No other corporate
dispute in last many years has received as wide an attention as the dispute
between the two Reliance brothers, over allocation and pricing of gas from KG
Basin. Finally, after about five years, the verdict by the Supreme Court puts
at rest the uncertainties and speculations by both the sides as also by the
general public and press and media about what will finally happen in this case.
The verdict, in essence, has established the following:
among family members could not go beyond, and be in conflict with, the
Government Policy on issues which concern public at large.
resources of the country, such as gas, are national assets, and it is only the
Government which can formulate Policies relating to such national assets.
Private parties cannot allocate these assets to themselves.
Government is the competent authority to determine the price.
In this paper, I do
not propose to discuss and analyse the merits and demerits of various
articulations, that each of the parties presented, and also the final judgement
according to which the Reliance Power and Reliance Natural Resource Company did
not get the allocation of gas at a price of $ 2.34 per million btu for which
they had made their submissions in the Court. I wish to restrict this paper to
the implications, that the verdict has, in the context of overall development of
gas sector and with particular reference to its impact on the power sector.
In the last few days,
experts from various fields have made their comments which have been widely
covered in the press and media. Stock markets have also responded both in
favour and against different companies according to the perception on how these
companies will be affected by this judgement. The following issues need to be
discussed to understand the implications of the decision :
would be the impact of the judgement on availability of larger quantity of gas
particularly for power sector?
extent NTPC's case for getting 12 mcmd gas at the rate of $ 2.34 per million
btu, which NTPC has been claiming as their entitlement as per the Contract with
Reliance Industries, would be affected?
What should be the impact of this judgement on the overall strategy of the Government
for development of gas fields through private participation?
will be the overall strategy of the Government in respect of price fixation?
And, its impact on the main gas consuming sectors viz. power and fertiliser?
From the Reliance
Industries gas field, in the KG Basin, as per the decision of the Empowered
Group of Ministers, about 62 million cubic meter of gas per day has been
allocated on Firm basis, and an additional quantity of 30 mcmd has been
allocated on fall back basis. Obviously the allocation on fall back will be
subject to availability and, therefore, it does suffer from uncertainty about
supply. Out of the total allocation of 62 mcmd, the allocation to power sector
is 31.2 mcmd (50%) and to fertiliser 15.5 mcmd. Under the fall back category,
power sector has been allocated an additional quantity of 12 mcmd. Thus, it can
be seen that whatever be the overall Gas Utilisation Policy, power sector has
been provided the largest allocation and rightly so, because for many years a
number of gas based power plants were being utilised to the extent of only about
60%. Almost 2,000 MW of gas based power capacity remained fully unutilised for
want of gas. The allocations by the Empowered Group of Ministers has rightly
recognised the need for additional generation from assets which were partly or
fully stranded. The judgement, by endorsing the right of the Government to
decide about utilisation policy as well as pricing mechanism, has strengthened
the position of the Government. And, to that extent, it brings about greater
degree of clarity and certainty. In absence of this judgement, various
developers and other stakeholders were apprehensive whether the allocations
already finalised by the Government would come under question and, therefore,
some of these would be reversed. In fact, lenders were also very apprehensive.
We must recognise
that the decisions of the Group of Ministers were based on the circumstances
prevailing, and also these deliberations were always under the context that a
major issue of allocation of gas and pricing was pending consideration of the
highest quote of the land. Therefore, now that this matter stands settled, it
would be necessary that a comprehensive policy is evolved on both these issues -
Allocation and Pricing. With the uncertainty getting over, the developers of
gas fields - Reliance Industries as well as others - should be in a position to
expedite the process and enhance gas production. To this extent, the impact of
this judgement in so far as gas availability is concerned, is likely to be
While the certainty
created out of the judgement may lead to expediting the process of gas
production, there is a school of thought which opines that the judgement gives
too much of authority to the Government and to that extent the flexibility and
freedom which, in their opinion, were likely to be available to the developers
get restricted. We will deal with this issue subsequently.
As regards the impact
of the judgement on the NTPC case, there are views that since the Court has
indirectly upheld the price fixation by the Group of Ministers, which is at $
4.20 per million btu, it is quite likely that NTPC may have to fall in line and
agree to this price. However, there is another opinion that the empowerment
provided to the Government, under this judgement, will also entitle the
Government for a differential treatment to a public sector company like NTPC.
