Business Today

Ambani gas battle: The inside story

We bring you the most comprehensive insider account of the latest outbreak between the feuding Ambani brothers so far, write Puja Mehra and Suman Layak.

Puja Mehra & Suman Layak | Print Edition: August 23, 2009

It isn’t too often that the Ruias of the Essar Group—or any Indian business house for that matter—are able to steal a march on the Ambanis. Reliance Industries Ltd (RIL) and Essar have been head-on competitors since the nineties, with the Ruias present in most sectors that the brothers Ambanis are operating in—right from refining and oil marketing (RIL) to telecom and power, which is Anil Ambani’s turf since the brothers split four years ago. Oil & gas exploration is also an area common to both conglomerates, although Reliance’s operations are way ahead in terms of size and scale. Now how’s this for irony: the Ruias are ahead of Reliance in the queue for receiving gas—gas that has been explored and produced by RIL itself!

Gasonomics, as Anil’s side sees it...
and the Mukesh side’s interpretation
PRICE: RIL committed to supply gas at $2.34 mmbtu in the MoU signed between the brothers. RIL had bid to supply gas to NTPC at the same price. Why should RNRL accept a higher price?PRICE: Never committed a price since it is subject to government approval. Government rejected the price of $2.34 in January 2006. This price doesn’t compensate for cost escalations.
GOVERNMENT’S LOSS: For the purpose of calculating its profit share, government can continue to value all sale at $4.2/mmbtu—letting RIL sell gas at any price it wants, or is obligated to.RIL’S LOSS: If government values gas at $4.2 for its profit share and RIL has to sell at $2.34, it could suffer a loss of $5 billion.
RIL’S LOSS: RIL costs are low enough for it to make profits even at $2.34/mmbtu.MOU’S VALIDITY: The MoU wasn’t shared with the RIL board or its shareholders. They cannot be subjected to the consequences of the MoU.
GAS, A NATIONAL ASSET: RNRL-RIL agreement does not deal with ownership of gas or gas field, there is no division of national assets.GAS OWNERSHIP: Despite the MoU, RNRL can't lay claim to future discoveries. Gas is owned by the government; RIL can’t sell it unilaterally.
RNRL’S GAS NEEDS: ADA Group can get its Dadri and Shahapur plants ready within 30 months of securing gas supply.RNRL’S GAS NEED: RNRL’s Dadri and Shahpur plants are far from being ready. It has no immediate use for the gas it is seeking.

If you’re wondering how on earth that is possible, it’s pretty simple: Whilst RIL is free to market the natural gas it produces—it is producing 31 million metric standard cubic metres per day (mmscmd), which is expected to hit a peak of 80 mmscmd—it’s up to the government to decide which sector gets the gas first. So according to the gas utilisation policy, existing fertiliser units should get first priority, then the LPG and petrochem industries, then power, then city gas—and it’s after all those sectors that refining, which is one of RIL’s core operations— gets a look-in. Essar Steel, along with a couple of other steel producers, has been allocated the gas that was reserved for the city gas sector, which hasn’t been able to pick up its entire allocation. Reliance, meantime, will have to wait some more time to fire up its refineries with the gas that it has explored and produced.

Indeed, the government’s gas allocation policy has plenty to do with the battle royal that involves Mukesh and Anil Ambani and the government. According to a production sharing agreement (PSC) signed between the government and RIL, the gas produced from the KG D-6 fields has to be utilised in accordance with the utilisation policy. And it’s this policy that’s working against the interests of Anil’s RNRL, which has no power units operational, and hence can’t be privy to gas. RNRL has two gas-based power projects on the drawing board—a 7,480 MW unit in Dadri in UP, and a 2,800 MW plant at Shahpur in Maharashtra.

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