Reliance Industries Ltd (RIL) has petitioned the Government not to institute competitive bidding for the valuation or sale of gas to avoid “inherent problems” and has instead asked for a crude-oil linked pricing along the lines that Iran had proposed to India. Negotiators with Iran had rejected the notion of crude-oil linked pricing without floor-to-ceiling levels because of the uncertainty it creates.
Analysts think that RIL’s move may be because of its intention to use the allocated 12 metric million standard cubic meters per day (mscmd) for city gas distribution (CGD) projects to meet its captive power plant requirement of 16 mscmd in its Special Economic Zones (SEZ) at Haryana and Mumbai. RIL may be worried that if international bidding is called, it would have to participate and win the bid process even for its own consumption. It is not clear if RIL’s reservation if linked to operational costs and hassles or to the uncertainty it creates for its operations. It could very well be that RIL thinks that since it has control over the 12 mscmd gas and has a direct requirement far exceeding its allotted share and therefore be allowed to use it as it pleases since it would have to otherwise import the gas at extra costs.
RIL has been pushing for such agreements with other suppliers as well. For example, the gas sales purchase agreement (GSPA) with NTPC Ltd was not based on international competitive bidding. RIL is arguing that since the Production Sharing Contract (PSC) only calls for an “arms-length” valuation between unrelated but willing parties and because it does not call for an explicit open bidding, the Government should not adopt the open bidding route as a fait accompli.
The Government had instituted a committee to create a transparent mechanism for gas price valuation after it was mauled in the cross fire between RIL and Reliance Natural Resources Limited (RNRL) run by Mukesh Ambani’s estranged brother Anil Ambani. While the report from this panel will be submitted in October, preliminary leaks indicate that the panel is looking for an international open bidding as the preferred route to avoid controversy. While this may be convenient for the Government RIL feels that this convenience would come at the cost of its business.
The Government has been certainly caught on the wrong foot with this demand from RIL. While it has been arguing with Iran that the best way forward is non-crude oil linked pricing mechanism that includes floor-to-ceiling rates, one of the country’s major energy industry is using Iran ’s argument ostensibly for selfish reasons. RIL owns gas fields in the Bay of Bengal and supplies gas to RNRL and NTPC. While NTPC agreed to the Iranian formula, RNRL is adamantly opposing it arguing that its contract with RIL is for a period of 17 years and RIL cannot renegotiate the contract mid-way. The big question is how did Government-owned NTPC agree to these terms when the Petroleum Ministry itself is arguing the opposite with Iran and is proposing to create a mechanism that is opposite of what RIL wants.
Given the press the Government is under, some reports say that if it is forced to follow the Iranian formula, it may adopt a link to a basket of freely trade fuels in the international market to hedge its risk. Another alternative is to create an index based on imported Liquefied Natural Gas (LNG) price rates fixed by regional and international competitive exchanges—in other words this is more or less what RIL wants.
What is clear is that the Government needs to formulate a policy for fixing energy prices based on international norms that does not stifle domestic industry. At the same time, the pricing should not be created to facilitate a subsidy through the back door for individual companies. A look at how other nations handle such policy may be a great place to start.
