2. What is the fight about?
2
RIL agreed to sell RNRL 80mmscmd of gas from KG Basin for
17 years at $2.34 per mmbtu for its Dadari power plant.
With RIL not supplying he gas, RNRL went to court against it for
not implementing this part of a family MoU signed when the
empire was being carved up between the two brothers.
IIPM AHMEDABAD 6/3/2010
3. Where does Petroleum ministry come in?
3
RIL got the right to look for gas in the KG basin after signing a
PSC with the government.
In the PSC, the government gets a share of RIL’s KG profits.
Since profit are related to the price,
the government say it has the right to vet each contract RIL signs
to sell gas.
The ministry used this to reject the RIL-RNRL contract, saying it
was not an arms-length one.
IIPM AHMEDABAD 6/3/2010
4. So what’s the problem?
4
RNRL argues the ministry’s role under the PSC is limited to
ensuring it gets fair share of profits theoretically.
RIL can give the gas away free as long as it gives the government
its share of the profit,
Based on either the price fixed by the government or on a
competitive arms-length bidding process.
IIPM AHMEDABAD 6/3/2010
5. 5
Interestingly, while answering question in parliament, the
government stance for year has been that its role is limited to
ensuring it gets its share of profits.
The Bombay High Court has ruled that the family MoU does not
violate the PSC- that is, the ministry could not cancel the RIL-
RNRL agreement.
RIL challenged this in the Supreme Court.
IIPM AHMEDABAD 6/3/2010
6. How was the contract an arms-length one when
there was no bidding?
6
In 2003, NTPC invited global firms to bid to supply it gas for its
Kawas-Gandhar power plant for 17 years.
RIL bid the lowest $2.34 per mmbtu and NTPC gave it a latter of
intent in June 2004.
The RIL-RNRL contract was based on this since it was signed in
the same time period except,
The RNRL contract was for 28 mmscmd of gas while the NTPC
one was for 12 mmscmd.
IIPM AHMEDABAD 6/3/2010
7. 7
RIL later objected to some of the clauses in the NTPC tender and
refused to supply the gas.
NTPC went to court against RIL.
RNRL argues that since the contract was based one NTPC one, it
was an arms-length one.
IIPM AHMEDABAD 6/3/2010
8. What is the market price of this gas?
8
RIL had called for bids from buyers in April 2007, and they bid
an average price of $4.33 per mmbtu.
After some minor tweaking, the government accepted $4.20 per
mmbtu as the price.
IIPM AHMEDABAD 6/3/2010
9. Do RIL and the government lose at the $2.34
price?
9
Compared to $4.20, they do.
RIL’s cost of producing gas, according to the DGH, is $1.28 per
mmbtu, so it doesn’t really lose at $2.34 though it does earn less.
The government’s gain/losses are 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.
IIPM AHMEDABAD 6/3/2010
10. How does RIL’s capital expenditure come in here?
10
Under the PSC, RIL first gets to recover its capital and operating
costs out of whatever revenues get generated; it is only after this
that the government get a share in the profit – this share rises as
RIL’s revenue to cost ratio rises.
If its capital expenditure goes up, the government’s profit fall.
The DGH says the capital expenditure has been verified by
independent experts including the CAG – the CAG’s report,
however, has not been made public.
IIPM AHMEDABAD 6/3/2010
11. 11
RNRL has pointed out that these experts weren’t really
independent and were connected with RIL in various ways.
Besides, two of the four member management committee that
okays RIL’s costs for the KG basin are employees of RIL under
the PSC, this will be common for all contractors, not just RIL.
IIPM AHMEDABAD 6/3/2010
12. Is there a larger policy issue here?
12
The policy through which the government is now allocating gas
Dadri cannot get gas under its allocation formula – came into
being seven years after the PSC was signed.
So the issue is whether a government can come up with a
government can come up with a policy after private sector
players have come in and invested billions.
IIPM AHMEDABAD 6/3/2010
