Dr. Bhamy Shenoy's interview with The Hindu on Ambani brothers' dispute.

Understanding the ongoing gas-pricing dispute

D. Murali

Chennai: In the ongoing gas-pricing dispute, is the Government partial to either of the Ambani brothers, as claimed? No, it is not, avers Bhamy Shenoy, a senior advisor to the Center for Energy Economics at University of Texas, Austin.

“It is the bounden duty of the Government to safeguard the interests of the taxpayers. Billions of dollars are involved in this deal and the Government cannot be a mute spectator,” he adds, during a quick email interaction with Business Line.

Shenoy argues that the Indian Government should legally resolve the violation of basic terms of production sharing contract (PSC) – that is, not trying to get the arm’s length market price – and try to make null and void the original contract itself to safeguard the national interest. “Even otherwise, the Government is likely to have the legal rights to refuse a lower gas price allegedly negotiated between the brothers based on the PSC. If the brothers were on good terms, no one would have found out about this deal.”

Excerpts from the Q & A. Link of the original article

What is the dispute between the bhais about?

When the partition took place between the Ambani brothers, Mukesh and Anil, the settlement involved Krishna Godavari basin (KG) D6 block gas reserves. Discovery took place in 2002; reserve estimate is as much as 30 trillion cubic feet (TCF) of gas and 14 TCF has already been proven. Oil reserve proven is 140 million barrels. Peak gas production is 80 million cubic meters per day.

The alleged settlement was for Mueksh Ambani’s RIL (Reliance Industries Ltd) to supply 20 million cubic metres per day for 17 years as per the High Court, at $2.34 per million Btu (British thermal unit) to Anil Ambani’s RNRL (Reliance Natural Resources Ltd). The High Court might have found that RIL needs to supply gas as per the private settlement between the brothers.

Since PSC is an overriding contract, which controls the sharing of gas reserves between the investor (RIL) and the Government, RIL is bound by the terms of the contract terms. Once RIL gets its share it can decide how to share with RNRL. But the total pie of gas revenues and how it is shared between the Government and RIL have to be as per PSC.

Isn’t it normal that the gas can be sold to any one?

PSC usually does give the right to sell gas to any one. But it is not clear if this particular PSC has that clause or not. But PSC definitely will have the clause of selling gas at arm’s length and be market-based.

A price agreed by brothers cannot be considered to be arm’s length. Even if RIL agrees to sell gas at a lower price, the Government is not bound by such a clause since the Government owns all gas reserves, and PSC gives the right to take some portion of those revenues.

For starters, can you explain what a PSC is?

It is the PSC or ‘production sharing contract,’ which provides the legal framework for exploration, development and production of gas reserves. PSC was used for the first time by Indonesia. It is a legal framework used by several countries today for oil and gas exploration.

If properly administered, PSCs are most suited for profit-sharing when crude oil price can swing widely. When prices go high, as it happened in 2008, it can force the government to take recourse to windfall profit taxes. PSCs will anticipate such problems.

While PSC thus gives a stable tax regime for investors, the government gets a bigger share of the profits when the investment generates ‘windfall’ profits if the PSC terms are structured properly. However, it needs considerable expertise on the part of the government to implement a PSC.

PSC also gives considerable scope for ‘rent seeking’ officers and ministers since it is not easy for outsiders to detect possible sweetheart deals. It is for these reasons that some countries adopt the simple ‘concession’ type of contracts.

A well-negotiated PSC provides protection against the oil companies from gold-plating the investment. It can also prevent excessive operating costs. PSC provides for a coordination committee consisting of the representatives from the government and investors to approve all the major decisions.

PSC can provide checks, as follows, against selling oil and gas below the ‘market prices’:

* The title of hydrocarbons stays with the government.

* The state maintains the management control, and the contractor is responsible for the execution of petroleum operations.

* The contractor is required to submit annual work programmes and budgets for the scrutiny and approval of a state institution, usually the national company.

* The contract is based on product-sharing, not profit-sharing.

* The contractor provides all the financing and technology required for the operations and bears the risks.

* During the contract term, after allowance for up to a specified percentage of annual production for the recovery of costs, the remaining production is split between the contractor and the state.

* The equipment purchased and imported by the contractor becomes the property of the state. Service company equipment and leased equipment are exempt.

Is gas pricing critical to the current dispute?

Once the investment of the investors are recovered and also when their return exceeds some benchmarks, the Government gets a bigger share of the so-called ‘profit oil and gas.’ The most important factor to be monitored for ensuring the proper share of the profits generated in any PSC is the price for oil and gas.

