Business Today

Taming Reliance

Anilesh S. Mahajan        Print Edition: March 18, 2012

When P.M.S. Prasad enters a building, doors tend to open for him. The head of Reliance Industries Ltd's (RIL) oil and gas business certainly is not used to being kept waiting.

Unusually, he had to do just that one wintry evening in December last year, when he walked into Petroleum Secretary G.C. Chaturvedi's office in New Delhi's Shastri Bhawan. The secretary's staff asked Prasad to wait in the anteroom along with other hopefuls seeking a meeting. A few minutes later, he was told that a meeting would not be possible since he did not have a prior appointment. Silently, the embarrassed Prasad left.

No one could have imagined such a thing happening in the petroleum ministry to a top executive from RIL, India's largest, and arguably, most powerful enterprise.

In many ways, the snub epitomises the state of RIL's relations with the Ministry of Petroleum and Natural Gas since S. Jaipal Reddy began helming it in January last year. Several big-ticket RIL proposals are stuck at the petroleum ministry, something that people who follow the company and the ministry say is without precedent.

Reddy is perhaps the first minister who has taken on RIL in the post-liberalisation era. The buzz in political circles is that he was sent to the petroleum ministry to remove turbidity in decision making. The day he took over, Reddy told reporters: "I am a new minister in an old government. It would be unfair to expect me to bring in new policy." Strictly speaking, he has not done so. He has simply followed the rulebook - very zealously. Some liken his insistence on following the rules to former prime minister V.P. Singh's resistance of RIL founder Dhirubhai Ambani in the mid-1980s.

RIL says that it does not see any change in the oil ministry's stance under Reddy. But what has happened on the ground in the 13 months since the Andhra Pradesh politician became petroleum minister speaks volumes.

Keenly aware of a perception in some quarters that RIL has cosy relationships with oil ministry staffers, Reddy made a series of personnel changes early on. Many, from the minister's personal secretary down to the peon, were transferred. The biggest casualty was S. Sundareshan, who became the first petroleum secretary in 14 years to be transferred from the ministry - all his predecessors retired in office.

Insiders were stunned when Sundareshan, who joined the ministry in April 2007 as an additional secretary, was moved to the Heavy Industries ministry in May 2011. (He became Petroleum Secretary in February 2009.) Reddy apparently conveyed the transfer decision to Sundareshan "in two minutes, over coffee".
THE WAY IT WAS

Ram Naik
Ram Naik
RAM NAIK
(March 1999-May 2004)
During his tenure, IndianOil’s bid for a 26% stake in IPCL failed. RIL submitted the winning bid
Sought pricing decontrol for petroleum and petrochemical products
Allowed private players to set up retail stations and sell petrol

Murli Deora
Murli Deora
MURLI DEORA
(January 2006-January 2011)
During his tenure, RIL was allowed to keep additional area in KG-D6 block
Renewed push for decontrol of petrol and diesel prices
Withdrew gas marketing rights from operators, aiding RIL in case against RNRL
Pushed for out-of-court settlement of dispute between GAIL and RIL-BG consortium

THE WAY IT IS

S. Jaipal Reddy
S. Jaipal Reddy
S. JAIPAL REDDY
(January 2011 - present)

Refused to clear RIL's annual budget for development of KG-D6

Considering ways to link production with the recovery of costs

Refused mid-term price revision of gas from KG-D6

Has delayed implementation of the RIL-BP deal

Refused commercial certificate for RIL's NEC block in Mahanadi basin Rejected RIL's request for extension of exploration in Cauvery block

Refused to accept RIL's coal-bed methane pricing mechanism

Ordered probe into sale of condensate from KG-D6 to RIL's Jamnagar refinery

Has not cleared GAIL's outof-court settlement with RIL-BG consortium

Threatened to slap notice on RIL for decline in gas production from KG-D6

Transferred bureaucrats said to be close to RIL to other departments



Sundareshan was handpicked by Reddy's predecessor, Murli Deora, who is said to be close to the Ambani family. In an analysis of Deora's appointment as petroleum minister in January 2006, the US Embassy in New Delhi noted: "Deora's only vulnerability, as a Mumbai politician, is his long-standing connection to the Reliance industrial group, which includes significant energy equities."

"People say that I have gone out of the way to help Reliance Industries during my tenure as petroleum minister. But all this is rubbish,'' retorts Deora. "I have done progressive things. Look at the RIL-BP deal, this is the biggest FDI in India to date. All those who were working within the ambit of the law had my support."

Joint secretary Apoorva Chandra was transferred in August 2011. The bureaucrat, who is from the Maharashtra cadre of the Indian Administrative Service, was an old timer in the ministry, having worked under Deora as well as his predecessor in the National Democratic Alliance (NDA) regime, Ram Naik. (Both ministers are from Mumbai.)

