RNRL letter to Petro Ministry

Dear Sir,

Subject: Petroleum Ministry's Press Note dated 21.08.2009 silent on several key questions of public and national interest

1. We are happy to note that the Petroleum Ministry has issued a Press Note dated 21.8.09 in response to recent developments, providing answers to a series of questions in public and national interest regarding the supply of gas from KG-D6 fields.

2. We welcome the Ministry's stand that it is committed to protecting the interests of the government-owned navratna NTPC. We trust the Ministry will now take all appropriate steps to ensure that NTPC gets its rightful share of 12 mmscmd of gas from Reliance Industries (RIL) at a price of USD 2.34 /mmbtu for a period of 17 years for its Kawas and Gandhar expansion projects.

3. On the issue of KG-D6 capex, we were surprised to learn from media reports that RIL had, in a letter to the Ministry on 20.08.2009 - just a day before the Ministry issued its own public statement - justified the massive escalation in the Development Cost of KG D6 block. We were also surprised that the Petroleum Ministry, within the short time of less than a day that was available for any verification, defended RIL's apparently inflated capital expenditure, without seeking to allay legitimate public apprehensions on the subject. We have already written a separate letter dated 25.08.2009 to you, seeking an expeditious completion of the CAG audit, and an independent credible revalidation of such capex, in the light of several issues of conflict of interest, etc. surrounding the previous evaluation, and request you to kindly take appropriate action in that regard.

4. We would like to also bring to your kind attention certain other critical issues of public and national interest for your necessary action.

Pricing of Domestic Gas

a. The international price of gas, i.e. the Henry Hub price quoted at Nymex, has crashed by nearly 80% from USD 13.58/mmbtu in July 2008 to USD 2.73/mmbtu on 24th August 2009. As against this dramatic collapse in prices globally, the price consumers are paying for RIL's KG Basin gas during the same period has moved in the opposite direction, and actually gone up by over 20% in rupee terms.

b. This is primarily because the said price of gas, a domestic natural resource for sale in the domestic market in India, has quite strangely been denominated in a foreign currency i.e. US Dollars. This has led to an entirely unjustified annual increase, at peak production, of over Rs 3,700 crore for gas consumers. Over the expected life-time of the KG Basin fields, this increase will amount to a staggering burden of nearly Rs 50,000 crore, even assuming that the exchange rate remains constant at the current levels.

c. Most of this unwarranted increase in gas prices will be borne by power and fertilizer consumers and will lead to a substantial increase in Government subsidies. This aberration once again demonstrates the need for the entire gas pricing policy in India to be reviewed, not just on account of the denomination in a foreign currency, but also because of its lack of elasticity in response to sharp movements in global prices.

Availability of Domestic Gas

d. As per media reports, the DGH has stated that RIL is capable of producing up to 52 mmscmd of gas but is, at present, producing a much smaller quantity in keeping with the lower demand for gas. The same view has been reiterated several times over by senior RIL officials in numerous media reports since June 2006.

e. The DGH had further stated that production from RIL's KG-D6 basin could be ramped to 80 MMSCMD by the end of August 2009, if not earlier.

f. In such a scenario, it is surprising that the Petroleum Ministry continues to take the stand that there is a scarcity of gas in the country, as most recently enunciated in its affidavit to the Supreme Court.

g. This perception of scarcity - a totally artificially created phenomenon - is being exploited by RIL to extract a higher price of gas and make super normal profits. Most independent experts firmly believe that there is little or no demand for gas in the country at the high price of USD 4.2 per mmbtu, which is presently being insisted upon. Indeed, there is unanimity among experts that the price for gas will fall much lower if the contractor is forced to ramp up production, rather than hoarding gas to its sole advantage, as it is doing presently. Only the price thus discovered would truly qualify to be called a freely determined market price of gas.

h. We would, therefore, once again request you to compel RIL to end the artificial scarcity by quickly ramping up production. This will ensure the price of gas corrects to appropriate lower levels in the larger public and national interest.

Petroleum Ministry's Intervention in Court Matters

i. Media reports indicate that RIL is relying on the Petroleum Ministry's affidavits in the RIL-RNRL case in the Bombay High Court and Supreme Court to strengthen its own ongoing case against NTPC, and dishonor its binding gas supply agreement with NTPC. Yet, the Petroleum Ministry, it would appear, is not considering intervening in the court case between RIL and NTPC. Indeed, fears are now being expressed that the Petroleum Ministry's recent statements in Parliament may harm the interests of NTPC in its legal battle against RIL.



j. In contrast to this hands-off approach in the RIL-NTPC case, the Petroleum Ministry has chosen to actively intervene in a similar commercial dispute over gas supply between two corporates, even though the Government's interests in this case are fully protected as per the judgment of the Bombay High Court.

k. We would request you, in the interests of having a uniform approach, to kindly consider becoming a party in the RIL-NTPC litigation, as it involves a Government-owned PSU, and concerns an exorbitant burden of an additional Rs 30,000 crore that power consumers in the country may be called upon to bear, solely for the benefit of a private monopoly gas producer, RIL.

5. We request the Petroleum Ministry to take immediate and appropriate steps on the above important matters, in the wider national and public interest.

Thanks Gautam