They also feel that the price fixed by the Group of Ministers was without
prejudice to the Court case which NTPC has been engaged in to get a favourable
decision for 12 mcmd of gas at $ 2.34 per million btu. In any case, this matter
is yet to be decided by the Court. There appears to be sufficient weight in the
argument that merely on the ground that the Court recognised the authority of
the Government to fix the price, which the Group of Minister decided to be $
4.20 per million btu, NTPC may not be obliged to follow that price. It will
depend on how the case, which is already pending, is decided. It may also
depend on the decision which Group of Ministers may take in respect of NTPC,
outside the Court. The Supreme Court verdict authorises the Government for
doing so at a policy level (not necessarily for NTPC). The GOM may very well
decide a price which could be different from $ 2.34, also different from $
4.20. It is not unusual for differential pricing to be rational. In any case,
in the gas sector, so many prices are prevalent. A via media could be to settle
the matter outside the Court, for which GOM may decide a price and also other
issues in the case.
As regards private
participation, there appears to be a strong undercurrent, as reflected in the
press and media, based on the opinions of various experts that curtailment of
flexibility and freedom for private developers because of excessive
authorisations given to the Government, the private sector interests will
reduce. The Former Petroleum Secretary, in his article published in a Business
Daily, has articulated that the verdict will not affect private investment. He
has suggested that Government has the powers to approve the gas pricing
formula. But the production sharing contract, which the Supreme Court has
upheld, provides for Guidelines to govern such approval. The price has to be on
arms length basis to the benefit of the Contractor as well as of the Government,
and will take into account the prevailing policy, if any, on pricing of natural
gas. Obviously prior to this dispute, the perception about various provisions
in the production sharing contract was that the developers have significantly
higher degree of freedom and flexibility, both on allocation and on pricing. As
a matter of fact, Ministry of Petroleum itself used to hold that view until
2006, saying that the Government had little role to play in these matters. They
also did not agree to the request of the Ministry of Power to intervene in the
dispute on gas supply to NTPC. On balance, it appears that the impact of the
judgement on private sector interests would definitely be there. However, this
could be minimised through a well conceived policy on both the issues.
Harmonising various provisions of production sharing Contract with Court verdict
and minimising uncertainty could be the objective of such a Policy.
Approach and Policy
for Price fixation is crucial. Obviously, in the gas sector market has not
matured to a point that issue like price could be left to the market to
determine. As a matter of fact, in none of the energy segments - power, coal or
gas - market has reached anywhere near maturity. Shortages are so excessive
that leaving price to be fixed by the market could only be disastrous for
consumers. The judgment has rightly recognised this ground reality. However,
leaving price fixation to the Government is also not the best of the options.
Power sector is the right example. It learned the lesson in a hard way.
Governments kept this authority for decades together till the sector reached the
stage of bankruptcy. It was than recognised that power tariff fixation has to
be distanced from the Government. It has to be handed over to an independent
quasi-judicial institution which could determine tariff in a transparent
manner. With some initial teething problems, this mechanism in the power sector
is establishing itself with modest success. In coming years, the wisdom of this
approach will be fully realised. In the gas sector also, the price fixation has
to be handled by an agency different from the Government. This would be in the
best interest of developers, lenders, consumers and public at large. The
present dispensation in the petroleum sector under which the Petroleum and
Natural Gas Regulatory Board has been given only down stream jurisdiction, and
that too with a lot of ifs and buts has to change. Either the same regulatory
institution should be empowered to cover also the upstream segment or another
regulatory set up should be established. The existing arrangement of
Directorate of Hydrocarbon, also functioning as a regulatory body, under the
Ministry, is not a satisfactory arrangement. While fixing the price of gas, we
need to keep in mind the price of power. Our manufacturing has to compete
globally. People need to be provided power. Regulating price of power has no
meaning if fuel price is not regulated.
Last, but not the
least, the architecture of various agencies in the petroleum sector including
the regulatory institutions, has to be such that it leads to an era of better
predictability and certainty about this important fuel. Thus far, the consuming
sectors have always been subjected to their erratic behaviour, both in terms of
supply and predictability about price. Both power and fertiliser are important
sectors - power for industry as well as people, and fertiliser for common man,
in fact, agriculture relevant to all. Climate change concerns do require a
substantial shift to maximum deployment of gas as the fuel. Massive expansion
of gas sector would require a skilful balancing of the interests of investors,
financiers and consumers. A well structured and duly empowered regulatory set
up is, perhaps, the right answer.