Murli Deora, Former Petroleum Minister
Murli Deora, Former Petroleum Minister
A May 2011 note by Chandra generated a lot of controversy. He advocated that RIL be permitted to cut gas supply from the company's most promising asset, the D6 block in the Krishna Godavari (KG) basin, off the Andhra Pradesh coast, to industries considered non-core. Chandra says he does not know why he was removed: "I informally asked the minister as well, but he told me nothing." His exit was followed in November 2011 by the reshuffle of a dozen undersecretaries in the ministry.

Big Gas, Big Stakes
The biggest dispute between the ministry and RIL is over gas output from the company's KG-D6 block. The block is estimated to hold India's largest gas reserves: around 11.3 trillion cubic feet. As per a field development plan agreed by the government and RIL in 2006, RIL was to produce 61.88 million metric standard cubic metres per day (mmscmd) by April 2011 from 22 wells, and ramp up production to 80 mmscmd by April 2012, from 31 wells.

S. Sundareshan, a former oil secretary
S. Sundareshan, a former oil secretary, headed a panel that accepted RIL's claim over the entire KG-D6 block
Currently, however, production is at 34.5 mmscmd from 14 functional wells - less than half the initial estimate. The company has written to the ministry suggesting that production from the D1 and D3 fields could fall to 27 mmscmd by April 2013. Of the 21 wells that RIL drilled, three were duds and the gas output from four others went dry due to flooding.

The top rung of the petroleum ministry is miffed. It is even threatening to amend the production sharing contract (PSC) with RIL and disallow expenditure to the tune of $1.85 billion (a little over Rs 9,100 crore) to penalise the company for the sharp decline in output from the KG-D6 block. The underlying thinking in the ministry is that RIL has padded up costs.

"When there is as much suspicion as there is about gold plating by Reliance (of expenditure on the KG-D6 block), it is necessary to dispel the impression that the ministry is close to Reliance," says Mani Shankar Aiyar. He served as petroleum minister for a little over a year before being replaced by Deora.

The suspicion that Aiyar is referring to is centred on the capital expenditure earmarked for KG-D6's bestyielding gas fields, D1 and D3. The 2006 field development plan hiked the spending on the D1 and D3 fields to $8.8 billion from the original $2.4 billion. Such escalation in the oil and gas business is not unusual and the costs at KG-D6 are not out of the ordinary. The capital expenditure on a neighbouring block of state-owned explorer ONGC is pegged at $7.2 billion for 30 mmscmd of gas - more than double the cost per unit of gas at KG-D6. However, the gas kernel is deeper than for D6.

Bibhas Ganguly, President & COO (Business), RIL
In oil and gas, the business stops when the drilling stops: Bibhas Ganguly
But what has the petroleum ministry and lawmakers seeing red is the falling gas output, which some say is deliberate. Tapas Sen, a Rajya Sabha member belonging to the Communist Party of India (Marxist), estimates that the decline in production has caused a loss of around Rs 15,000 crore to India's energy economy. Even discounting for the bluster expected from an opposition lawmaker, there is something to Sen's argument.

One mmscmd of gas can fire a 220 megawatt power plant for a day. Theoretically, the gas from KG-D6 can fire one-eighth of the power capacity in India, the world's fourth-largest economy by purchasing power.
 
All Well, Circa 2014?
The falling production may be linked to a gas pricing review coming up in 2014, says a senior petroleum ministry official, who insisted on staying off the record. The current price set for KG-D6 gas is $4.2 per million British thermal unit (mmBtu, a unit of energy; one mmscmd of KG-D6 gas yields about 35,000 mmBtu). This price was set in 2009, after a bitter court battle over the supply and pricing of gas between RIL, chaired by Mukesh Ambani, and Reliance Natural Resources Ltd (RNRL), run by his younger brother, Anil.

Natural gas, which trades from $3 per mmBtu in North America to $8 per mmBtu in Malaysia, is expected to get more expensive in the years ahead as China and India increasingly rely on it for their energy needs.

RIL has initiated arbitration against the government. It will likely drag on for a couple of years, says the senior ministry official, to coincide with the 2014 price review. The tactic is "avaricious", says the official. "Murli Deora didn't change the lock-in period [for gas pricing]. You expect Jaipal Reddy to change it?" RIL's Prasad was not available for comment despite repeated attempts to contact him. Bibhas Ganguly, the company's President and COO (Business), who reports directly to Prasad, spoke with BT but did not comment on the arbitration.

The terms of the PSC make for another sore point between RIL and the petroleum ministry. The contract allows RIL to recover 100 per cent of its exploration and production costs but does not link this recovery to gas output. This assumes significance given the revenue sharing arrangement between the two sides.

