The Dispute over Krishna-Godavari Gas

2009-2011
RIL & RNRL KG GAS DISPUTE
OIL AND GAS MARKETS SIIB Energy & Environment
Ankit Anil Gupta PRN 09020243008
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Table of Contents
BACKGROUND ....................................................................................................................................... 3
BRIEF CASE TIMELINE .............................................................................................................................. 3
HOW ISSUE EVOLVED? ............................................................................................................................ 4
WHY GAS PRICE WAS RISEN UP BY THE RIL? ........................................................................................... 5
WHAT WAS RNRL DEMAND? .................................................................................................................. 5
RNRL ACCUSATIONS ON RIL AND ON GOVERNMENT OF INDIA .............................................................. 6
COURT ROUNDS ..................................................................................................................................... 6
BOMBAY HIGH COURT ................................................................................................................................ 6
SUPREME COURT ....................................................................................................................................... 6
ROLE OF MODEL PRODUCTION SHARING CONTRACT IN DISPUTE .......................................................... 7
PROFIT AND LOSS SCENARIO….. ............................................................................................................. 8
ANY LOSS TO RIL AT $2.34 ??? ..................................................................................................................... 8
GOVERNMENT IN PROFIT OR IN LOSS .............................................................................................................. 9
REVISED PACT AS PER SUPREME COURT ................................................................................................. 9
CURRENT STATUS OF RIL FOR THE KG GAS ........................................................................................... 10
PICTURES OF KRISHNA GODAVARI BASIN BLOCKS ................................................................................ 11
BIBLIOGRAPHY ..................................................................................................................................... 12
Background
Krishna-Godavari basin the first thought which comes to in our mind is of the KG- Gas, RIL and RIL and RNRL issue over the case which was the First Modern MAHABHARAT over the gas in the Indian 21st century. What is the KG Gas or rather the where does the origin of KG basin and the KG gas comes. It all started in April 2000 when under the NELP when on the 12 blocks the bid was won by the RIL and D-6 block becoming the heart of the issue. To be precise we can say that the PSC of the D-6 block which was made in between the Government of India RIL & NIKO (NIKO was partnering RIL in 2000) is the main issue of this dispute. KG basin has importance because of its geographical wide spread i.e.., onshore; the KG basin has an area of about 28,000 sq km, while the offshore area is estimated at 21,000 sq km till a depth of 200m and another 18,000 sq km between 200m and 3000m. But in the year 2002 there was sad demise of Mr. Dhirubhai Ambani, who was the one man army of the reliance but later as company has to progress Mr. Mukesh Ambani became the CMD of RIL and Mr. Anil Ambani became the Vice - President of RIL.
But Later in 2005 reports started to arise regarding the fracturing relationships of Mukesh and Anil in RIL. Hence a family separation was made in which Ms. Kokila Ambani was the key member and distributed the business among the two brothers.
Brief Case Timeline
2002: RIL found the biggest discovery of the year in natural gas
June/July 2004: RIL wins NTPC tender quoting USD 2.34 per million British thermal unit price for KG-D6 gas Jan 10, 2006: RNRL files a case against RIL over Krishna Godavari (KG) basin Nov 7, 2007: Government approves market price determined by RIL at above 4.20 dollars/unit Dec 2007: RIL and RNRL file separate appeals against judgment Jun 2009: Bombay High Court asks RIL and RNRL to honor the 2005 MoU Jul 4, 2009: RIL files petition in SC, seeks stay on earlier order Jul 18, 2009: Government files petition to nullify Ambani family MoU July 28, 2009: Anil Ambani alleges
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Petroleum Minister is helping Mukesh Ambani Oct 27, 2009: Arguments by the government and RIL against the HC ruling begin in the SC Nov 5, 2009: Justice Raveendran withdraws from the case as his daughter works for RIL Dec 16, 2009: Arguments end in the Supreme Court (SC)
May 7, 2010: Supreme Court rules in favour of Mukesh Ambani and observes that the family MoU was not legally binding.
June 25, 2010: Revised pact signed.
How Issue Evolved?