Since there are no well-defined benchmarks for assessing the market prices for oil and gas, there is a lot of judgment involved to assess the correct prices, requiring considerable experience in international oil and gas trade. This is precisely where the Ambani brothers’ dispute can result in huge losses to the nation if the Government does not act diligently.

On the market price or the right price for gas.

Depending upon what the crude oil prices would be in the next 20 years and also the relationship between crude oil and gas (it could get a premium or be discounted as much as 30 per cent with respect to crude oil equivalent price), total profits generated over a period of 20 years could be between $156 and $48 billion.

Usually, the Government’s share of these profits is about 70 per cent and thus it can vary between $109 and $34 billion from the KG reserves. For example, if average crude oil price were to be about $100/b (per barrel), then crude oil equivalent gas price would be $16.7 per mmbtu (million BTU). On the other hand, if oil prices were to be $50/b, and gas prices are discounted as much as 30 per cent in relation to oil prices, then the gas prices could be $5.83. When the gas prices can vary over such a wide range (perhaps even more) it is not prudent to sign a fixed price contract.

What is now at stake, therefore?

If the Government were ‘forced’ to accept a lower price that RNRL is demanding, then profits would be just $13 billion. Thus what is at stake are billions of dollars depending upon how PSC terms are implemented. I am presuming that the PSC is negotiated for the Government by experts in accordance with the international best practices without hiding any sweetheart deals. This is a big assumption. Since PSCs have commercially-sensitive terms, the public do not have access to them even under the RTI (Right to Information) Act.

Your views on the gas market in the country.

The total control of the gas market today in India by the Government is a problem. Despite the recommendations of many high-powered committees, the Government has not liberalised the gas market.

Gas prices are fixed on an arbitrary basis by the bureaucrats in the petroleum ministry without allowing the market to decide. Even when India was paying international price to import LNG (liquefied natural gas) at as high as $12/ million British thermal unit (mmbtu) in 2008, the Government-owned gas production was sold at a throwaway price of less than $2.00/mmbtu.

Two important lessons that have been learnt by oil companies are: Never sell gas at fixed prices on a long-term basis, and gas prices move in sympathy with oil prices.

Anyone who gets access to cheaper gas can monetise it by making use of it in industries where the final market prices are not controlled by the Government. There is ample scope for such diversion. It is very unfortunate that the Government has not liberalised the gas market knowing fully well that some are making money by diverting cheaper gas to industry where they get higher netbacks.


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Bio: Dr Bhamy Shenoy, an alumnus of IIT Madras, has over 30 years of experience in the international oil sector, first for Conoco and then as a USAID consultant in the former Soviet Union countries. In India, he has been associated with the consumer movement, and education reform. He has field experience of implementing PSCs (production sharing contracts). And, as a board member of National Oil Company of Georgia, he played a key role in reducing oil sector corruption.

Dr Shenoy is the convener of Mysore Grahakara Parishat

Lalit Mahal Road Tree Felling: DEVELOPMNET vs. ENVIRONMENT?

It is unfortunate that there has been an unnecessary controversy on the felling of 134 trees to widen Lalit Mahal road between ATI and Arch Gate. Instead of striving for a win win situation, this has turned into a fierce zero sum game between environmentalists and development oriented enthusiasts. Sustainable development is impossible without taking care of environment.

Mysoreans are divided into groups based on place of residence-those living close to Lalit Mahal Road and those away from it. When the world is becoming a global village, can we afford such a division?  When Amazon forests are destroyed in Brazil to produce ethanol, the rest of the world is worried. The same is true when forests in South East Asia are destroyed to manufacture bio-diesel. Why are some of our political leaders questioning the rights and doubting the concern of environmentalists who live out side the area? The majestic trees lining Lalit Mahal Road belong to every one and not just to the people living in and around that road.

(Lalit Mahal Road: Since the footpath is cluttered, pedestrians are forced to use roads which can cause traffic accident. Based on MGP’s recent observation of vehicular movement (812 vehicles during 30 minutes between 5 to 5.30 PM on June 17, 2009 were observed by MGP’s member Syed Tanviruddin), vehicle density on Lalit Mahal Road is similar to the one on T Narasipur Road seven years back. Based on this one day random perhaps not representative shows that we need a detailed study to conclude that Lalit Mahal Road has high traffic as claimed by some. ) 

