Mani-Talk: Modi's Impossible Choices on Petroleum Front

(Mani Shankar Aiyar is a Congress MP in the Rajya Sabha)

When Mukesh Ambani declined at the last moment to join the business delegation that accompanied Modi to Japan, quite a few jaws dropped. Was he signalling his displeasure at the new government having completed 100 days in office without taking a decision on the pricing of natural gas? The previous government had indicated that the minimum price of natural gas, of which Reliance is the principal private sector producer, would be approximately doubled in April, then said the elections were on so a decision would be deferred till after the elections.

In view of the close nexus between Big Business and the funding of Modi's extravagantly expensive campaign, the assumption was that a decision in favour of Reliance, perhaps well in excess of what was being rumoured as the direction in which the UPA was tending, was likely. In the event, the present government seems to be caught in the same set of dilemmas that bound the previous one.

After the New Exploration Licensing Policy (NELP) was announced in 1997, Reliance, along with its Japanese partner, was among the first private enterprise entities to be awarded a mining license after signing a Production Sharing Contract (PSC) with the government.

The PSC stipulated that any gas found by Reliance and its partner in the Krishna-Godavari basin off-shore would be marketed by Reliance at a price to be determined in a transparent manner through what is technically called "price discovery at arms' length", which means the price has to be what the market is willing to bear, subject to its not being a collusive price reached on non-market factors by agreement between buyer and seller.

This general principle was particularly relevant to the marketing contract that Reliance entered into with a sister enterprise of the Reliance Group for the bulk of the gas it had discovered. This was a contract between the two Ambani brothers, Mukesh running the gas business and Anil embarking on the electricity business. The contracted price of $2.34 per unit being similar to that signed between an ONGC subsidiary and the public sector NTPC, all was considered straightforward and above board.

As Minister of Petroleum & Natural Gas (May 2004-January 2006) I trumpeted the Reliance discovery as the world's largest off-shore discovery of the year 2003 as I travelled the world drumming up bids for the 2005 NELP round. It was a national achievement which, if it fulfilled the expectations roused by Reliance's own announcements, would have sharply reduced demand for gas from abroad, perhaps even making us self-sufficient, and that too at a most affordable price.

Two things happened in 2004-05 to rock the boat. First, the price of crude oil rocketed to $100 and at one time even touched $140. Second, the two brothers fell out with each other. The selling brother reckoned that he stood to lose a great deal if he persisted with the contracted price. The buying brother insisted on his pound of flesh. The dispute went to the Bombay High Court that ruled in favour of Anil Ambani.

Meanwhile, even as the case was on, the Government impleaded itself and was, therefore, a party to the appeal to the Supreme Court that followed. The argument  made by the Government in the Supreme Court was that since natural resources like natural gas belong to the nation and its people, and the KG basin had only been leased not sold to Reliance, the Government must have the final say in determining the price at which KG gas would be marketed. The Supreme Court agreed. And the Government eventually raised the price by almost double to $4.20 (leaving some wits to point out that 4.20 translates into "char sau bees"!) 

The consequence of this sequence of events was that the earlier Reliance contract between the two brothers was, in effect, torn up, and the arms' length market discovery of price, written into the PSC, put aside. The new policy reverted to the administered pricing of gas, with the Government, not the market, becoming the determinant of gas pricing.

Alarmed at the Government becoming the price determiner, foreign firms, who had been flocking in droves to India's burgeoning petroleum sector in my time, shied away from NELP rounds after 2006. Meanwhile, Reliance, notwithstanding its tie-up with the global oil major, BP, has been unable to maintain its production commitments. Gas output from KG is at a fraction of what it was drummed up to be. Our energy security, at present and into the future, stands in jeopardy, as does our foreign exchange and fiscal balance. For the extent to which domestic gas production does not match expectations generated earlier, our foreign exchange outgo rises to import the balance requirement; and the extent to which Government intervention raises gas prices, it increases the subsidy to be paid out on account of fertilizer and power (the two principal consumers of gas) as well as cooking gas (LPG). That, of course, impacts the fiscal balance.

But worst of all, administered prices drive away the very foreign oil majors who, a decade ago, were looking on India as an emerging petroleum giant. And, of course, Reliance has shown that not even India's biggest entrepreneur has the technical expertise or deep enough pockets to confidently meet the enormous risks involved in petroleum exploration. We desperately require the foreigner to realize our petroleum potential.

While we wrestle with our domestic issues, the world of petroleum is being transformed beyond recognition. High oil prices have led to Western producers and consumers shifting to shale oil and shale gas, breaking the nexus between oil and gas prices. Result: Indian gas prices are rising while international gas prices are declining. We appear to have landed ourselves in the worst of all worlds.

The easiest way for the Modi government to distance itself from the previous government would be to give up the administered pricing system reintroduced by the previous government and go for market pricing hell-for-leather. This is what the Kelkar committee has recommended. But Modi is hesitant because that might drive up his subsidies to unmanageable levels or drive up consumer prices to levels that would be politically unmanageable.

Achche din aaye ya nahi, burre din tho aa hi gaye hain! One answer might lie in reviving the Iran-Pakistan-India gas pipeline that I fostered. But that requires a minimum of understanding with Pakistan that the government is loath to extend.

And so Modi dithers. He is now discovering that "good governance" is not about alliterative slogans and rhetorical bombast. It is about making impossible choices where there are no win-win solutions. How delightful to watch them twisting slowly, slowly in the wind!

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