When the Reliance group was still a unified entity with both brothers sharing management responsibilities, RIL had announced in 2003 that group company Reliance Energy Ltd (REL) would be setting up a gas-based power plant at Dadri in western Uttar Pradesh, for which gas would be supplied from RIL 's KG basin production. In 2005, however, the group broke up with each brother acquiring control of different business areas. While the oil and gas business went to elder brother Mukesh, Anil had control of the power business. As part of the division of the group, RIL was demerged and Reliance Natural Resources LTD (RNRL) was formed to act as a conduit for the gas from the KG basin to REL. All RIL shareholders were made RNRL shareholders, except that Mukesh 's holding in the parent company was substituted by Anil in the new firm. Thus, RNRL was part of the Anil Dhirubhai Ambani group (ADAG).
In 2005, RNRL and RIL signed a memorandum of understanding (MoU) on the terms under which gas would be supplied for the Dadri project. This MoU specified that the price at which the gas would be supplied would be the same as the price at which RIL would supply gas to an NTPC project. NTPC had invited global bids for supply of gas in 2003 and RIL finally won the bid and was issued a letter of intent by NTPC in June 2004. The price quoted by RIL in its bid was $2.34 per mmbtu (million metric British thermal units). But due to the various reasons the price was changed from $2.34 to $ 4.2/mmbtu, which shocked to RNRL because due to rise in the gas by almost 100% will increase the operation cost of Dadri power plant by several hundred times so this is where all
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MBA Energy & Environment, SIIB Page 5 dispute started. RNRL argued that international gas prices have historically been much higher than Indian prices and so that can 't be a benchmark. Further, the bid price for the NTPC project must be followed under the MOU irrespective of whether or not RIL and NTPC have finalized their deal. Finally, that the government only has the right under the PSC to fix the price at which gas will be valued for the purpose of determining the government 's share of revenues from the project. RIL, it insists, is free to sell its share of the gas at whatever price it decides. And to add expensive fuel to fire of disputes the EGoM. passed the RIL revised version of gas price in Nov 2007.
Why Gas Price was risen up by the RIL?
The main reason by the RIL which drive them to increase the price were as
1. Since from 2005 the time of signed MoU the prices of gases were sharply increased
2. In May 2007, RIL invited bids from various gas users like power and fertilizer companies and on that basis arrived at a price of $4.2 per, which was then approved by the petroleum ministry as a market-determined price. Hence RNRL alleges that this was eyewash and an orchestrated auction between small time users and that the ministry has been partisan towards RIL in the whole issue
3. Also according to the PSC which was signed by the RIL and Government of India and RIL, the government has the final say on what must be the price of the gas for the sale and also to whom to dedicate or to supply the gas.
4. Also RIL has not till now concluded that deal with NTPC since there were some issues which remained unanswered by them in contract from NTPC some issues pertaining to damages it would have to pay in case of failure to supply the agreed quantity of gas. Hence, it says, there is no NTPC price to be followed as per the MOU with RNRL
What was RNRL Demand?
RNRL was demanding 28mmscmd of gas from KG-D6 for 17years at US$2.34/mmbtu for its planned Dadri power plant. RNRL also claims its right to get additional
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12mmscmd of gas if gas sales agreement with NTPC for 12mmscmd does not materialize.
RNRL accusations on RIL and on Government of India
As per the terms of the PSC, if RIL gets a higher sale price from RNRL base, on the price the Petroleum Ministry wants to fix for the first few years, 99% of all revenues and profits will go to RIL, and only a measly 1% will accrue to the Government! Of the initial revenue of Rs 50,000 crore, RIL gets almost all, i.e. Rs 49,500 crore v/s. the government‘s Rs 500 crore.
By making and publishing the various advertisements the entire issue was brought into eyes of citizens of India so that they might too feel the heat of high price rise in the power, fuel and agriculture for this reason, and hence a direct loss to government and to consumers also.
Court Rounds
Bombay High Court
Bombay High Court Ordered RIL to supply the gas as per the original statement
 The Bombay high court directed the parties to honor a June 2005 memorandum of understanding (MoU) between companies. It asked the parties to complete the contractual nitty-gritty and enter into a ‗suitable arrangement‘ within one month so that RNRL gets an assured supply of 28 mmscmd gas from RIL‘s KG basin at $2.34 per mmBtu for 17 years for its power plant.
