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Government's Gift - Kg Gas Pricing is absurd and ridiculous

 

The underground Natural Gas in KG Basin is a National property. It costs Reliance almost Dollar 1.28 per mbtu to bring out that gas to the surface, according to Directorate General of Hydrocarbons, a Government of India dept. For that strain, it is fair that they sell the Gas at 4.2 Dollars per mbtu, 3 times the cost of production. Then only the below unsaid objectives can be met

Confession / admission: 'the pricing formula was irrational' - Mr. Montek Singh Ahluwalia, Deputy Chairman, Planning Commission; part of the group of Ministers who approved the price in 2007. Business Standard, 9th Feb 2012

The Government was paying about 1.80 Dollars per mbtu to ONGC, till August 2009. So, the above price to Reliance, is suspect

No one has asked till now as to why the Gas Price should be above 2 Dollars per mbtu ?

 

Government's unsaid Policy

 

Enough has been written by Arun Shoourie and Gurumurthi about the Corporate practices of Reliance and their way to wealth. It is Time to ignore all those trashes. Now is the time to make, Mukesh Ambani, the richest person in the World. If we back him, he would overtake Mr. Bill Gates and make India proud. What if some have to survive below Rs 32 per day income ? Let the next Government act

Production Sharing Agreement

 

This is a very ingenious, model agreement to follow, whenever Government wants to enrich an individual or a Corporate

The agreement is made without specific terms about the Price and the Quantity. Is anyone in India stupid enough to make such a Sales / Purchase or Production Agreement.

Production quantity is not to be stipulated. Whatever be the Production, Production cost is to be paid to Reliance first. It is not necessary that Government approves the 'planned production expenses'. If CAG indulges in fault finding mission, such reports can be ignored. No payment can ever be deemed as 'overpaid' - that we did not demand much more is a favour to Government and the public

If output is curtailed for any reason, so long as a sensible or nonsensical excuse is given, it has to be accepted. The Gas will remain underneath the Sea, without any cost to Reliance. At an opportune time, when the price is right, we would pump out more.

Government is signing a contract with Reliance for a Public Property, without clarity on Price and Production delay or loss.

Gas production is below 80% of the promised output. And it cannot be improved before 2012 ? If gas price is raised further, output will rise within a fortnight is what I feel. Till then, output can be restricted as the storage space is free and secure.

 

Questionable Financing Methods ?

For the exploration work involving Crores of Rupees and long gestation period, all the relevant costs must have been checked minutely by the Promoters as well as the Public Financial Institutions that must have extended loans. Sales price and basic manufacturing costs are the crucial ones. That the Sales Price was unknown and was to be determined only after Production started / after 2006 is an unbelievable statement.

If price was to be fixed later, Reliance is guilty of quoting a price to NTPC against their tender.

The sales price could have gone down in 2006 ! On what basis, banks lent money, in case they did ?

During the 2008 Crisis, Gas price was less than 3.5 Dollars per mbtu - one occasional check at bloomberg.com

 

Country's Energy future

Gas is a National asset. It is needed in bulk for producing power - economical source of energy. If gas price is controlled / kept reasonable, Nation benefits. Otherwise, higher power cost does mean higher price for many products. And the mumbler Manmohan and his sycophants talk trash about inflation control

Ongc and Reliance are near 50% suppliers of Gas produced in India. These 2 Major Suppliers / Monopolistic Suppliers have been permitted to fleece the public, the real owners of the Gas.

Essar group has been permitted to charge 5.25 Dollars per mbtu as per reports in March - April 2011. Transportation charge of One Dollar is extra.

[ Transportation charge is 19% for a bulk item going through pipes from production point to storage terminal to terminal near end user and then to the end user, all through pipe lines ] Please check the Balance sheet of a Consumer product or Cement company. Transportation charge will normally be below 10%. 

Reliance has already asked for upward price revision in late 2010. They have curtailed the supply. Technical problems reads like a manufactured excuse. Curtailment in Supply, new higher price to Essar, exorbitant transportation charges and over 200% price rise by ONGC for Gas are all coincidental or thrust upon India by Gaddaffi ?

