Earlier this week, the Aam Aadmi Party (AAP) and its leader Arvind Kejriwal released a letter suggesting that the "Modi government" wrote to Central government to increase gas prices to $14.2 per mmbtu. Kejriwal has been asserting for a while that while Congress wants gas prices to rise to $8, the BJP would drag it up to $16 if it comes to power, adding that AAP wants it to remain at $4.
Let us see why Arvind Kejriwal's conclusions jump many deductive dots at once in what really is an attempt to merely create sensation.
Firstly, this letter that AAP has "exposed" has been written by the Managing Director of GSPC. GSPC is not the same as "Modi government". True, GSPC is a public sector unit in which the government of Gujarat (GoG) is the dominant shareholder. GSPC has a board of directors consisting mostly of IAS officers (one retired IAS officer) and other independent directors.
It has, however, been given full autonomy by GoG on business and commercial matters. Of course, GoG, as the dominant shareholder, does assist GSPC in the removal of obstacles, if any. But, by and large, GSPC's board functions without day to day interference from ministers in GoG. Neither Saurabh Patel, Energy & Petroleum Minister, nor Narendra Modi are on GSPC's board. Nor do they micromanage GSPC's affairs.
Therefore, when Tapan Ray wrote a letter to the Ministry of Petroleum and Natural Gas, he did not write as an officer in GoG, but as a Managing Director of GSPC. That distinction, not only in position, but also in the objectives of the two has missed the reasoning of Arvind Kejriwal who has hurriedly conflated GSPC with Modi government in order to score political points.
As an illustration, if the ONGC chairman supports the gas price hike, is it the same as saying Sonia Gandhi or Manmohan Singh both want a gas price hike even if the UPA decides to, as a matter of policy, adopt a formula which results in a lower price? The government of India is a 69 percent shareholder in ONGC.
Moreover, it is useful to understand why (rightly or wrongly) ONGC desires a gas price hike. ONGC is going to be the largest beneficiary from a gas price hike since it will be the largest producer of gas from KG Basin. (See how the controversy surrounding the gas price hike has affected ONGC here and here.)
Therefore, while the boards of ONGC and GSPC will take a decision which furthers the best interests of their companies, the government of India, the Gujarat government, BJP or Congress, on the other hand, may take a different view on it since it has to take into consideration public interest at large.
In other words, GSPC and GoG have intelligibly distinct goals. The former has the luxury, if you will, of caring only about its own wealth maximisation. The latter has to take a decision with a much larger focus.
That is why, as this author has pointed out, both BJP and Gujarat Government have opposed UPA's decision to hike gas prices. The Yashwant Sinha-led committee on finance has sought a rethink on the Rangarajan formula. Arun Jaitley has made it clear that BJP will reconsider the gas pricing formula if voted to power in the upcoming Lok Sabha elections.
Is there, therefore, a difference in the views of BJP/GoG and GSPC? Yes. Are the two entities separable? Yes. Are their goals intelligibly distinct? Yes. Unless of course, Kejriwal holds the hackneyed view that existed in India for decades - that public sector units can keep bleeding losses and not bother about financial health.
Another aspect that must be borne in mind is the reason GSPC wrote this letter to the central Government. Unfortunately for Kejriwal, the reason was not to enrich Mukesh Ambani.
GSPC had participated in the NELP (new exploration and licensing policy) rounds and won rights of exploration and production in the KG Basin. Pursuant to that, GSPC entered into a Production Sharing Contract (PSC) with the government of India. Articles 21.6 and 21.7 of the PSC pertain to valuation of gas.
Clause 21.6.1 states the general rule that the contractor (ie, GSPC) shall endeavour to sell gas at "arms-length prices to the benefit of parties to the contract". Indeed, there are exceptions to it. If GSPC sells gas to the government or any government nominee, gas is valued on "the terms and conditions actually obtained", ie, practically what the recipient wants. If GSPC wants to sell excess gas (which cannot be commercially exploited, or if there is no market), the government takes it for free.
The "arms-length price" determination comes into question only if GSPC sells gas in the open market to entities other than government or government nominees. Article 21.6.2(c) states that such gas shall be valued "on the basis of competitive arms length sales in the region for similar sales under similar conditions." This is the segment wherein what pricing formula government adopts is critical for those involved in exploration and production.
Article 21.7 in GSPC's PSC with the government of India, in fact, permits GSPC to send the government a proposal for a gas pricing formula. Therefore, it isn't as if GSPC woke up one fine day and wrote to the centre to hike the price; that too, for enriching Mukesh Ambani!
What did GSPC do to arrive at its own determination of an arm's length gas pricing formula? As the letter itself describes at length (with supporting annexure), GSPC carried out a price discovery through e-auction. It invited bids in which around 37 bidders participated by submitting around 234 bids. The purpose of this exercise was to obtain inputs to discover a gas price which reflects affordability in the Indian market at large.
Based on the inputs received through this exercise, and based on the costs it shall incur in exploration and production in total, GSPC proposed a gas pricing formula (which, indeed, results in a higher price as of today since it takes into consideration Brent Crude Oil Price in the formula).
Right, wrong, good or bad - GSPC (and not GoG) proposed this pricing formula to the government of India; that too, for the gas it produces and sells from the Deen Dayal West field. GSPC has not written to the government to enrich Reliance's pockets. Umpteen references in GSPC's letter make it clear that GSPC is requesting a pricing formula only for the gas it sells in the open market. Indeed, why would GSPC write a letter for a reason other than its own benefit?
And, who benefits if GSPC's proposed formula is accepted? Its largest shareholder. Who is that? Government of Gujarat. Not Mukesh Ambani.
(A copy of the model PSC can be accessed on the ministry of petroleum and natural gas's website here. GSPC's PSC is more or less similar to the model PSC vis--vis gas valuation clauses.)
To sum up, if a PSU, which is undertaking exploration and production in the DDW field and which has commercial autonomy, proposes a pricing formula based on inputs it received from 37 bidders through an elaborate price-discovery process, is it the same as simplistically alleging that the Modi government wants $16 for gas price?
And does that charge sustain if BJP and the Gujarat government have made their opposition to UPA's gas price hike amply clear and BJP has assured reconsideration of pricing formula if voted to power?
Let readers decide.
Published Date: Mar 28, 2014 18:21 PM | Updated Date: Mar 28, 2014 18:21 PM