Until RIL recovers 1.5 times its investment, the government will get only 10 per cent of the revenues from selling KG-D6 gas. This will rise to 16 per cent when revenues account for 1.5 times to twice RIL's investment. It will go up to 28 per cent when RIL recovers two to 2.5 times its investment. Thereafter, the government's share of revenues will be 85 per cent.

In other words, the higher the cost of exploration and production, the longer the government has to wait for a bigger share of revenues. A draft report by the Comptroller and Auditor General of India (CAG), leaked in June 2011, noted that RIL was allowed to increase capital expenditure over 3.5 times, which could result in a revenue loss for the government.

Ganguly declined comment on the terms of the PSC, too. But, in the past, RIL executives have blamed the tough geology in the KG-D6 block and errors in initial analysis of data for the decline in production. The gas discovery is the first of its kind in India and parts of it are up to three km below the sea surface.

It took energy giant BP (formerly British Petroleum Plc) 18 months to conduct due diligence on the block before buying 30 per cent equity interest in it for $7.2 billion in February 2011. And, given the rough sea and the weather in the Bay of Bengal - the KG-D6 gas block is 60 km from the Andhra Pradesh shoreline - RIL executives say there is only a five-month period for exploration in a year. (BT's emails and calls to Gaffney Cline Associates, the British agency that conducted the initial analysis of data, remained unanswered.)

But RIL's argument is not being bought either by Reddy or S.K. Srivastava, who heads the Directorate General of Hydrocarbons (DGH), the petroleum ministry's technical arm and deemed regulator of the sector. Srivastava maintains that RIL must dig an additional nine wells to ramp up production by April 2012 .
BT RETRO

Some in Reliance Industries believe that Mukesh Ambani's current crop of troubles can be traced to his feud with younger brother Anil over gas from the Krishna Godavari basin - the very same asset that the elder Ambani is having so much trouble over today at the petroleum ministry. In two cover stories dated December 19, 2004 and August 10, 2008, BT chronicled the drama and bitterness, some of which still seems to continue like a bad hangover.


The company, instead, has dug in its heels. It sent the petroleum ministry its arbitration notice on the evening of November 24, the same day Chairman Mukesh Ambani met Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee. In a press release four days later, it said: "Reliance and its partners are entitled under the PSC with the government of India to recover their full costs from the revenues generated… The PSC contains no provision which entitles the GoI (government of India) to restrict the costs recovered by the company by reference to factors such as the level of production or the extent to which field facilities are utilised."

"Whether the government or Reliance is at fault is debatable. But the fact is, the country is suffering," says former minister Naik. Aiyar contrasts the arbitration attempt with RIL's claims in 2004, when it announced the gas find. "It would not have come to this if they had lived up to their boasts a few years ago. They were telling the country that we (India) may not have to go around the world looking for gas, as Reliance has found gas in the KG basin," he says.

On February 19, Reddy visited the KG-D6 block, becoming the first Union minister to do so. He later reiterated that the ministry would slap a notice on RIL for the decline in gas production.

The two sides stand eyeball to eyeball on many other fronts. The DGH has been sitting on several other RIL proposals for a while now. It has not allowed the company extensions for exploration of a block in the Cauvery basin. And it is yet to clear several exploration proposals by RIL, including for the NEC 25 block in the Mahanadi basin, off the coast of Orissa. Geologists believe that the Mahanadi basin has the most potential on India's east coast after the KG basin. Currently, the petroleum ministry is looking into alleged irregularities in the allocation of condensate from the KG-D6 block to RIL's refinery in Jamnagar. The condensate is refined to obtain downstream products, such as petrol. The ministry is also locking horns with the company on the issue of pricing and allocation of gas from its coal bed methane (CBM) blocks in Sohagpur, Madhya Pradesh.

The good old days

For RIL, all this is a far cry from the way things used to be. The history of Reliance's relations with the government is well-chronicled. In the 1980s, news daily The Indian Express published a series of articles by journalist Arun Shourie and chartered accountant S. Gurumurthy on how the company allegedly used its political connections to break the law.

One of the stories talked about Reliance importing textile machinery components to increase capacity beyond its licensed limit. In 2002, when the NDA was in power, the company made a successful bid for a 26 per cent stake in state-owned plastics maker IPCL, gaining managerial control. Many had argued that the divestment to RIL would give the company dominance in the market for petrochemical products, especially with duties on imported products as high as 25 per cent. They were overruled by then prime minister Atal Behari Vajpayee and, ironically, Arun Shourie, who had by then become the minister for disinvestment. The minister argued RIL's case passionately in Parliament, saying: "In a village, a cobbler is a monopolist, but you do not want to penalise the cobbler for being the only cobbler in a radius of five miles." IPCL was fully taken over by the Reliance Group in April 2007.