Price would rise to about 6 Dollars per mbtu is my fear

The benefit of the higher price will go to Reliance as the major share holder. Fleece the Public to pamper one person

Can the Nation bank of Reliance ? NTPC and RNRL could not

Nation Duped ?

Profit / loss of Revenue to Government - Questionable calculations and explanations

The Petroleum Minister, Mr. Murli Deora, speaks colourful nonsense when he shouts about the Government 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.

Excise [tax], Sales tax [ tax on tax ] and Octroi  [tax on tax on tax ] is paid by the buyer / public. So all these have to excluded. 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 is better to forget this 'notional loss, and take over KG fields paying Reliance, the cost incurred so far, subject to scrutiny'.

CNBC TV 18:  Reported on the inauguration Day, that the reported income per year to the Government from Cairn's field was stated to be around 20, 000 Crores. In 13 years, it would be 2,60,000 Crores.

260000 is 5 times more than the 44000 Crores from Reliance in 13 years. Assuming that the accounts are not fudged / gold plated, and the planned amounts are paid.  Compare, contrast and scratch your head.

It makes no sense to protect 9 Crores per day, inflicting inflated Gas price - making Power, Fertiliser and other bulk items costly. Ratnagiri Power Station, whatever be the name of the Enron's shamble is now called, cannot produce 1000 MW Power in January 2012 because of non availability of Gas.

Reliance Industries - epitome of Corporate Ethics ?

 

1] Business Standard, 13-10-2011  Sebi caught Reliance Industries in February 2010 for 'insider trading'. Reliance requested recently for a 'consent order'. The penalty could be Rs 1500 Crores

2] 6th October 2011, Business Standard: A FIR is likely to be filed against Reliance Industries. I think that the timing would be subject to the availability of space in Tihar Jail

 

Capital Budgeting - worth listening Whistle Blower

 

Anil seeks probe into RIL's 'huge gas scandal'  - Press Trust of India / New Delhi July 30, 2009, 17:15 IST

[Mr. Anil Ambani - younger brother of Mr Mukesh Ambani, rank equal to Mr. Mukesh in 2003]

Questioning clearance by junior Oil Ministry officials to the near four-fold hike in costs to Rs 45,000 crore for gas fields by Mukesh Ambani-led Reliance Industries (RIL), Anil Ambani today demanded a probe into the "huge scandal".

"I am deeply concerned that RIL's capital expenditure of nearly Rs 45,000 crore on KG-D6 fields as confirmed in Parliament by the Petroleum Minister and which is nearly 33 per cent of India's total defence budget was cleared by a management committee...." he told PTI in an e-mailed interview.

"The committee comprised of one junior level official each from the Petroleum Ministry and Director General of Hydrocarbon and two representatives of the contractor (RIL)... talk about conflict of interest," he said, adding that any expenditure above Rs 150 crore by any arm of government goes to the Cabinet Committee of Economic Affairs for approval

The Press as well as the Government slept till now. No one probed further till end 2010

Monetary Gifts / Benefits to Reliance ?

Operator gains more than the Owner

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

 

Windfall Gain !

But whatever Reliance has done is known to British Petroleum. They are buying 25% stake in the Oil Fields. They are going to pay about 9 Billion Dollars / 40000 Crores for this over the years

Look at it differently. The 35000 spent by Reliance will come back to them via BP. With their money fully recovered, they would still be owning 75% - worth 90000 Crores.

