: 'THE LNG supply price in the Indo-Iran oilfield-for-LNG deal has been described as "fairly competitive" by the power sector generation utilities, especially if the rate stays below $3 per million British thermal units (mmbtu).

The deal, which was signed today, provides for import of 7.5 million tonnes of LNG from Iran at a price of $1.2 plus 0.065 of Brent crude average, with an upper ceiling of $31 a barrel on Brent prices.

At the upper Brent crude price of $31 dollars a barrel, the LNG cost would be $3.21 per mmbtu.

Another Quote: '

Petronas LNG, which competed with Reliance for the NTPC tender, quoted $3.45 per mmbtu only for the LNG supply. Coupled with the quote of Petronet LNG Ltd, which quoted $0.65 per mmbtu for regassification, the total delivered cost of gas at the power plant would have come to $4.14 per mmbtu as the second best price that NTPC had on offer.

Did Reliance, after getting NTPC's letter of intent in June 2004, deliberately delay it for 18 months, and then staged a drama in December 2005 of Gas Supply Agreement, with terms not in NTPC's tender and blocked them from reaching out to Petronet LNG, a Government linked gas supplier ?

e] Mukesh Ambani's Margin ? Reliance Shareholders duped ?

It was in the press that a small piping / distribution outlet, which was a part Reliance, was sold to Mukesh Ambani, for 25 or 250 Crores. Out of the 4.2 Dollars Sales Price, this outfit will earn 1.2 Dollars per mbtu and Reliance Industries will get 3 Dollars per mbtu

If this is true, one individual reaps colossal gain, at the cost of the Nation and the Public. 

f] Sub Judice ?  

" Reliance has cautioned that NTPC should not comment on matters sub judice lest they be construed as attempt to influence the outcome of its court case seeking natural gas price committed in 2004"

Both the Prime Minister and Finance Minister are reported to have attended a Planning Commission meeting on 22nd September 2009 - CNBC TV 18 report. 'The Planning Commission commented that Gas from PSU units are "artificially kept low".'

Gas / Power have a role in inflation / everyman's budget. You can read below, that ONGC makes 25% net profit on Sales. Planning Commission makes this fantastic discovery now

Would that 'influence the Court' or support RIL ? Suspense should rise in coming days

I do hope that Reliance will issue a similar Cautionary Note to Planning Commission and Prime Minister, if not done already

f] Conveniently variable Government Standards -

Sugar manufacturers have to supply a part of Sugar produced to the Government at a price lower than Market Price. It is called Levy Sugar. Roughly 10% of the Population suffer from Diabetes. Government is having one scale for Reliance and another for Sugar Industry !

Sugar is needed by less percentage of the Public than Gas / Power. Why then, differing scale ?

 

Profit / loss of Revenue to Government - Questionable calculations / needless assumptions

The Petroleum Minister is playing to the Gallery when he shouts about the Government Revenue / loss of Revenue, with assorted baseless statements, which the Press faithfully reprinted, without any scrutiny.

a] What Revenue are they talking about ?

At 4.2 Dollars, total generated income from 10 tcf, would be 42 Billion Dollars. Government would get 17.8 Billion and remaining 24.2 Billion would go to Reliance

Out of this 17.8, only 9.2 is the Profit, if it is made. 6.5 Billion is by way of Taxes - Excise and Sales tax. 2.1 Billion / 5% of total revenue is the Royalty.

Shouting a figure of 17.8 is misleading. Relevant figure is the projected profit of 9.2 Billion in 13 years - that is 44160 Crores. The Profit per year is only 3396 Crores.

It is just 9.15 Crores per day.  Nothing fantastic to crow about or beat the breast after all the bungling. Government collects about 750 Crores per day in Indirect Taxes.

It makes no sense to protect 9 Crores per day, inflicting inflated Gas price, making people pay 18 Crores per day extra ! 18.6 Billion in 13 years.

It is better to forget this 'notional loss, and take over KG fields paying Reliance, the cost incurred so far, subject to scrutiny'.

The news in CNBC TV 18 On the inauguration Day of Cairn's field, the reported income per year to the Government was stated to be 20, 000 Crores. In 13 years, it would be 2,60,000 Crores. 260000 is 5 times more than revenue from Reliance. Compare, contrast and scratch your head.

2] If Supreme Court tomorrow decides that the price of 2.34 quoted by Reliance to NTPC is Fair price for all, so that the Public including the 16 Crores Farmers and the Crores of self employed shop keepers, small scale Industries and even big Industries benefit, the total income generated, would only be 23.4 Billion Dollars.  At best, 5 Billion Dollars or 20000 Crores and at worst, 500 Crores, as RNRL avers. Anil Ambani would know because after all he was the No 2 person in Reliance. There will hardly be any Profit.

