Gas wars: Reliance Industries on the warpath

Though its exploration and production business contributes just 1.51% to its turnover (Rs 6068 crore out of Rs 4.01 lakh crore in FY14) and less than 10% to its sum-of-the-parts valuation of R941 per share, Reliance Industries Ltd (RIL) is serious about taking the government to task over what it perceives to be a series of arbitrary actions on the latter’s part. Last month, RIL filed its fifth arbitration suit against the government, and the first since the NDA came to power (see box, Furious Five).

For a company once seen as getting governments to see things its way, this is not just the result of a series of setbacks, it is a completely new strategy. But then, these are not normal times for RIL – not only have various governments at the Centre not bought its story, Delhi chief minister Arvind Kejriwal in his previous 49-day term even ordered filing of an FIR against RIL chairman Mukesh Ambani for conspiring with former oil minister Murli Deora and then oil minister M Veerappa Moily to hike gas prices. What makes RIL’s new strategy more odd is that Ambani is seen endorsing Prime Minister Narendra Modi at several high-profile events such as the Make-in-India one.

RIL’s troubles really began in 2010 when, from 59 mmscmd in the June quarter, production in its KG Basin fields fell dramatically – to a mere 9.8 mmscmd in FY14 – and when the company was forced to restate its reserves in the KGD6 field dramatically from 10.3 trillion cubic feet to 3.4 trillion cubic feet. Around the same time, the CAG came out with its report alleging RIL had artificially hiked the costs of its fields – gold plating, in jargon. By doing so, it was alleged; RIL was ensuring the government got less than its due share of profits from the gas fields.

While the case dragged on with no resolution, the government decided, in May 2012, not to allow RIL to deduct $1billion of expenses in the fields; in July 2013, another $792million of expenses met the same fate and this was followed up, in November, with another $800million of expenses being disallowed.

Long before the first set of penalties were levied, RIL had filed its first arbitration since the writing on the wall was clear. Indeed, soon after S Jaipal Reddy took over as petroleum minister in 2011, he began talking of taking action against RIL and also blamed it for deliberately delaying work on the field.

Four years after RIL filed its first arbitration (see box, Arbitrary, not arbitration), the case has just about got going with the government using every tactic in the book to delay the arbitration.

After Reddy was moved out of the ministry, in October 2012, the government began the process of looking at how gas prices were to be fixed in the years to come – the original price of $4.2 per mmBtu fixed for RIL’s KGD6 gas was only for a period of five years, to end on March 2014. C Rangarajan, the head of the prime minister’s economic advisory council (PMEAC) was tasked with the job and, in January 2013, he came up with a formula that, at that point, roughly doubled the prices to $8.4 per mmBtu. While that looked high, at that point, India was importing gas at far higher prices, in some cases even as high as $15-17/mmBtu. Given that gas-based power plants were operating at a 25% capacity, that seemed a prudent decision at that point.

For one reason or another, the decision cleared by the Cabinet was never implemented. This is also the period when Kejriwal ordered the filing of the FIR against Ambani. With the Supreme Court now petitioned against the hike in gas prices, RIL decided to file its fourth arbitration. Nine months into the filing, this arbitration appears to be going nowhere. Two other arbitrations filed by RIL relate to expenses incurred by it in its Panna-Mukta-Tapti fields as well as on the amount RIL has to pay as liquidated damages on four fields which it relinquished after not finding oil/gas in them. What is interesting is that in the Panna-Mukta-Tapti case, which has also been going on for years, since 2011, petroleum minister Dharmendra Pradhan has asked, on file, that RAW, the country’s foreign intelligence agency, be asked to investigate the link between RIL’s lawyers and the chief arbitrator in the case. Pradhan also ordered “exploring the possibility of handing over (the) case to Serious Frauds Investigation Office on the issue of notional tax” – while the government maintains RIL is expensing the tax at a higher level than it actually pays, this is part of the contract between RIL and the government.

In the latest case, filed on January 14, 2015, RIL has argued the government has erred in forcing it to give up 81% of the area it had been given in the KG-D6 block. According to RIL, its production contract allows it to retain the area. Interestingly, while the latest CAG report says RIL’s drilling was illegal since this had to be given up under the production contract, it allowed RIL to expense the drilling costs since it had found oil/gas during this process. While both the government and RIL are citing different clauses in the production contract, or have different interpretations of them, what doesn’t make sense is why the government is delaying the arbitration through neutral parties. More so since, at the same time, ministers like Arun Jaitley are talking of streamlining the Indian arbitration process so as to infuse confidence in investors who are keen to have foreign arbitration clauses in their agreements.

With the Aam Aadmi Party winning a landslide victory in the capital just around the time the government was to take a decision on allowing a premium on gas prices for deepwater gas fields such as the ones Reliance has, it is clear the battle is only going to get messier.