If I go through the available figures / read in a hurry in Business Standard, I do not feel comfortable

Involving BP, shouting aloud their expertise as if the earlier one was not that good, arranging a meeting with the PM and then accepting their offer can all be well scripted drama played out in public, but actually be an advance shield for the protection of likely 90000 plus Crores gain that Reliance would make

[ Reliance has incurred about 7.6 Billion Dollars so far and may spend 3.6 Billion Dollars more in the next 15 years. CAG's figures are below. For the so far incurred amount 7.6, BP has valued the Enterprise at 36 Billion Dollars and paid 9 Billion for 25% stake]

Got an idea of the real value of one National Asset, undersold for factors, irrational

 

Two differing Life Span

Reliance wants to hold on to the reserves and milk the maximum. Government approves it. It is a shame

Reliance commits for 17 years supply of Gas to NTPC and RNRL. How could / did they commit for 17 years unless they were certain of the life span of the reserves ?

But when it comes to Government and cost recovery, Life term of the Field is taken as 13 years for valuing the Income generation and Profits.

 How and why ? Nobody asked, nobody knows !

 

Reliance - Kamadhenu above Navratna like NTPC

Reliance offered gas at 2.34 Dollars per mbtu to NTPC and they reneged the offer is a matter of public record. They had profit margin even at 2.34 is simple inference. If they were not sure of making profit at this price, they are unfit to be in Business.

NTPC is a Navratna Company of the Government and is one of the largest producer of Power in the Country. Government allowed Reliance to kick NTPC.

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

This Government led Man Mohan Singh lacks clarity in Thinking and consequently in execution. To compound that, it is spineless, shameless and is corrupt / can be bullied

If I were the President, I would ask the PM to explain and rectify or just get lost in 24 hours. He is a drag for the Country

Kicked out NTPC  is under editing now. Please refer to it after 13th February

 

Price  Cover up by the Government

 

The Government was paying about 1.80 Dollars per mbtu to ONGC, till August 2009. Government started gradually paying higher and higher price to ONGC. The price doubled in 2 years time. ONGC makes 25% profit on Sales as per 08-09 Annual Report. In 2011, ONGC was allowed to charge over 4.0 Dollars per mbtu in 2011.

Reliance price is nearly comparable to ONGC. Due to above facts, this is manipulated advance cover up by the Government

Additional Fringe benefits to Reliance / Gifts  - Do the Public get such benevolence from the Government ? Business Standard 9th and 10th September 2011

 

1. 'RIL was allowed by DGH to enter and the second and third exploration phases without relinquishing 25% each of the total contract area at the end of Phase I and Phase II in June 204 and 2005 respectively, as against Articles 4.1 and 4.2 of PSC by treating the entire contract area as discovery area'

What was the meaning of the contract then ? If the Government can waive / overlook one term, why it cannot impose a new term or modify one ?  It is now pissing in its pants that Reliance has invoked the Arbitration clause.

2. 'Subsequently, in February 2009, the government also conveyed approval to treat the entire contract area of 7645 Sq.km as discovery area, thus enabling the operator to completely avoid relinquishment of area'.

Yet, according to CAG, Reliance contention that Petroleum existed in the entire contract area, is baseless

CAG Comments and others: Cost fudging

CAG's observations / comments - Comptroller and Auditor General [CAG] Final Report  on Reliance  

1]   Business Standard 9th and 10th September 2011

CAG  'has attacked the Petroleum Ministry and .. Reliance Industries Ltd. [RIL]. The CAG has also recommended revisiting the Profit Sharing Formula

[ [ After the scathing draft report of CAG, Mr. Mukesh Ambani of Reliance Industries met the Prime Minister is a point  to be kept in the background. The final report is slightly mild and watered down ]

2] 14th June, 2011: Source  CNN-IBN TV channel, 2239 hours

After the CAG's commenting about the inflated Capital Expenditure by Reliance in KG Basin, CBI is going to investigate the matter further - There is no word till 9th February, 2012

3]  CAG report.  Business Standard 9th and 10th September 2011

'The Operator submitted an initial development plan [IDP] in May 2004 with an estimated capex / Capital Expenditure of 2.4 Billion Dollars. The IDP was followed by an addendum {AIDP} in October 2006 with an estimated capex of 5.2 Billion Dollars for Phase I and 3.6 Billion Dollars for Phase II.

