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Implications of supreme court judgement in the gas dispute, Shri R V Shahi, Former Secretary, Ministry of Power

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:

  1. Any MOU among family members could not go beyond, and be in conflict with, the Government Policy on issues which concern public at large.

  2. Natural 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.

  3. 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 :

  1. What would be the impact of the judgement on availability of larger quantity of gas particularly for power sector?

  2. To what 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?

  3. What should be the impact of this judgement on the overall strategy of the Government for development of gas fields through private participation?

  4. What 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 positive.

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.