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More trouble in the pipeline

Even as Anil Ambani accuses Mukesh of gold-plating development costs of the KG Basin fields, he turns the heat on Reliance’s gas transportation venture.

The rumblings are there for those who care to listen and this time, more than allocation or price of gas, it has to do with transportation and the cost of it. For Mukesh Ambani, the task doesn’t end after getting the gas out of the deep seas. He’s also got to transport it to the end users. For this purpose, he plans to lay some 8,700 km of pipelines across the length and breadth of the country.

He’s got the government’s nod for most of these projects, although, till date, only the East West Pipeline (EWPL), which runs across 1,386 km and has been built at a cost of Rs 18,000 crore by Mukesh Ambani-controlled Reliance Gas Transportation India Ltd (RGTIL), is operational.

Is the higher transportation tarrif unjustified?
The Anil camp thinks so
Transportation tarrif offered to NTPC in 2005: $0.72/MMBTU
Tarrif estimates to Ministry of Petroleum and Natural Gas in 2007: $0.93/MMBTU
Tarrif being charged currently: $1.25/MMBTU

The premise for the pipeline controversy is something known as costplus, which, simply put, allows the operator to recover his costs and then make a decided percentage of that as profit. In the pipelines business, the operator is allowed to recover 12 per cent of capital employed per year. He is allowed a 3 per cent increase every year.

The EWPL has been built to take the gas to Gujarat from the KG Basin off Kakinada, in Andhra Pradesh. RIL has submitted a tariff plan to the Petroleum and Natural Gas Regulatory Board and is now charging that tariff for carrying gas to customers outside Andhra Pradesh even as the board reviews its application.

The problem here is not too dissimilar with the gas pricing dispute: RIL had proposed a much lower tariff to NTPC Ltd for gas transportation when it had bid for its gas supply contract— just as it had bid a much lower price for the gas itself. Documents with Business Today show that RIL had initially proposed a charge of carrying the gas for around 48 cents per million British thermal units (MMBTU), along with a marketing and risk management margin of 36 cent per MMBTU.

In May 2005, RIL sought to bring in 24 cents of this margin into the main tariff, citing increase in steel prices and revised the tariff to 72 cents from 48 cents, reserving another 12 cents for marketing and risk management margin.

Today, in 2009, RIL is charging $1.25 per MMBTU transportation charge along with a 13.5 cent per MMBTU marketing margin. A speech that Anil Ambani made at the annual general meeting of Reliance Natural Resources Ltd (RNRL) touched upon this tariff issue and he wondered aloud why it should be as high as 30 per cent of the cost of the gas at $4.2 per MMBTU.

RIL's Pipeline Plans
Pipeline
Length
East West Pipeline (EWPL)1,386
Chennai-Tuticorin600
Kakinada-Basadbpur-Bardhaman1,100
Chennai-Bangalore-Mangalore652
Bhopal-Cuttack1,100
Jamnagar-Bhopal820
Hyderabad-Goa651
Kakinada-Chennai600
Shadol-Phulpur350
Hyderabad-Nagpur-Bhopal800
Hyderabad-Hassan650
Total8,709
Whilst EWPL has been completed, others are planned projects for which govt approval has been obtained, except for H’bad-Nagpur-Bhopal & H’bad-Hassan Source: Goldman Sachs report on RIL dated March 24

The chasm between 48 cents and $1.25 per MMBTU means a difference of almost 35 paise per unit of electricity, if this gas is used to produce power. Somak Ghosh, Head (Corporate Finance), YES Bank, says: “Even if the Dadri plant (Anil’s proposed 7,480 MW power unit) was on the coastline, the prospect of importing gas would have meant setting up a terminal. That would have added to the cost of the project and subsequently to the cost of gas and thereafter the electricity tariff. The ongoing discussions are very important from long-term objective to deliver power at an affordable price.”

So, how has the tariff climbed so high? Sources indicate that in 2007, RIL had told the Union Ministry for Petroleum and Natural Gas that it would charge 93 cents per MMBTU for transportation. In contrast, Gail India Ltd had offered a tariff of 39 cents per MMBTU to set up the EWPL in 2004.

Today, it charges a tariff of around 58 cents per MMBTU (Rs 1,150 per thousand cubic metres) on its Hazira Vijaipur Jagdishpur (HVJ) pipeline, which has a similar length as the EWPL. But such data can be deceptive. The counter argument can be that GAIL has proposed a tariff of 88 cents for its 572-km-long Dahej-Uran-Panvel pipeline and the HVJ pipeline (with the 58 cent tariff) was built two decades ago.

Another question that needs to be answered is why is gas transportation tariff pegged in dollars? That is almost like making the Indian consumer pay for foreign exchange fluctuations in their electricity bill, even for a pipeline which travels only through India. The question can be asked about the natural gas pricing, too— why does it need to be pegged to the dollar once the price is determined?

Both RIL and Reliance ADAG were unavailable to answer any questions on record. But sources point towards the prices of steel and how they peaked in the last two years when the pipeline was built. And they add that if the dollar was moving southwards at this time, nobody would be asking why gas transportation costs are pegged to the dollar.

RIL-baiters have also been questioning the shadowy way in which the EWPL project was shifted from RIL to a privately-held company owned and controlled by Mukesh. This was done after the licence and permissions were granted to the RIL subsidiary. One answer: “RIL was executing three other projects namely retail expansion, KG Basin exploration and the second Jamnagar refinery under the then Reliance Petroleum at the time. The Board thought it best to not undertake another risky venture under the RIL umbrella.”

But then, as the rival camp will be prone to ask: Why then was RIL lending its financial muscle to complete this project? The defence is that only Rs 2,000 crore has been paid by RIL to RGTIL as advance payment to book space in the pipeline and this may be converted to preference shares in future. The rest is Mukesh Ambani’s own cash. The sparring goes on.