"We found most procurement activities were undertaken late in line with the schedules of the IDP of May 2004. By contrast, activities in respect of items in the AIDP were initiated even before the submission / approval of the AIDP" CAG has said.

That is, the entire amount of 5.2 plus 3.6 Billion Dollars, totalling 8.8 Billion Dollars or say, roughly  40000 / Forty Thousand Crores is without approval or sanction.

Goldman Sachs says 'while the report reiterated that RIL violated terms of its production sharing contract [PSC] for D 6, it stopped short of questioning the validity of the increase in capex from 2.4 to 8.8 Billion Dollars between 2004 and 2006'. Analysts claim that CAG has remained silent on the contentious issue of higher capex.

4. In the other report submitted to the Parliament on 8th September, besides RIL, CAG blasted Air India. The Contrast is striking

 

Mumbler Manmohan's interference ?

The total expenses have not been audited by CAG till June 2010

The CAG presented an initial scathing report on Reliance. After that, Mr. Mukesh Ambani met the Prime Minister. The final report got much toned down. Certain points raised in the initial report got totally side tracked.

The Prime Minister does not have any legal right or moral authority to guide the CAG. I have the suspicion that he did

1]  'A report by Citi says the report has made no mention of the 746 Million Dollars of expenses included but not incurred [ tantamount to front-loading of expenses] that was referred to in the draft report'.

2. Goldman Sachs says 'while the report reiterated that RIL violated terms of its production sharing contract [PSC] for D 6, it stopped short of questioning the validity of the increase in capex from 2.4 to 8.8 Billion Dollars between 2004 and 2006'. Analysts claim that CAG has remained silent on the contentious issue of higher capex.

 

Gold Plating ?  Artificial / not incurred expenses: Business Standard 10th September 2011

'A report by Citi says the report has made no mention of the 746 Million Dollars of expenses included but not incurred [ tantamount to front-loading of expenses] that was referred to in the draft report'.

Reliance gets the right to recover the cost first. More is the cost, more and faster is the recovery.

Production Lapses - not questioned

 

1] Reliance have developed only 5 and hardly much work done on others is the muted protest of DGH in April 2011. What the hell they were doing till now is a relevant question

Though denied, the then DGH got a flat for his daughter in Mumbai was one newspaper report.

2] For lack of clarity / details in the newspapers, we have to assume that the expenses of Reliance is for all the 23 or so wells in the KG / Krishna Godavari Basin.

Additional Relevant Points are below till regrouped suitably

Crocodile Tears: Mr. Prasad, Reliance Director:  If Gas is bought by NTPC from Reliance at 4.2 Dollars per mbtu - interview to Business Standard, 7-9-2009. His argument / defense can easily be turned against Reliance. Gas, the basic raw material, accounts for 70% of the cost. If the Gas price is only about 2 Dollars per mbtu,  NTPC can produce power at less than Rs 2 / unit

 

Backstabbing of NTPC

An Executive is one who plans, executes and accepts the Responsiblity. I like simple definitions that I can grasp.

The top officiating Executive of the Government is the Prime Minister. I would not call him an Executive as I believe in the above definition. As the Head of the Group of Ministers, his performance record is poor and shabby - below pass marks in academic terms

There were 2 side kicks. Murli Deora as Petroleum Minister and Mr. Sibal as Director of Hydrocarbons.

1] The family property division was brokered between the warring brothers, Mukesh and Anil Ambani, with several well wishers putting their efforts. The final agreement / memorandum of Understanding was signed between the 2 brothers with the concurrence of their mother. This is just a background information for the readers.