3] For the omissions / oversights, it is better for the Government to forget this 9.2 Billion / 0.7 Billion per year / 3000 Crores per year and not subject the Public to untold sufferings and price escalations on many other fronts.

4] " Ministry of Petroleum and Natural Gas has estimated that the Government would earn 17.8 Billion Dollars over the expected 13 years life of the field" .." This estimate marks the first time the DGH, the upstream regulator has worked out such an estimate"   Business Standard, August 21, 2009

They had a floor price, if Prasad is right. They had none, if DGH estimated the earnings, for the first time after all these years, in August 2009. Who is bluffing the Parliament / the Public ?

'Under the PSC, Reliance first gets to recover its Capital and Operating costs from the Generated Revenue" .. " policy for Government allocation came 7 years after the PSC was signed" ..Clarity came through the formation of EGoM and the Government made decisions subsequently. Price, approval, utilisation and allocation came from EGom"

Profits

The President of India holds 74.14% shares of ONGC. The reported revenue in 2008-09 is about 63968 Crores. Contribution to Central and State Governments by way of Cess, Royalty, duties, taxes and dividends is 28049 Crores / about 5.8 Billion Dollars per year. And their Net Profit is 16126 Crores, after paying downstream units and what not. The net margin is 25% of revenue.

These figures are relevant when Government shouts before the Press that they will earn 17.8 Billion in 13 years from Reliance and attempts to cover their omissions and commissions.

Even at Higher Price: It is only 1.3 Billions per year, if the Supreme Court accepts the price of 4.2 and not otherwise. In Rupee terms, it is 6000 crores per year or just 10 days collection of indirect Tax collected from the Public. And the Public will suffer for 13 years or more because of leeway's given

 

Reliance Versus NTPC

Reliance actions and words are cheap. It is necessary to ensure that they do not get away from the 'contract' easily. The points against Reliance are proved with their own words and actions

The beginning: In 2003, NTPC [ National Thermal Power Corporation, in which Government is the majority shareholder ] floated an international tender for 17 years gas supply, to its planned Kanwas - Gandahar power plants. Reliance bid the lowest - 2.34 Dollars mmbtu - and NTPC gave it a letter of intent in June 2004. [ Business Standard, 7-8-2009 ]

Summary assessment: Reliance is saying that terms about Price, allocation and others, where they are uncomfortable, were not clear in the Production Sharing Contract. If he is speaking the Truth, he also spilled the Truth on a major point, in his interview with Business Standard.

'when you do not know, you try to take risks but you hedge it'. By his own words, he has no real defense for going back on their commitment to NTPC

Solicitor General - G. Subramaniam - Business Standard, 4-9-09

" The fact that NTPC had to file a suit is a telling comment on the facts of the present case "

a] Reliance Agreed to the Terms: An International Tender would certainly have, as most others, specific terms , conditions and also have provision for resolving 'issues' that may arise any time in 17 years. One who is not comfortable with the terms does not participate or withdraws before the final date.

So, unless they disagreed with any term or signed the tender agreement, with a stipulation, that term 'x' needs to be renegotiated in the better interests of both,

They have agreed to the terms in a legal document and cannot renege on that.

If other companies adopt Reliance method with impunity, no Project, even of Government can ever get completed. If Government awards Ultra Mega Power Project to Corporate XYZ in 2009 and stipulates its completion in 2015, that company can always search and locate one or more 'defective terms' in 2011, indulge in a charade of negotiation, disagree and disown the Contract in 2013, unless 'higher payment' is made. Even more than that of the second bidder to the original tender. Such practices should be curbed before they become big and widespread like Corruption.

b] Manipulation or Stalling ?

Prasad / Reliance: Reliance contacted NTPC in December 2005. From June 2004 to December 2005, that is for 18 months, Reliance had the letter of intent on hand, engaged NTPC in negotiations over term a or b and now say, since NTPC did not agree to our terms, and confirmed that in writing, we have withdrawn the offer to supply the Gas.

Very Cheap approach / low Corporate Ethics.

They participate in the tender agreeing to the Published, open terms of NTPC. After 18 months, they demand that NTPC should agree to their terms and interpretations ? Nauseating attitude ?

c] Reliance Objection is untenable - by their own admissions. Prasad's interview

" The main outstanding issue was about liabilities in case of failure to supply, which he felt had to be limited because we were not going to bet the entire company for the sake of a single contract. We offered 50% higher liabilities than what NTPC was giving us for non acceptance of Gas'.

