Anil Ambani: Gas pricing/Gold Plating/Reliance Power

ADAG was quick to respond to Petroleum Minister’s justification in the Parliament regarding Oil Ministry’s intervention in high profile RIL-RNRL case. Though, Mr. Anil Ambani, Chairman, RNRL, thanked the Ministry for providing the gas supply assurance to power plant at Dadri in Uttar Pradesh, however, as always, he did not leave any stone unturned to criticize the Government and the RIL.

Mr. Ambani accused the RIL for gold plating its capital expenditure in the development of KG D-6 field. He further blamed the RIL for keeping the production of gas from KG D-6 field low and hoarding the national asset and creating an artificn the country. Moreover, Mr. Ambani also criticized the Government approved gas price of $4.2 per mmbtu and stated that RIL is lacking demand for its gas due owing to exorbitant price of gas. He was also prompt to hold the RIL responsible for preventing his company to implement its Dadri power plant.

In the midst of this blame-game started by Ambani junior, it becomes pertinent to do a reality-check and find the legitimacy of his accusations. While accusing the RIL for gold plating its capital cost, it appears that Mr. Anil Ambani forgot to mention that with the rise in the capital cost, recoverable reserves and peak production estimates from D-6 doubled to 11.3 trillion cubic feet (tcf) from the initial level of 5.32 tcf and 80 million standard cubic metre (mmscmd) from 40 mmscmd respectively.

Ambani Junior has also overlooked the fact that cost estimates for Cairn’s Barmer field in Rajasthan increased 2.5 times in three years. It is essential to mention here that compared to RIL, which is operating in India’s first deepwater block in harshest weather conditions, Cairn’s is operating in an onshore field, which does not require charter of costly deepwater rigs. Moreover, operations in an onshore field like Cairn’s Barmer field could be continued throughout the year at stretch compared to deepwater fields like RIL operated KG D-6, where possibility of continued operations are reduced to only couple of months in a year. This result into RIL being forced to keep the costly rigs idle leading to heavy monetary losses.

Despite all the adverse conditions and manifold escalation in the prices of commodity, rigs, equipments and EPC charges globally , RIL has managed to contain the per barrel oil equivalent (boe) cost of gas from KG D-6 at less than $5, which is half of the world average of $10-12 per boe, thus setting high benchmarks in global exploration business.

Mr. Ambani also failed to remember that the capex estimates were approved by the Directorate General of Hydrocarbon (DGH), the upstream regulator in the country. The DGH had also appointed Dr. P Gopalaswami, an eminent consultant and reservoir engineer and Mustand Engineering, a US-based engineering consultancy of international repute. Both the independent consultants validated RIL’s cost estimates.

As far as Mr. Anil Ambani’s allegation on RIL for keeping the gas production from KG D-6 low is concerned, he has apparently failed to consider that, RIL, at many occasions, has reiterated that it is ready to produce 40 mmscmd of gas from June end onwards and would be in position to commence the production of 80 mmscmd of gas by the end of this year. However, the Government has only allocated close to 37 mmscmd of gas from KG D-6 field so far. Besides, various Government nominated consumers were unable to off-take their allocated capacities of gas from the field. As the RIL is abided by the Government’s Gas Utilization Policy, it is forced to restrict its production in line with allocation and off-take capacity of consumers.

It was also alleged that RIL tried to create demand for its gas by keeping the production low from its field. It is a common knowledge that Working Group Report on Petroleum & Natural Gas Sector for XIth Plan has projected gas demand of 225.5 mmscmds for the year 2009-10, which is likely to increase to 262 mmscmd and 279 mmscmd by 2010-11 and 2011-12. Similarly, India Hydrocarbon Vision (IHV)– 2025, prepared in year 2000, much before RIL made its discovery in KG Basin, had projected the gas demand at 277 mmscmd in 2009-10, which has been estimated to jump to 329 mmscmd by 2014-15. These estimates, prepared by prominent personalities of the country, suggest that India is currently witnessing huge gas demand and supply has been unable to meet the pace of it. Mr. Ambani, while alleging the RIL (obviously due to his personal animosity), forgot that he, in a way, was questioning the relevance and accuracy of all these projections. Besides, he was also questioning the intellectual ability of all the members of Working Group and IHV-2025. If not so, then whether he was trying to say that the members of the working group and IHV-2025 or any committee, were influenced by RIL while estimating the future gas demand of the country.

He further criticized the Government approved price of $4.2 per mmbtu for KG D-6 gas. It appears the very fact that much higher gas prices compared to $4.2 per mbtu already exist in the Indian market slipped out of Mr. Anil Ambani’s mind while making this comment. In fact, almost all the non-APM gas prices in the country are higher than KG D-6 gas price of $4.2 per mmbtu. Gas from Panna-Mukta and Tapti field is priced currently at $5.7 per mmbtu whereas from Ravva Satellite field it is priced at $4.4 per mmbtu, which is slated to be further revised soon. Gas from GSPC and Niko’s Bheema fields are priced currently at $5 per mmbtu. Average price of gas, from all the private and joint venture fields’ in the country, work out to be $4.73 per mmbtu. Comparatively, KG D-6 gas, priced at $4.2 per mmbtu, is much lower than the average gas price in the country and therefore very much justified in the present scenario.

In fact, ONGC and OIL have also requested the Government to revise the gas prices from APM fields to $4.2 per mmbtu from the present level of $2 per mmbtu. As far as Mr. Ambani’s comment on significant drop in international gas prices, the junior Ambani needed to specify that he was pointing towards spot prices of gas which were ranging between $12-22 per mmbtu during last year. Gas prices for long-term supply generally remain constant. RIL will supply gas to its consumers on long-term basis. Gas price for RIL has been fixed by the Government at $4.2 per mmbtu for five years. Therefore, any sudden spurt in the global spot gas price will not yield any benefit to RIL during all these five years. It could be safely concluded on the basis of above mentioned facts that Mr. Ambani’s remark on KG D-6 gas price as ‘exorbitant’ does not stand true. It could be better to say that all these facts just slipped out of his mind during his conversation.

Furthermore, Mr. Ambani’s comment that RIL is preventing it from implementing the Dadri project is also questionable. ADAG has made announcement for putting up about 32,000 MW of power generation capacity during last few years with investment of over 2,00,000 crore but the fact remains that Anil Ambani led company has failed to add even a single MW of power generation capacity during last four years. Besides, Mr. Anil Ambani has been unable to execute any large scale project in so far his corporate career. This raises a genuine question mark on his ability to implement Dadri project too. As reported in the media, ADAG has even failed to acquire the required land for Dadri plant and hasn’t moved any step forward towards the implementation of the project. This raises doubts over the intentions of Mr. Ambani about putting up the Dadri power plant. Hence, his pointing finger towards RIL is like holding others responsible for his own inability. A famous quote better suit to Mr. Ambani’s this allegation “the pot calling the kettle black”.