 The Bombay High Court allowed Reliance Industries to sell gas from KG basin at the government-approved price of USD 4.20 per mmBtu as an interim measure, while reserving judgment on a case brought by RNRL
Supreme Court
The Honorable Supreme Court has, inter-alia, held that:
1. MoU amongst the family of the promoters does not bind the corporate entity RIL.
2. The terms of the PSC shall have an over-riding effect;
3. The parties must restrict their negotiations within the conditions of the Government
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MBA Energy & Environment, SIIB Page 7 policy, as reflected inter alia by the Gas Utilization Policy and EGoM decisions.
In simple terms that PSC overshadows the MoU stand in the case and RIL will renegotiate the gas supply agreements with RNRL in the manner and within the timeframe stipulated by the Hon‘ble Supreme Court.
While the MoU may be kept in mind during the process of renegotiation, it is clearly held that the MoU is not binding. RIL has always held that it is bound by the provisions of the PSC and everything else would be subservient to this overriding agreement with the sovereign. The Supreme Court has unambiguously upheld this consistent stand of RIL.
The judgment has defined the extent of marketing freedom that RIL enjoys in the area of sale of natural gas produced. In view of the findings of the judgment, RIL can sell gas only at the price approved by the Government and only to the entities that have been allocated gas under the Gas Utilization Policy. RIL has no ability to deviate from price, quantity and tenure as determined under Government‘s policies, or to discriminate amongst various consumers.
Role of Model Production Sharing Contract in dispute
The government‘s stance in the RIL case against RNRL is that the agreement between RIL-RNRL to supply gas has no legal sanctity since RIL had to get the contract approved of by the government first. The Production Sharing Contract (PSC) which governs the rights and obligations of both the government and winning bidders like RIL is quite clear on this. The model PSC issued for 8th round of NELP-VIII, Clause 21.3 says the contractor has the freedom to market the gas ―as per Government Policy for utilization of gas among different sectors‖ and 21.3.1 elaborates on this, saying ―the Government may from time to time frame policy for utilization of gas among different sectors‖.
The problem, however, is that this is not the PSC that RIL signed with the government in 2000. That contract, under the NELP-I, gave unrestricted freedom to the contractor (RIL) to sell and the government‘s role was restricted to ensuring it got its proper share
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MBA Energy & Environment, SIIB Page 8 of the profits. In other words, it would appear that the government changed the model PSC (the changes first came about in NELP-VII in 2007) terms around the same time that the RIL-RNRL fight was heating up — this is when the petroleum ministry said it had the right to reject the RIL-RNRL contract under the PSC. If the ministry has this right, the RIL-RNRL case goes for a toss — while RIL maintains it cannot sell any gas from the KG Basin without the ministry‘s explicit approval, RNRL contends the ministry has no such rights under the PSC.
Profit And Loss Scenario…..
Any loss to RIL at $2.34 ???
 Compared to $4.20, they do
 RIL‘s cost of producing gas, according to the DGH (Directorate General of Hydrocarbons), is $1.28 per mmbtu but according to the RIL it was coming about $1.43 per mmbtu, so it doesn‘t really loss at $2.34 though it does earn less
Post-Well Expenditure Cost ($/MMBTU) RIL‘s development Exp. (Capex) in KG 0.54118 Production (Operating) Exp.
0.2211 Interest Cost 0.1316 Total post-well exp.
0.8945
Pre-Well Expenditure Cost ($/MMBTU) Exploratory Exp. (Capex) 0.144 Production Exp. (10% of Capex)
0.17 Total pre-well Exp. 0.314
TOTAL NET COST OF PRODUCTION 1.43
Table 1: Breakup Cost of RIL for KG Gas Production by RIL in 2003
Royalty @ 5% on margin ($4.2-$0.314) 0.02
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Government in Profit or in Loss
The government‘s gain/losses were more complicated. If gas prices are raised, fertilizer and electricity prices also go up and consumers end up paying more – to keep them at the same level, the hike required in government subsidies will be much more than the increased profits it gets when the gas is priced at $4.20
The Mumbai High Court had given a verdict in favor of NTPC and RNRL for 2.34 dollar gas price! It brought down the approved price of 4.2 dollar to 2.34 for all consumers or only two plants of NTPC which have been bided for gas by RIL will enjoy 2.34 dollar price of gas while all other power plants pay 4.2 dollars for the same gas.