What is wrong with that ? Anyway, it is a minor matter, if you have read so far.

Reliance as well as Government take the life span of the Gas Field as 13 years. Reliance is committing for 4 more years and the field may run dry. Wherefrom the gas would get supplied in such an event ? You can over commit but none can question that or ask for 'higher contingent liability' ? Is there any Logic ? So Reliance defense is extremely shallow

 

Confession:  Stalling tactics - Business Standard, 28th September 2009

"RIL, a Mukesh Ambani Company said the 0.135 Dollars per mbtu Marketing Margin" over and above the EGoM price of 4.2 Dollars per mbtu 'was to cover risks like sellers liablities in case of non supply, customers drawing less than their quote".......

For this 0.135 they stalled the Letter of Intent of NTPC ? They knew that they could 'box' NTPC. Today, they are getting 4.20 from NTPC. Who made that possible ?  The whole charade needs to be exposed.

 

d] Cheapness of Prasad / Reliance:  Reliance Liability for NTPC - difference in Gas Prices

1] ' NTPC has contracted RLNG [ regasified LNG] on a long term 'take or pay' basis for 10 years from Jan 2010 for its existing plants at an average delivered price of 11.2 Dollars per mbtu on net Calorific basis'  Read the sentence again to note the Cheapness.

NTPC could have awarded the contract in July 2004, had Reliance not delayed or played for long the 'trust me' dramas.

Petronas LNG, which competed with Reliance for the NTPC tender, quoted $3.45 per mmbtu only for the LNG supply. Coupled with the quote of Petronet LNG Ltd, which quoted $0.65 per mmbtu for regassification, the total delivered cost of gas at the power plant would have come to $4.14 per mmbtu as the second best price that NTPC had on offer.

2] Prasad: If NTPC buys gas at 4.2 mbtu, it can produce power at Rs 3 per unit. [ Prasad provides three different prices for Gas and the likely resultant / NTPC's cost of Production for Electricity.  But it did not have Time or need to calculate the escalating Capital Expenditure costs ! Do you believe it ? ]

Power cannot be stored. And that Power goes to Industries / Public. [ Gas can be stored and lie underneath the Earth - no godown charges, no maintenance charges, no theft and encashable, at any time ]

Reliance's own figures show that Gas / Fuel account for 65 of the Cost of Production of Electricity. Should not have Reliance supplied at 2.34 or even less, if they had concern for the Society ?

3] NTPC 'not succeded in any of the tariff based competitive bidding for development of the Ultra Mega Power Projects'. The point above shows why it could not - Gas Price and Reliance

NTPC should file a case against Reliance ' for Liability to the opportunities lost '.

Reliance admits its Guilt in Print

If the above points do not yet satisfy you, here is the admission of Guilt by Reliance

Courtesy - Prasad: 'when the economic value of the contract is protected and a reasonable supply is known, liabilities are important but they cannot make or break the contract'

So, Reliance contention that Liability was the only major outstanding point of contention with NTPC and that was eventually the cause for NTPC's action and Reliance's counter action, is disowned by the President of Reliance Gas, now elevated to Director as well

Irresponsible / unbalanced approach of the Power Ministry / Official  - Business Standard, 21-9-09

"We are with NTPC, whose claim to Gas at 2.34 flows outs contracted arrangement with RIL. It has nothing to do with RIL-RNRL dispute"

Both NTPC and RNRL / Reliance Power are producers of Power. Gas is an economical source of energy to operate a Power Plant. They are both stuck with Reliance, the hide and seek Gas Supplier. One has a Tendered offer / near agreement and another, a MOU, brokered by many and tendered finally, with affection and in good trust, by the family. Both have to run to Courts and praying that at least the 'Supreme Court will at last give, hopefully, the final judgement'

It is a pity that these common points escape the attention of Power Ministry. Tata Power, constructing a Ultra Mega Power Plant, needs 12 Million Tons of Coal - Business Standard, 24-9-09

Government shouts that it would award 9 more contracts for Ultra Mega Power Projects. Have they planned for the Coal or Gas Requirements ? Tata Power says that foreign Capital for Power Plants have nearly dried up and Indian Banks may hit the lending ceiling for the sector soon. So, even Capital is a problem.