In 2003, Reliance Infocomm, an RIL subsidiary (now RCom, an Anil Ambani company), and Tata Teleservices, both fixed-line operators, benefited from a government decision to allow fixedline operators to offer mobile services - giving them entry into a multi-billion dollar business. In 2007, one of the units in RIL's Jamnagar refinery was declared an export oriented unit, allowing it to sell refined crude oil in the global market. It is the only such refinery in the country. In 2010, the Commerce Ministry levied an additional duty of 22 per cent on imported petrochemical products - a decision that was revoked in January 2011, after protests by the Saudi Arabian government.

After retiring, several bureaucrats have served and continue to serve on RIL group company boards, while others work as consultants. Former power secretary D.V. Kapoor serves on the RIL board. In 2000, former IPCL CMD K.G. Ramanathan resigned a government post and joined Reliance Power (now an Anil Ambani company) as a director. This was before the IPCL stake divestment and at a time when RIL was looking to build its energy portfolio.

Many RIL employees in the energy sector are former government employees from state-owned companies such as ONGC, IndianOil and Bharat Petroleum. Geoscientist Rabi Bastia went on a sabbatical from ONGC in 1996 to join RIL. He is now a Vice President, heading exploration operations at RIL. Bastia is credited with the huge gas find in the D1 field at KG-D6 block, in 2002, as well as RIL's discoveries in the Mahanadi Basin. Incidentally, Ganguly, too, was formerly with ONGC.

To be sure, it is standard operating procedure for businesses to cultivate close relationships with bureaucrats and ministers or hire experts from the government or state-owned companies. Such examples abound in groups such as Sterlite, Arcelor Mittal, Essar, Bharti Airtel, Hyundai, and many other companies. But even by those standards, RIL and the Ambanis outshine their peers and have leveraged what analysts call the ability to manage the policy and regulatory environment to their advantage.

Notes to accounts
Minister Reddy is trying to ensure that there is no repeat of past mistakes by the petroleum ministry. In September 2011, the CAG came down hard on the ministry for allowing RIL to retain the entire 7,645 sq km KG-D6 block in violation of the PSC. Under the terms of the contract, RIL should have relinquished 25 per cent, or more than 1,900 sq km, of the total area outside the discoveries in June 2004 and 2005. This would have allowed DGH to call for fresh bids for the area and potentially earn fresh revenues.

But RIL claimed that the entire block was a discovery area and sought to retain it. The claim was studied by the DGH, then headed by V.K. Sibal, and subsequently by a committee headed by Sundareshan, who was then the ministry's additional secretary. Both agreed with RIL's contention and it was allowed to retain the entire area.

Today, Sibal is under the lens for allegedly granting undue favours to RIL, including allowing the company to increase expenditure on the KG-D6 field from $2.4 billion to $8.8 billion. Going by precedent, says a retired senior CBI officer, if the evidence leads to RIL, its executives can be booked or, at least, questioned. The CAG report was also critical of government oversight of the project and sought an "in-depth review" of 10 contracts, eight of which were awarded by RIL to the Aker Group on a single-bid basis.

The cold war between the two sides has taken a bit of a toll on RIL . Since January 20, 2011, the day Reddy became petroleum minister, shares of the company have shed 16.8 per cent in value compared to a 5.7 per cent erosion in the Bombay Stock Exchange index. (RIL shares were down 37 per cent between January and December 2011, before the current stock market rally.) "The market is observing things very minutely. The major trouble for the company is the more than 40 per cent dip in production at KGD6," says Bhavesh Chauhan, senior analyst at Mumbai brokerage, Angel Broking.

RIL's Ganguly says "things are positive" with the ministry "at this point in time". He points to the recent approval of what is called the "declaration of commerciality" and "optimised field development plan" for the D-34 gas field in the KG-D6 block, which will allow the company to sell gas from the field commercially. The D-34 field is only the fourth in the KG-D6 block that has received such an approval (the others are D1, D3 and MA). "In oil and gas, the business stops when the drilling stops," says Ganguly, calling the approvals "good news for all of us".

Still, no one doubts that Reddy has constructed a big hurdle before RIL's biggest project . "It has all been brought into the open. No one can reverse this or wriggle out of this," says the senior petroleum ministry official quoted earlier.

Understandably, Mukesh Ambani is not a happy man. In December, he refused to accompany Prime Minister Singh on a tour of Russia, despite repeated entreaties. Ambani co-chairs the Indo-Russian CEOs' council. Judging by how a new line is being drawn for RIL, it may well be a while before he shares a plane with the prime minister.

(An earlier version of this story erroneously mentioned IPCL is 46 per cent owned by Reliance and that Mukesh Ambani is IPCL's chairman. IPCL was fully taken over by the Reliance Group in April 2007. The error is regretted.)

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