<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Reason To Smile: Anil Ambani (left) has won the case against his brother
Mukesh Ambani (Pics by Tribhuwan Sharma and Sanjay Sakaria)
Reliance Natural Resources (RNRL), the Anil Ambani-owned company, received a shot in the arm on 15 June when the Bombay High Court ordered Mukesh Ambani-owned Reliance Industries (RIL) to supply 28 million standard cubic metres per day (mmscmd) of gas for 17 years at $2.34 per million British thermal unit (mBtu). Earlier, an empowered group of ministers had said the gas should be sold at $4.20 per mBtu, a price that was acceptable to RIL.
Although Reliance is likely to move the Supreme Court against the High Court’s decision, analysts say that even at this price RIL would make a profit from selling the gas to RNRL. Here’s how: according to details submitted by RIL to the director-general of hydrocarbons (DGH) in May this year, the cost of production from the Krishna-Godavari (KG) Basin is estimated at $0.8945 (Rs 42) per mBtu. At a sale price of $2.34 per mBtu, RIL would retain a margin of 60 per cent.
Notionally, though, reduction in sale price from $4.20 to $2.34 per mBtu would amount to Rs 4,000 crore of revenue loss to RIL every year for 17 years.
Besides, the KG Basin is projected to deliver 45 mmscmd of gas per annum. Even after supplying 28 mmscmd to RNRL, RIL would still be able to sell the remaining gas at international prices, which have fluctuated between $3.5 per mBtu and $19 per mBtu since March-April. “Internationally, the gas prices are not cost-driven, but market driven,” says a senior official at the Gas Authority of India.
Analysts in the oil and gas sector point out that RIL’s production cost (as submitted to DGH) for the year 2009-10 is based on a production rate that is lower than 80/120 mmscmd (the peak rate from KG Basin).
Further, the Bombay High Court order says that RIL’s counsel Harish Salve was asked by the Bench whether the price of $2.34 per mBtu has a component of profit, “to which Salve made a very categorical statement, that even at that price RIL makes a profit”.
The $2.34 per mBtu price was arrived at after NTPC invited international bids in 2005 for its gas-based power projects in Kawas (645 MW) and Gandhar (1,300 MW) in Gujarat. “RIL quoted $2.34 to NTPC, because they would have made profit at that price,” says a senior NTPC official. However, RIL executives say the price was never firmed up, hence is not the final cost of gas sale.
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According to a senior oil and gas researcher with a New Delhi-based international analyst firm, there is no risk involved for RIL since the gas has been found at KG Basin and the buyer is tied up, hence there was no question of loss on production. RIL started gas production in its deep-sea KG fields in April this year, more than seven years after the find around the coast of Puducherry. The gas production from Dhirubhai 1 and 3 wells of the KG-D6 block is expected to add about Rs 4,100 crore to the annual revenue of RIL.
Source: RIL letter to director-general of
Hydrocarbons dated 22 May 2009
According to an oil and gas analyst, the transportation and marketing cost, which is a major aspect of pricing, cannot be ignored in arriving at the final cost. Says a senior official in the ministry of petroleum and gas: “At $4.20, the government had quoted the well head price. RNRL would still have had to pay $6 per mBtu when you add the cost for transportation and marketing. At $2.34, RNRL would have to shell out $3.93 per mBtu for transporting it to Dadri,” says the official. But one of the arguments against the Bombay High Court order is that the RIL shareholder has lost value. However, as per the original plan of partition between brothers, RIL shareholders received 100 shares each of Reliance Communication Ventures and RNRL for every 100 RIL shares held. By that logic, “If an RIL shareholder has lost in this decision, the same shareholder has benefited from the RNRL shares,” says a senior executive of Anil Dhirubahi Ambani Group (ADAG).
Secondly, if RNRL had signed the gas agreement for 3,500-MW Dadri power project by 2006, it would have been up and running. If it had done the financial closure, then RIL would have made huge margins by now.
While the battle for gas between the Ambani brothers is likely to continue for a few more months, the Bombay High Court order has identified two winners — Kokilaben Dhirubhai Ambani and the shareholders of both RNRL and RIL. While the court has upheld the peace treaty signed on 18 June 2005 brokered by Kokilaben as sacrosanct, it is also evident that shareholders of both the companies benefit.
But the court has also opened another window of opportunity for the Ambani brothers to bury their hatchet for higher mutual and shareholders’ gains. The contract commences the day gas starts to flow into any of the power projects owned by ADAG. However, will RIL blink? According to legal experts, Mukesh’s group will not come to the negotiating table, and will opt to fight.
They also feel that it could probably be one of the shortest fights, in terms of time taken to deliver a judgement, at the Supreme Court. “It is a case where both parties will struggle with new evidences; such cases are disposed of quickly,” says a corporate lawyer with a leading law firm in New Delhi.
Amidst the ongoing legal battle between the Ambani brothers on the gas issue, the government is preparing the ground for its intervention. The question that begs an answer is: should the government get involved in adjudication of a treaty that is essentially a private (family) treaty? Considering that the various New Exploration and Licensing Policies have failed to attract any significant foreign player, it would do well to stay away from the issue, if it wishes to make this sector attractive.
(Businessworld Issue Dated 23-29 June 2009)