Gayatri Ramanathan

Also see End game & Without prejudice

As the three member-bench of the Supreme Court begins hearing the special leave petitions in the Reliance Industries Ltd Vs Reliance Natural Resources Ltd case on September 1, questions confronting the Court include:

•  Who owns the gas? Is it the Government which as the sovereign owns all natural resources, and does its sovereignty extend to resources that have been leased out to private contractors and with whom it has signed a production sharing contract (PSC) to ensure a share of the profits?
• Or is it the contractor who under the provisions of the PSC decides who he sells to and at what price?
• If it is the government that owns the gas, then does it mean that the government gets to set the price of gas from all its gas fields? If so, why are other contractors (such as Cairn Energy, Niko Resources-Gujarat State Petroleum Corporation that operate Rawa and Tapti respectively) allowed to sell at market discovered prices? What is the logic for the government setting the price for gas from KG D6?
• Will this gas price apply to future gas finds regardless of volumes, cost of extraction or future market trends? Or will the government set prices for each gas field?
• What is relevance of the National Thermal Power Corporation’s (NTPC) global tender which was also bid at a market discovered price? Is it irrelevant now as the government has since set the price?

Whatever conclusions the court comes to, the repercussions of the court’s decision will be felt on the forthcoming round of NELP VIII for which road shows are starting later August. Said an analyst with an international consultancy firm, “The long term impact on the E & P industry will be negative unless the Supreme Court resolves all issues about ownership and pricing, leaving no ambiguity. Though the government has made the usual noises about moving away from the administered price mechanism (APM), its stand on this case seems like a move back to the APM regime which does not augur well if it wishes to attract the ENIs and BHPs (BHP Billiton) to the Indian market.” 

The questions arise from the three year old high-voltage court drama played out between Anil Ambani owned RNRL and elder brother Mukesh Ambani owned RIL for the sale of gas to RNRL under the Ambani brothers demerger agreement. Under the agreement RIL has to supply 28mmscmd of gas to RNRL for 17 years at a price (See Timeline for the case’s progression).

The Bombay High Court in its ruling of 15 June, 2009 upheld the provisions of the demerger pact and ruled that RNRL is entitled to 28 mmscmd of gas for 17 years. This in effect invalidates the gas allocation policy spelt out by the government for KG D6 gas which divides the initial 40 mmscmd mainly between operating fertilizer and power plants. The government in its Special Leave Petition has argued that natural gas is a national resource and it has the right to decide on its allocation and pricing.

An industry insider said, “The government’s stand is changing the goal posts midway and will send out wrong signals to international investors.” Former British Petroleum country head A K Jhawar and Niko Resources chairman Edward Sampson wrote to petroleum minister Murli Deora, had already expressed their reservations in 2007, when the ministry first mooted the idea of bringing back some measure of price control. “Besides, as the PSC clearly says that explorer will be free to market his product (oil or gas) within the country at market driven prices, the government’s move to regulate pricing would negate policy as stated in the PSC,” the analyst said.

Added another analyst, “The government’s stand in the case has raised more questions than it answers: 

• If the government owns the gas why did it allow RIL to participate in NTPC gas supply contract tender before it had finalised its gas utilisation and pricing policy?
• Why did the government remain a spectator when NTPC dragged RIL to court for not signing the gas supply and purchase agreement? 
• As the gas supply agreement between RNRL and RIL was part of the demerger scheme approved by the government in 2005, why did it not raise any objection to the agreement at that time?”

The political establishment including the opposition Bharatiya Janata Party and the Left parties too have endorsed the government stand that gas is a natural resource. Said Ram Naik petroleum minister in the last BJP government, “We fully endorse the government’s stand that natural resources are national property, though we feel that the government woke up very late on the issue. They should have put their foot down when the Ambani brothers signed the contract to distribute the gas between them.” Petroleum minister Murli Deora in a statement in Parliament said, “We will make all endeavours to protect the government’s legal rights the utilisation of gas and its allocation…we will allocate gas to Dadri plant subject to availability and the plant will be treated on the same footing as other similar plants…”

Nor does the government’s fear of losing revenue in allowing RNRL to buy gas at a lower price seem warranted. Analysts point out that under the product sharing agreement, the government will receive five per cent royalty on the gas discovered and is entitled to a rising share of the gas extracted. It gets 10 per cent of gas or its value until Reliance recovers 1.5 times of its investment. For 1.5 to 2 times the investment, government is entitled to a 16 per cent share. For 2 to 2.5 times investment it will get 28 per cent share.  And thereafter it is entitled to 85 per cent share of the production.

Ball is firmly in the Supreme Court’s turf – as the three judges sit down to deliberate on the case, it is clear is that there are some tough questions  whose answers will have long term impact on the country’s E & P sector.

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