Is this really a case of crony capitalism?

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Pulling the strings Reliance Industries Ltd Chairman Mukesh Ambani had made no secret of his campaign to get the government to raise the price of gas. Photo: AP
Pulling the strings Reliance Industries Ltd Chairman Mukesh Ambani had made no secret of his campaign to get the government to raise the price of gas. Photo: AP

A fortnight ago, Paranjoy Guha Thakurta, perhaps the most scrupulous investigative journalist in India, released his latest book (co-authored with Subir Ghosh and Jyotirmoy Chaudhuri) Gas Wars: Crony Capitalism and the Ambanis, at the India Habitat Centre in New Delhi. The hall was packed because, next only to the Narendra Modi saga, the government’s seemingly arbitrary doubling of the price of natural gas from $4.20 to $8.40 per million metric British thermal units (MMBTU) last December had been the hottest subject of discussion among the National Capital’s intelligentsia for months.

The increase was especially ill-timed because industry was in decline, while the urban working and middle classes were being squeezed relentlessly by the pincer movement of inflation and stagnation. Most of the public’s anger was focussed on the two Reliance companies, headed by Mukesh and Anil Ambani. Their close links with leading politicians and senior officials and their enormous influence on the government’s economic policies had been laid bare by the series of scams that had surfaced between 2011 and 2013. Their flamboyant lifestyles were grist to the gossip mills, and their epic battle to control the Reliance empire after the death of their father Dhirubhai Ambani had had television viewers glued to their chairs for years.

Mukesh Ambani had made no secret of his campaign to get the government to raise the price of gas. So, when the Rangarajan Committee announced the increase to $8.40 per MMBTU, and justified it through a reference to the landed price of imported liquefied natural gas (LNG) at Indian terminals, while making little or no mention of its cost of production, the price hike instantly became the embodiment of crony capitalism. So, when Mukesh’s Reliance Industries Ltd (RIL), followed a few days later by Anil’s Reliance ADAG, served libel notices on not only the authors, but everyone remotely involved in the production, distribution and launch of the book, including Flipkart and Amazon India, it did not come wholly as a surprise.

The surprise came as I read the book. For, try as I would, I could not find a single statement in it that could be considered libellous. On the contrary, literally everything in it has come from published sources and interviews given by senior officials and experts who had dealt with the Krishna-Godavari (KG) Basin gas pricing and distribution issues during their working lives. My surprise deepened as I read further, because far from indulging in Ambani-bashing, the authors had spared no effort to present Reliance’s side of the story, even when given no help by the two companies and their owners.

What they have written, therefore, is far more than a story of crony capitalism at work. It is an analysis of the compulsions that lead to the development of crony capitalism in the early stages of industrialisation. These compulsions are not peculiar to India — indeed it is difficult to think of a single country that has passed through the early and middle stages of industrialisation without going through a phase of cronyism. Reliance’s activities, therefore, need to be understood before they are condemned.

Of the half-dozen or more specific charges that have been levelled at RIL, four stand out: That it has used its enormous clout within the Congress party to get two petroleum ministers, Mani Shankar Aiyar and Jaipal Reddy, shifted out of the ministry when they refused to fall in line with the company’s wishes. Aiyar was replaced by the avowedly Ambani-friendly Murli Deora who, along with another ‘friendly’ minister, Pranab Mukherjee, lost no time in increasing the price of gas from $2.35 to $4.20.

The second is that, by some means that no one has yet fully understood, RIL was able to get out of its obligation to return the unexplored part of its concession after five years by claiming that it was drilling, and otherwise exploring, the entire block — a process called ‘discovery’ — when, in fact, all of its exploration and production had been confined to the northwestern quadrant of the concession.

The third is that the government knowingly entered into a production-sharing contract that was defective. Instead of it giving the government a fixed share of oil revenues after the company had recouped its costs, the agreement put its share on a sliding scale such that the more the company spent on the discovery of oil and commencing production, the lower would be the government’s share of the sales revenue after RIL had recovered its costs. This gave the company a powerful motive to ‘gold plate’ its investment, ie, ‘front load’ as much of it as possible and buy the most expensive equipment available, while doing it.

The fourth is that when RIL could not get the gas price rise out of the government under UPA-1, it embarked on a covert form of arm-twisting by deliberately reducing its output of gas until the prices were adjusted to its satisfaction.

How many of these allegations are correct? How much of what RIL did was crony capitalism and how much was a legitimate use of influence to minimise costs and risks? One of the book’s many virtues is that it gives readers sufficient information to draw their own conclusions.