If only Mysoreans are fully informed of the real value of a tree, our reaction to felling of trees on the sly will be different. Value of a tree is not just what it fetches as timber or fire wood. Comparing value of a human life to value of a tree is not relevant. Such an emotive argument is just for debating purpose. After careful study, American Forestry Association in 1992, has estimated the value of a tree to be around Rs 50 lakhs (based in today’s rupees) taking into consideration air conditioning provided, prevention of soil erosion, wild life shelter, and reducing air pollution like absorbing green house gas carbon dioxide and generating oxygen. Indian scientists have also estimated similar figures. When we take into consideration the age, size, some being close to die etc, total value of these 134 trees to be felled may be around Rs 50 crores on a conservative basis. On this basis, Mysore City Corporation wants to destroy around Rs 50 crores of assets to widen a road to facilitate the “smooth” flow of traffic and to reduce accidents.

Can we justify widening Lalit Mahal Road the cost of which is not just the usual direct cost of acquiring land, preparing the road, asphalting etc but also involves the loss of trees? No such analysis has ever been done. But for anecdotal inferences and conclusions of increasing traffic, frequent traffic accidents, inconvenience to pedestrians, etc there is no economic analysis done to justify spending more than Rs 75 crores for widening Lalit Mahal Road. Is this a rational approach?

Just seven years back when Dalal Consultants conducted a traffic analysis of Mysore city, they considered ten busiest roads (Mysore-Bangalore, Hunsur, Ooty, KR Hospital to Bannimantap, Ramavilas, Chamaraja Double, T. Narasipura, Viswamanava Double, JLB and Sayyaji Rao) of the city. But Lalit Mahal Road was not one of them. In this short period can it become an important road in the city requiring the investment of such a huge amount?

According to that study, after Ooty Road and Mysore-Bangalore Road, it is T Narasipur Road which had the least amount of traffic. By implications, Lalit Mahal Road which runs parallel to it  must have less traffic. Based on Dalal report, total accidents in Mysore in 2001 were 607 (103 fatal). There does not appear to have any correlation between density of traffic and road accidents. In recent years fatal accident rate in Mysore has sky rocketed reaching a maximum of 215 in 2005 and then declining to 178 in 2008. While Lalit Mahal Road has recorded fatal accident of 10 in 2008, it was 11 on T Narasipur with higher traffic density. Other roads like JLB, Mahadevpur, and Bangalore-NilagiriRoads had higher accident rates in 2008. It is a mystery why MCC has given such a high priority to widen Lalit Mahal Road when other roads with higher traffic density and accidents are crying out for help?

The traffic accident research has also shown that just widening the road does not lead to lower accidents. The main cause for accident is not the width of the road nor the road conditions. The main reason given by the police for traffic accidents is the over speeding and reckless driving. Research has also shown that strict enforcement of traffic laws will reduce accidents. How many of us are agitating for that?

If we want to promote tourism in Mysore, it is not just four or six lane wide roads which attract tourists. It is the heritage boulevards like Lalit Mahal Road with trees add to the charm of a city. In Mysore we do not have many tree lined boulevards. Should we not preserve the ones we have even if it results in some minor inconvenience to some of the car owners living in and around Lait Mahal Road?

When the remaining part of the Outer Ring Road is completed and also Teresian College is widened (where there are relatively very few trees), traffic density on Lalit Mahal road which is really not all that critical will  be bound to go down. Movement of sand trucks can be limited to night time as has been done on other roads. It is true that as some of the layouts get developed, number of vehicles will go up. Even then it will not reach a critical level to need the widening of the road. If drivers follow the traffic rules and discipline, the present road should be more than enough to meet the possible traffic density increase for the next 15 to 25 years.

Our energy planners are assuming that even in India, vehicle ownership (especially after Tata’s Nano) will continue to increase rapidly and congest the roads. In Mysore also we will soon face this problem soon. However this will be more critical in other parts of Mysore than on Lalit Mahal Road( that may be one of the reasons for Dalal Consultants not to have studied this road). On the other hand, there is another scenario which may take us in the opposite direction.

There are looming problems of peak oil (some experts claim that world oil production has  reached the peak already or will reach soon) and global warming. Because of these twin problems, there will be a brake on vehicle growth in the long run. From this point we need not worry about the potential problem of continuing traffic increase in the future on this road. Still as some have suggested as an insurance policy, MCC should ask land owners to leave more clearance on the right side of the boulevard (opposite to ATI) in K C. Layout to widen the road in the future so that we need not cut the trees. Existing trees can act as dividers.