Reliance was to sell some quantity of Gas to RNRL of Anil Ambani at the price of 2.34 Dollars per mbtu, same price quoted by Reliance to NTPC.  Government suddenly raised an objection that the price agreed was not reached at arm's length. [ It is difficult to reach agreements at arm's length. It is convenient to hand over Cash or such others, only if it is below arm's length ] Reliance expressed inability to supply [was it engineered ?]. RNRL went to Bombay High Court and won. Reliance went to Supreme Court. Anil Ambani lost

Mr. Deora was blabbering to the Press that Gas is a National Property. Neither the Price nor the Quantity can be fixed by Reliance. The sound bytes should be with the TV channels. No one raised the question below

Reliance offered to sell Gas to NTPC at 2.34 Dollars for 17 years. RNRL quoted the NTPC precedent for the price. So the bunch of Ministers who blabbered cannot plead ignorance.

Reliance, in Deora's words, was only 'gas extracting agent'. How did they participate in NTPC tender and offered gas supply for 17 years. They were not owners, as Deora claims - they did not power of attorney from the Government. So what they did is ILLEGAL. They had neither the ownership nor the authority. If what Reliance did is accepted as Logical, tomorrow some one else can offer to supply Taj Mahal, say a tender is floated by a Billionaire

 

Fooling the Retail Investors of Reliance

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 shareholders of Reliance Industries

 

Government's share from KG - bloated, skewed nonsense

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. That is, the Government's share of the profit is about 12000 Crores / 3 billion Dollars. 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 - only 1.3 Billions per year, if the Supreme Court accepts the price of 4.2 and not otherwise.

Conclusion

Mukesh Ambani's words cannot be taken at face value ?

Mr. Harish Salve, counsel for Reliance Industries or Mukesh Ambani declared in the Supreme Court that the family MOU is not worth the paper it is written upon. It is in Supreme Court's record and cannot be erased or modified now

Not bad is it ? 2 Billionaires sign on a paper. Yet the contents and consent are worthless. The unsaid part says a lot

 

Reliance is not reputed for its Corporate Governance

The old history has been written in detail by Mr. Gurumurthy and Arun Shourie. It has not improved in 2009 is much more relevant.

6 Directors filed a belated affidavit in Supreme Court [?] that they did not know the terms of the MOU between Ambani Brothers. Does that indicate something ? Directors have limited actual power

 

Gas is an essential commodity for Energy Security of the Nation. So leaving KG gas to the dictates of Reliance is risky

It is better to cancel the Production Sharing Contract with Reliance. Gas can be priced at 2 Dollars / Rs 100 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

Expected Government revenue from KG gas  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.

 

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 "

 

Reliance admits its Guilt in Print:

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 a Director post.

 

Questionable Financing Methods ?

For the exploration work involving Crores of Rupees and long gestation period, all the relevant costs must have been checked minutely by the Promoters as well as the Public Financial Institutions that must have extended loans. Sales price and basic manufacturing costs are the crucial ones. That the Sales Price was unknown and was to be determined only after Production started / after 2006 is an unbelievable statement.

The sales price could have gone down in 2006 ! On what basis, banks lent money, in case they did ?

 

July 2, 2011 - From Spokespersons for Reliance in Government's employment

1. Mr. Sibal claimed in 2009 that Reliance has submitted the 'Accounts' to DGH. Reliance admitted later that it has not submitted. After submission, CAG went deep into the matter. As of July 2011, both are in a spot. Like this 'accounts submission', Mr Sibal acted as a paid spokesperson for Reliance on 2 other points. You can find them in KG scam / will provide details later

2. Reliance claimed 'discovery' on areas that were barren / inactive. DGH approved such questionable discoveries. That helped Reliance to hold on to those fields instead of surrendering them. This is land grab on Sea. Both Reliance and DGH are guilty in my view.

3. CBI has filed a charge sheet against Mr. V.K.Sibal, former DGH [ Director General of Hydrocarbons ] . Investigations are on some other fronts now. Further charge sheets are in likely

 

Some old details are in Kg gas 2, Kg background and Kg scam files. They have not been edited since long

 

	Errors and Omissions exempted.  If there be any unwanted oversights, mistake in content or suggestions for improvements,  I will be thankful for your feedback
	Personal website of R. Ranganathan M.Sc., [ MBA - IIMA]    Main / original content: Oct 2009: last minor modification, Feb 11, 2012