Kicking a storm Author and journalist Paranjoy Guha Thakurta
Kicking a storm Author and journalist Paranjoy Guha Thakurta
Photo: Shailendra Pandey

First, can the increase in the price of gas in 2007 and the second increase last December be defended? The answer is a qualified ‘yes’. One fact was lost sight of in the hullabaloo that followed the gas price increase in 2007: that the original price of $2.35 had also been fixed with a reference to international prices. In September 2003, the National Thermal Power Corporation (NRPC) had floated an open tender for 12 million standard cubic metres (MSMCD) a day of natural gas. Reliance won the bid because it quoted the lowest price and bound itself to it for 17 years. Its two closest rivals were RasGas of Qatar, which quoted $2.53 per MMBTU, and Petronas of Malaysia, which quoted $3.08. In both cases, well-head prices were a dollar less, but the gas had to be liquefied before sending to India and degasified to be piped to its destination. This had added a dollar to their price, and made Reliance the lowest bidder.

This price became the benchmark for the KG Basin gas pricing because no sooner had NRPC accepted the bid, than Anil Ambani, who had signed a contract with the Uttar Pradesh government to set up a 3,000 MW power plant at Dadri, near Delhi, asked for and obtained a similar agreement for 28 MSMCD of it.

But by 2007, when Reliance got its price hike, the world, and China in particular, was in the last stages of a prolonged boom. Oil prices had risen from $37 in 2004 to close to $100, and oil rig and other prices had risen in tandem with it. ONGC had been able to hire two deep-drilling rigs for its KG Basin concession in 2003 at a price of $150,000 a day. In 2007, the same rigs were fetching $470,000 a day. Reliance feared that if the price of gas was not raised, it would not be able to recoup even its investment, let alone make a profit.

When the New Exploration Licensing Policy had specified that companies that found oil were free to set their own price and even export the oil if they could not find buyers within India, why did the UPA wrest control of oil pricing back into its own hands? The answer is that with Anil Ambani trying to corner two-thirds of the gas left after meeting NTPC’s demands, the government had begun to feel a loss of control over a scarce natural resource. Thus, when the dispute between the brothers over raising the gas price to $4.20 reached the Supreme Court, the Central government impleaded itself into the case as a third party.

In May 2010, the Supreme Court upheld RIL’s right to raise the price of gas but also gave the Central government the unfettered right to decide who would get the gas in the future, at what price and in what quantities. With this, RIL lost the most important tool in its hands for warding off future cost inflation — the right to decide the price of gas and sell it to the highest bidder.

RIL’s attempt to ‘gold plate’ its costs has yet to be proved in court, but even if this turns out to be true, the reasons why it did so are not hard to perceive. As former ONGC chairman Subir Raha explained, the KG Basin was the most difficult place in the world from which to extract hydrocarbons. The depth of the sea at Bombay High is 60-70 metres. In the North Sea, the depth of the ocean is only 159 metres. So, it is possible to anchor the legs of a drilling platform on the ocean floor.

But in the KG Basin, where gas is being found at depths of 3,000-9,000 metres, there is no question of anchoring the drilling platform, so drilling rigs have to be kept at exactly the same spot, using GPS and computerised controls that make minute adjustments with the aid of thrusters all the time to keep the 36-inch-wide drilling pipes 9 km long absolutely straight. The penalty for failure could be a gas explosion that consumes the rig and all upon it. There are only 15 such rigs in the world and only two companies that have gone down to such depths. That is why they have to be booked up to two years in advance.

Deprived of the right to decide its price and sell to the highest bidder, with no certainty that the government would heed its pleas to raise the price of gas, embroiled in the most hazardous enterprise in the world, and unable to admit in public that it may have over-reached its capability for fear of setting off a mass sale of its shares, all that Reliance could do was to minimise its costs and try to recoup its investment as rapidly as possible. The production-sharing contract that the government entered into is deeply flawed and should never have been signed. But once it was there, it would have appeared as a way of doing so.

There is abundant evidence in the book, and its appendices, to demonstrate the influence that Reliance has had in the UPA government and will doubtless again have with the next government. But crony capitalism is not an evil in itself. It is one if the motive is solely to defraud the public. This is where the case against RIL becomes weak. Gas Wars exposes the crony capitalism that is rampant in our newly minted semi-market economy. But in the KG Basin, its use, and occasional abuse, has not been motivated by greed but by the instinct for self-preservation. Thakurta and his colleagues need to be congratulated for writing a book that allows us to look behind the phenomenon, and find its roots.

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1 COMMENT

  1. Mr Jha you are perhaps right. The intent to defraud the country may not have been there. But the way KG basin development was envisaged by the govt was poor. RIL did not even have the experience required to operate in more benign environments like Land or shallow water operations when they were awarded the deepwater block. Anyone who has experience with deepwater will tell you how different a ball game that is. BP who have years of experience still got it wrong with Mocando. RIL’s only qualification was a shallow water JV with Enron/BG. Their performance in that project hasn’t been much to write home about either. The decisions that were taken were taken years back are now hurting the country as a whole. RIL thought they could make it on their own. Someone should have had the wisdom to suggest to them to go with a more experience JV partner from day 1. But for that you need vision. Not something you can credit the UPA govt in having with having in abundance. Telecom, mining, civil aviations all good examples of that

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