Some ask the question why there has been no opposition to felling of trees when Makkaji Chowka is being constructed or a five star hotel is constructed near the race course. In fact it was MGP which had prevented the felling of trees by taking a recourse to chipko movement when they wanted to felling of trees in mid 90s. MGP has also objected to the construction of makkaji since it will give rise to traffic congestion. Since both these are considered as important for “development”, and there are no obvious alternatives, and also since we had protested against them once,  there was just no pent up energy to take these causes. Perhaps MGP may be wrong that it did not protest enough. But one possible wrong need not lead to another blunder by keeping quiet now.

Which are the invisible forces supporting the felling of trees and widening the road? It is not the protest from 17 corporators or some residents of Kurubarhalli. Alternates suggested and insurance policy of acquiring land will result in a win win situation for all. Now that all the obstacles on completing the Outer Ring Road is removed, officials should move on war path to complete it and also widening of Teresian College Road. Let us leave Lalit Mahal Road as it is with no felling of trees to maintain old charm and preserve Mysore’s one of the important priceless heritage boulevards.

Bhamy V Shenoy, Convener, Mysore Grahakara Parishat

Road Widening - Is The Solution Worse Than The Problem?

Work is going on full steam to widen Vinaya Marga in Siddharthanagar. It is is the second time in the last few years tha the road has been widened. After the present widening, the footpath will be reduced to almost nothing.

Mindless widening of roads to ease vehicle congestion is counterproductive. It will reduce footpaths and hence force people to walk on streets. Pedestrians and automobiles competing for the same road space would worsen traffic congestion and defeat the very purpose of widening roads. This has already happened in places where roads have been widened at the expense of footpaths, such as Temple Road in V.V. Puram and Sayyaji Rao Road in Bamboo Bazaar. It is sad that MCC has not learnt from those experiences.

On Temple Road in V.V. Mohalla, the widened portion of the road is completely taken up by parked vehicles. Since there is no walkable footpath, pedestrians have to now walk between parked vehicles and moving traffic. Since traffic is moving quite fast, the smallest mistake by either the moving traffic or pedestrians can lead to a major accident. Besides, pedestrians are also facing danger from parked vehicles moving in reverse. This is especially dangerous for the aged and the children.

"Solutions" are being provided without any forethought for the civic problems that afflict our city. As a result, in many cases, the solution is worse than the problem.

 

Syed Tanveeruddin, member, Mysore Grahakara Parishat

Why Are Underbridges So Narrow?

There are many underbridges in Mysore which allow roads to cross under railway lines or other roads. A common feature of these underbridges is that they shrink the road, affecting the smooth flow of traffic. When they do not even permit the full width of the road, where will they find space for footpaths? As a result, pedestrians find it extremely dangerous to walk on these underbridges. It is almost impossible for the elderly and the infirm to use these underbridges.

The problem exists in the various level crossings in the city. There also there is no provision for pedestrians.

Do the engineers who design and build these underbridges and level crossings not aware of the danger posed by them? They do not seem to be learning from past experience, since even newer underbridges (such as Jawa) continue the same defective design.

Underbridges are expensive to construct. Therefore, they must be constructed only after making an estimate (as accurately as possible) on the quantum of traffice expected in 20-30 years and making allowance for this projected traffic density. Provision must also be made for pedestrians. Otherwise, these underbridges will become major accident spots.

Vasanth Kumar Mysoremath and D.V. Dayanand Sagar, members, Mysore Grahakara Parishat

MGP Writes To KERC Against Proposed Rate Hikes

According to the Karnataka Electricity Reform (KER) Act, Electricity Supply Companies (ESCOMs) have to file applications before the Karnataka Electricity Regulatory Commission (KERC) and get its approval for any increase in tariffs. It has been reported that ESCOMs are about to approach KERC once again for an upward revision of tariff. MGP has written to KERC against such an application (copy of the letter is here).

In its letter, MGP has pointed out that tariff increase applications filed by ESCOMs in the past before KERC routinely violated the letter and spirit of the Electricity Act 2003, KER Act 1999, KERC (Tariff) Regulations 2000, and National Electricity Policy. The following are just a few violations of the KERC (Tariff) Regulations 2000: absence of scientific determination of the cost of service (embedded cost) to each category of consumers (Sec.4(5)(iv)), non-submission of audited Balance Sheets (only extracts have been submitted) (Annexe-II), absence of statement of proposed cross-subsidies, amount of such subsidy to the affected consumer category and the source of offset of this subsidy (Sec.4(5)(vi)), absence of a written explanation of the rationale of the proposed tariff (Sec.4(5)(viii)). KERC has repeatedly issued directions to correct these defects but the ESCOMs have ignored these directions and continued to file defective applications. They have been able to get approvals for tariff hikes so far only due to the generosity of KERC.

