The controversy over pricing and supply of gas to Reliance Natural Resources highlights the need for an independent regulator.

Raghuvir Srinivasan

Long before it fires power plants or lights the burner ring in your kitchen, the gas discovered by Reliance Industries in the Krishna-Godavari Basin is igniting controversies. First came the disagreement with National Thermal Power Corporation (NTPC), with which Reliance had signed an agreement in May 2004 for the supply of 12 million standard cubic metres (MSCMD) of gas. That issue is now in a court, which has asked the two to arrive at a mutually acceptable settlement outside the legal process.

And now comes the controversy over the pricing and supply of gas to Reliance Natural Resources Ltd (RNRL), an Anil Ambani group company. The Government has all but shot down the gas supply agreement that forms part of the family settlement between Anil and Mukesh Ambani.

The Government's main objection is to the gas price which, at $2.34 per million British thermal unit (mbtu), is substantially lower than the prevailing international price of around $10 per mbtu. The Government has a share in profit gas from the field and it contends that such profits will now be lower because of the low-price supply deal with RNRL. The Government also says that family settlement agreements cannot be the basis for commercial gas supply deals, which should be based on market terms.

The gas is critical to the Anil Ambani group's ambitions of becoming a major player in the energy sector. The relatively inexpensive gas from the KG Basin is to fuel the mega power project of Reliance Energy, planned at Dadri, near Delhi. Cheap gas is vital to the economics of the project and an increase from the agreed price or quantum of gas can put the project in serious trouble.

Late reaction

The Government's arguments appear unexceptionable, however; no commercial deal where public interest is involved can be based on family agreements and, again, it is correct that its share of profit gas will be affected following the lower prices (compared to the prevailing market prices) being offered to RNRL. Yet, one cannot but raise the question of what the Government was doing when Reliance Industries, after signing the Gas Sales and Purchase Agreement with NTPC back in May 2004, refused to honour it, citing objections over certain terms. NTPC finally went to court in December 2005 to enforce the deal.

Unlike the deal with RNRL, the NTPC deal was based on international competitive bidding and Reliance Industries won it by quoting the lowest price among all bidders. The proposed expansion of NTPC's gas-based projects at Kawas and Gandhar in Gujarat, which was to have been completed by 2007-08, is now unlikely to meet that deadline because of the imbroglio over gas supply.

The common factor in both issues is that the natural gas price has zoomed upwards in the last three years from $5 per mbtu to a high of $14 and is now trading at around $10 per mbtu. This was not anticipated and has completely changed the economics of the natural gas supply business.

Regulator needed

Be that as it may, the consequence of the Government veto on the RNRL deal is that the Anil Ambani group may have to renegotiate terms with Reliance Industries. A benchmarking of the deal on prevailing market prices would naturally mean higher prices to be paid by RNRL which could change the economics of the Dadri project as also other gas-based projects that the group had planned based on the KG Basin gas.

What this issue, as also the troubled NTPC deal, highlights is the need for an independent regulator. There are bound to be several knotty issues of pricing and other factors that will come up as the discovered reserves are tapped, and only an independent regulator equipped with the required expertise and resources can settle them.

The Government would do well to immediately constitute the Petroleum and Natural Gas Regulatory Board, the Bill for which was passed by Parliament in its last session. A strong, independent regulator alone can ensure an orderly development of the industry that is in its nascent stage of development.

(This article was published in the Business Line print edition dated July 30, 2006)
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