Perhaps, Government may say shortly, that only those with adequate provision for raw materials can bid and apart from Reliance, none may bid - unless, ISRO spots Coal also besides Water in the Moon and Coal Ministry, to the shock of all, plays it straight unlike Oily, Power Ministeries

Reliance versus RNRL - Mukesh Ambani Versus Anil Ambani

His mistakes:  Unlike his father, who was a Generous lender for much more generous returns, he predetermined the Receiver. His father even reportedly got a budget news in advance. He has to fight for even Gas. Hopefully, he may make amends with the forthcoming IPO for Towers to reach the Top. He is paying perhaps because of his past political leanings / calculations, which went wrong.

His Strength and Contribution:

He was the No 2 person in Reliance before his estrangement with his elder brother. He has based his arguments with pertinent facts that can stand scrutiny. He has hit the bull's eye with precision like an Olympic Shooter

He is the most widely known, authentic and still undeterred, Whistle Blower. There was none, of his stature, in the last 50 years. Hope he gets the 'whistle Blower Bhushan' award, from the Public

Why ? Just think for a moment that there was no fight between the brothers. Not one single, major point in the unfolding scam, would have become known to the Public like now. He deserves applause. Now to the fight for gas

1] Timing of the Agreement: The agreement / Memorandum of Understanding / MOU was signed in 2006. The Price is the same as offered by Reliance to NTPC in 2003. So the Price Term seems to be overboard. Many Companies transfer products internally, from one branch to another, either within the Country or outside of the Country. So even if for a minute one contends that it is all a family arrangement, with benami business entities, 'the Transfer Pricing mechanism / check ups / parameters should take care of such deals now and in future.

It is childish for the Government to say that prices were not at 'arms length'. Figuratively, Government is right, because, as NTPC also learnt to its cost,  agreements with Reliance Industries can be at 'kicks length'. Hope some private Insurance Company will come out with a suitable Insurance Policy for the likely victims

2] Judicial Scrutiny: The Bombay High Court must have heard the highlighted points, legal precedents / points of law and evidences / arguments presented from all sides. After all that, they have pronounced that the 'Family MOU does not violate the PSC'

3. As RNRL case is similar to NTPC, most other points are common for all and nothing more need to be said in specific

 

Other Points

Reliance Capital Cost / expenses  - Raises more doubts than answers

1]  Capital Expenditure: Reliance may have inflated the Capital Expenditure is a reasonable surmise

Government Incentive: Sales minus Expenses is the Operating Margin / Profit. While Government left some terms vague or flexible to convenient interpretations, one term was very clear.

Reliance / Prasad's assertion: 'under the PSC, Reliance first gets to recover its Capital and Operating costs of Generated Revenues'

Not a bad agreement at all, when it is Official and Open Invitation. The more the Capital Expenditure, the more you recover  on priority. And you get more for years too - Operating Expenses like, Depreciation, Interest on Capital Expenditure, go up - steady, additional annual income, in a way

[ Many Industrialists would welcome that. They did it in the earlier Permit License Raj also. Promoter's share of 20% investment was substantially funded through inflated bills ]

2 ] The earlier estimated Capital Expenditure / Capex was 2.5 Billion Dollars in 2004. It had shot up to 8.8 Billions in 2006:  3.44 times more than the earlier estimate.

The gas reserve was estimated at 3.8 Trillion Cubic Feet Gas in 2003. The Reserves was revised upwards to 10.3 tcf. Reserves have gone up 2.7 times more.

Why incur 3.44 times the original cost, when Reserves has risen by only 2.7 times ?

When a borewell is driven to take out underground water in a residential / commercial society and the water output is enough for the next 5 years,  do we drill 100 feet more or have another well for the water needs of 2020, at 4 times the 'costs for present needs' ? The underground water / gas is going to be there safely and if it going to vanish, you can do nothing about it.

3] PMS Prasad, in the interview to Business Standard: Rigged up Costs ?

' In 2003, we were using the rig that helped us to discover this field and the cost we were paying was about Dollars 115000 per day. Add the service and it was of the order of 225000 to 250000 Dollars. For the same rig today, I am paying close to 800,000 / day. The Rig that we hired in 2005 and 2006, we are paying over a Milllion Dollars. That Explains the difference'. 

It does not.  Instead, it raises further awkward  questions. If that is the best explanation, it is a belated manufactured excuse, riddled with contradictions.

a] Rig does not account for 100% of cost. In 2003, the rig cost was below 50% and Service charges accounted the rest as per figures provided by him. In subsequent years, he says, the rig cost went up due to world wide shortage of 'deep water' drills suitable for 5000 metres depth

If we accept that, Rig of 125000 / day became 500000 dollars. Service Charges could have gone up twice at best. That is, 125000 x 4 plus 125000 service charges x 2 totaling 750000 Dollars per day. The total cost, could have gone up, due to rigs, only 3 times and not 4.

b] In 2003, they just started exploring. They must have known the availability of Rigs, rental prices and their own future needs. What prevented them from entering into 3 or 5 years contract then ?

c] 'The rig that helped us'  Note his reply. The rig - Only one particular Rig. About 5 Billion extra expenditure rise, is not accounted by the Rig expenses for 5 years.