Such generosity has emboldened these companies to flout the directives of KERC and provisions of the Indian Electricity Act routinely, and the interest of the honest paying consumers has been completely ignored. It has also resulted in these companies frequently challenging the tariff ruling of KERC in the Appellate Tribunal for Electricity (ATE). It is very difficult for the consumers to argue against these challenges because the proceedings of ATE are always held in Delhi. To rub salt in the wounds of the consumer, the legal expenses of these companies in challenging KERC's orders before the ATE are passed on to the hapless consumers through the tariff. It is also well-nigh impossible for the consumers to appeal before the ATE because of the prohibitively high (Rs.1,00,000) filing fee. As a result of all these factors, the regulatory arena has become asymmetric with the ESCOMs having all the advantages and the consumers none.

In light of such irresponsible attitude of the ESCOMs and the abuse of KERC's generosity by them, MGP has urged KERC to summarily reject non-compliant rate-hike applications without even admitting them. It has also urged KERC that if these companies fail to file fully compliant applications within the specified time limit, orders should be passed providing an alternative tariff or amended tariff which will fully reflect the letter and spirit of the KER Act.

 

Shankar Sharma, Mysore Grahakara Parishat

CONSUMER CLUB INAUGURATED AT K.PUTTASWAMY P.U. COLLEGE

The Consumer Club of K. Puttaswamy P.U.College in Vijayanagar was inaugurated on 7-7-09. Dr. Bhamy V. Shenoy of Mysore Grahakara Parishat spoke on consumer rights and responsibilities and conducted an interactive session with the students. Mr. Shreeshaila Ramannavar, member of the Governing Council of Vidyavardhaka Sangha presided. Mr. P.Vishwanath, Secretary of Vidyavardhaka Sangha, Prof. S.K. Ananda Thirtha, Principal of the college, Smt. K.G. Smitha, convenor of the Science Forum of the college and Mr. D.V. Dayananda Sagar of MGP were present.

 

Dr.Bhamy V. Shenoy inaugurating the Consumer Club at K.Puttaswamy P.U.College. From left: Ms. K.G.Smitha, convener of Science Forum, Prof. S.K. Ananda Thirtha, Principal, Mr. P.Vishwanath, Secretary, Vidyavardhaka Sangha, Dr. Bhamy V. Shenoy of MGP, Mr. Shreeshaila Ramannavar, member, Governing Council, Vidyavardhaka Sangha, Mr. D.V. Dayananda Sagar of MGP.

Prof. S.K.Ananda Thirtha, Working President, Mysore Grahakara Parishat

Auction Site Buyers Are Not Consumers!

In a recent shocking decision (II(2009) CPJ 1 (SC)), the Supreme Court has held that buyers of auction sites from Urban Development Authorities are not consumers.

In its order, the Supreme Court said that only allottees of sites are consumers but not buyers of sites (whether by auction or not) from the UDAs. It also said that when people buy sites from UDAs, if amenities such as roads, water connections and sewage lines are not specifically promised, the UDAs are under no obligation to provide them.

This decision which will negatively affect thousands of auction site buyers throughout the country seems flawed. It is not clear why selling of sites by allotment is considered a service which is covered by the Consumer Protection Act while selling of sites by auction is not considered a service covered by CPA. Now, as a result of the latest Supreme Court order, people who pay a much higher market value for auction sites have no rights while people who pay a lower subsidized price for allotted sites are given the right to approach consumer courts for deficiency of service.

There is a problem with the second part of the judgment also. Previous decisions of the Supreme Court have held that the provisions of the CPA have to be interpreted in favour of the consumer since CPA is a benefit-oriented legislation. The present judgment goes against the spirit of these earlier judgments. Provision of civic amenities is a monopoly of the UDAs. When people buy sites from the UDAs, they assume reasonably that the sites are provided with basic amenities and if the UDAs do not provide these amenities, they should not be allowed to hide behind the excuse that they never promised them explicitly. The Court must have made the UDAs more accountable by ruling that unless the UDAs specify explicitly that they are not providing amenities such as roads, water connections and sewage lines, they are bound to provide them for all sites whether allotted or sold by auction.

Most countries in the world have accepted that "Buyer Beware" has now been replaced by "Consumer Is The King". The latest Supreme Court order tries to undo this.

Prof. S.K. Ananda Thirtha, Working President, Mysore Grahakara Parishat