The government knew that such an eventuality may not arise at all as they have already prejudiced NTPC‘s case by approving 4.2 dollar price for RIL. On top of that, Deora has decided that the cost of gas of PSUs – ONGC and OIL – which is now priced at 1.79 dollar per unit, as per administrative pricing mechanism, will be increased to 4.2 dollar per unit, but this was not for the sake of financial health of ONGC & OIL. It was the case of deception to help the favored contractor i.e. RIL. Actually customers i.e. power producers and fertilizer producers which were vying for low cost gas from ONGC and OIL. Deora wanted to ensure that RIL‘s market and hence the decision to enhance ONGC & OIL gas price. The government has taken the whole nation for a ride. Increasing the ONGC and OIL gas price to 4.2 dollar means an additional burden of not less than around Rs 100,000 core to power and fertilizer sector. So, the whole burden which comes to subsidiary markets which are directly or indirectly associated to it is around to Rs 120,000 core plus Rs 100,000 core i.e. a whopping Rs 2.20 laces core! This entire burden was passed on to consumers while the favored contractor would be immensely satisfied.
Revised Pact as per Supreme Court
RNRL signed a revised gas supply agreement with RIL, and resolved the dispute that had been started long back from 2006. Due to this announcement Reliance Natural shares went up by 7.5 per cent,
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MBA Energy & Environment, SIIB Page 10 while Reliance Industries rose 1.1 percent, and it also helped the government decision to raise state-set fuel prices and expose them to market forces during the end of June 2010. The companies did not disclose the terms of the pact under which Reliance Industries supplies Reliance Natural Resources. In the new pact RIL will supply 28 million metric standard cubic metres a day of gas for 17 years to RNRL at a government-set price of $4.2/mmBtu. The previous agreement between the two companies was based on a price of $2.34 per mmBtu, the brothers agreed on in 2005. The brothers, who five years ago split the business empire they inherited from their father, had since taken a step towards reconciliation, ending an agreement that banned them from competing on each other 's turf.
Current Status of RIL for the KG Gas
Reliance Industries has written a letter to the Petroleum Ministry on 15th September 2010 seeking a revision in gas price from its Krishna Godavari block by $1 per mmbtu from current $4.2 per mmbtu, say sources. Among the reasons cited by the company is that as the cost of production is rising, customers are ready to pay higher price of gas.
The difference between the domestic gas price and imported gas price is still over $2 per mmbtu.
ONGC also told the oil ministry earlier this year that "This ($4.2 per mmBtu) is not a viable price for making future investments. Nobody in the world makes investments at these price levels"
Analysts say that if oil ministry approves the gas price hike of $1 per mmbtu then it could add $500 million more to RIL 's profits
According to government estimates, for the XI plan period the natural gas demand would grow to 279.43 mmscmd in the year 2011-12. The domestic gas production is still at about 140 mmscmd
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Pictures of Krishna Godavari Basin
Blocks
Bibliography
1. http://economictimes.indiatimes.com/news/news-by-industry/energy/oil--gas/All-that-you-want-to-know-about-gas-row/articleshow/5901125.cms
2. Motilal Oswal Securities Ltd. An investment report on RIL
3. Directorate General of Hydrocarbon
4. http://news.oneindia.in/feature/2010/ril-vs-rnrl-case-timeline-ambani-brothers-dispute.html
5. RIL 's affidavit in reply to RNRL 's affidavit IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION SPECIAL LEAVES PETITION (CIVIL) NO. 14997 OF 2009
6. http://www.businessworld.in:80/bw/2010_06_25_RILRNRL_Ink_Revised_Pact.html
7. http://www.bharatpetroleum.in/YourCorner/PetroDailyDetails.aspx?Pnewsid=P000029082
8. http://thinkahead.net.in/forum/anil-wins-ambanis%E2%80%99-gas-war-ril-rnrl-get-a-month-to-supply-gas-at-2-34.html
9. Supreme Court Judgment, IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 4273 OF 2010 (Arising out of S.L.P. (C) Nos. 14997 of 2009)
10. RNRL AGM Chairman 's statement pdf copy
11. Statement from Reliance Industries, Media Release, May 7, 2010

Bibliography: 5. RIL 's affidavit in reply to RNRL 's affidavit IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION SPECIAL LEAVES PETITION (CIVIL) NO. 14997 OF 2009 6 9. Supreme Court Judgment, IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 4273 OF 2010 (Arising out of S.L.P. (C) Nos. 14997 of 2009) 10 11. Statement from Reliance Industries, Media Release, May 7, 2010