Confirmation: 'the rig we hired in 2005 and 2006'. Again the term used is Singular. So the Rig cannot 'explain the difference' as he wishes.

d] Let us believe Prasad for a minute. Rig costs 1 Million per day. 2005, 2006, 2007, and 2008, 4 years X 365 days or say 1400 Days. That is, only 1.4 Billion extra expenses due to Rigs. So rig does not explain the 3.44 times rise in Capex

e] Further Confirmation: Dhirubhai Rig 1, as per Business Standard, 23-9-2009, has been hired out to ONGC for 5 years, for about 500,000 / half a Million.

In 2003, they had to drill more wells and explore the Reserves. They had, as per Prasad's statement, they hired 'the rig' for one year. In 2009, they have drilled enough in the underground that they can spare one to ONGC. They hire out for 5 years !

One Caution: The extra ordinary excuses and shallow answers make this note lengthy and pedantic. It has to be read during working hours / in office and not even glanced to waste the late evening  hours

CAG / Comptroller and Auditor General of India  - inspection / verfication

1] Comments of the Comptroller & Auditor General of India, under section 619(4) of the Companies Act, 1956, on the accounts of Oil and Natural Gas Corporation Limited for the year ended 31 March 2009 - signed on 17-7-2009 in Mumbai

Page 68/69 of the ONGC's Annual Report

Why should they submit their accounts to CSG ? Because, they sell Samosas and Chanas could be one excuse. Or, Government is not yet ready with the special Rules for Reliance Industries !

2] Director General of Hydrocarbons [ DGH ] - Can he not be demoted ? After all, Government always need Scape-Goats for blunders and go again to the Public, with folded hands, for their next Votes

"The DGH says that the Capital Expenditure has been verified by independent experts including the Comptroller and Auditor General (CAG) "  - Business Standard, Friday, 7-8-09

3. Reliance Clarity - Prasad's interview

.."We have had only one interaction with CAG -that was in April May this year" - 2009

.." So, even though it is outside the scope of PSC, we have said we welcome the CAG audit and the scope of it" ..

.." Now a new date is being discussed some time in the third or fourth week of September to sit with CAG and the Petroleum Ministry to agree on the methodology" 

NO CAG audit has been done so far. DGH spoke with a foot in the mouth / lied to the Media

Reliance quotes the PSC when it suits them, and discards it, when it is discomforting. PSC is being misused as a convenient, reversible, two sided, wear. The Courts, they perhaps hope, will accept, this dual, diagramatically differing stances, like the Government

Production Sharing Contract, PSC was defective

a] How can there be a commercial Production Sharing Contract between the Government and Reliance Industries without Price, parameters for future pricing, quantity, tenure, liablities etc ?

Proofs

a] Bombay High Court, after hearing views and evidences presented has said that the Family MOU does not violate the PSC, the terms of which are unknown to the Public. 

b] Mr. Prasad:  'clarity came through the formation of EGoM and the Government made decisions subsequently. Price approval, utilisation and allocation came from EGoM' . If that be so, you two are to blame and the Public need not pay for your failures.

c]The Petroleum Minister's Statement that the Gas belongs to the Nation and cannot appropriated by a family of two warring brothers ?  That the Minister made this statement in 2009, is in itself an indirect admission that some basic points were not clearly spelled out in the PSC

Conclusion:

It is better to cancel the Production Sharing Contract with Reliance. Gas belongs to the people and it is dangerous to make Reliance, a monopolistic / dominant supplier of Gas, a vital raw material for the Power Security of the Country   [ Did not Government abolish Privy Purse, bring about a Constitutional Amendment and saved the Nation, 14 Crores - Now the sum involved and dangers are more ]

Gas can be priced at 2 Dollars / Rs 10 per mbtu or less: At the moment, Power as well as other units, bulk users of fuel, produce less for lack of Gas. That is, we are hurting our own production on several front, in these days of Economic downturn. If production goes up, GDP goes up

Those who like any part of this write up, can copy it without prior reference to me and circulate it in their circle, so that a large section of the public become aware of sordid details.

 

R.Ranganathan

October 4, 2009

Murky details are coming out in bits and pieces routinely. So, this page would get updated in the coming days