March 09, 2014

  People’s Democracy

(Weekly Organ of the Communist Party of
India (Marxist)


No. 10

March 09, 2014


Moily, Kejriwal and the Scam in
Gas Pricing


Prabir Purkayastha


and the near doubling of the gas price led to Kejriwal’s
short-lived government
filing an FIR against Moily, the petroleum minister and
Mukesh Ambani, the chairman
of Reliance Industries Limited. The scam in gas pricing is
of course not a
Kejriwal or AAP discovery; Left MP’s – Tapan Sen and Gurudas
Dasgupta and
earlier, late Dipankar Mukherjee – have exposed the
successive scams in gas
pricing that have helped Reliance to loot the people.


understand the dimension of these scams, let us look at the
current scam. The
price of gas has been raised from $4.2 per million BTU
(MBTU) set earlier to
$8.00 now. Just for the five-year period that the gas price
has been fixed, the
additional subsidy on account of fertilisers and power
generation would be Rs
1,80,000 crores, the consumers would have to pay double the
current price per
cylinder of cooking gas; on the other hand, the additional
profit to Reliance
will be of the order of Rs 100,000 crores. A classic case of
robbing the poor
to pay the rich. Mukesh Ambani is one of the richest men in
the world and
Reliance is sitting on a huge cash reserve right now while
the country is cash


gas price was fixed in 2007 at $4.2 per MBTU by an Empowered
Group of Ministers
(EGOM). This itself was a huge bonanza to Mukesh Ambani
owned Reliance
Industries Limited. Reliance had stated in court (in the
court battle between
the two Ambani brothers over gas supplies) that the cost of
production from KG
Basin was around $ 1 per MBTU. In other words, the
government had fixed the
price of gas at more than four times the cost of production
of Reliance gas!


Reliance had quoted a price of $2.34 to NTPC for a 17-year
period. Even if
Reliance had supplied gas to NTPC at their quoted price,
they stood to make a
considerable profit. Once the price of gas was fixed by the
government at $4.2,
Reliance claimed that they could supply to NTPC only at the
government fixed
price and reneged on their contract. In other words, they
had to make huge
profits as the government forced them to sell their gas at a
higher price!


the revised price of $4.2, under the profit sharing scheme
with government of India for KG
Basin D6 gas-field, a large share of profits would have also
accrued to the
government. To avoid this, Reliance took the simple route of
gold-plating its
capital costs in the KG D6 gas field – it claimed that it
would double its
production by this added investment. In actual practice, the
gas yield dropped
drastically even though the capital costs went up by four
times! The CAG
submitted a scathing report on the actions of both the
petroleum ministry and
Reliance in this huge increase in the cost of developing the
field. The
government has yet to take any meaningful action on the CAG




near doubling of gas price from the already exorbitant $4.2
to the new high of
$8 MBTU in the first year (2014), (subsequently set to go up
by 20% every
successive year), is not justified on any count. The
Rangarajan Committee that
went into gas pricing fixed the gas price – not based on the
cost of production
– but on some arbitrary formulae on market prices from Japan, Europe, the US,
etc. The Reliance argument –
repeated by Moily – that the cost of production is so high
that we need a much
higher selling price was never examined by either the
Rangarajan Committee or
by the petroleum ministry. So when Moily claims that the
cost of production in
off-shore oil/gas fields needs a higher price, he is
speaking off the top of
his head. He has not produced an iota of proof to
substantiate this claim.


for comparison, let us take gas prices in other countries.
The Henry Hub
terminal has a spot price for gas. It was hovering below $ 3
per MBTU for most
of 2013, when all this price fixation was going on. This was
below even the
$4.2 per MBTU price of gas fixed 4 years before. In China,
the gas price has been fixed recently at $4.7, again well
below what Moily has
fixed for India.


should the price given to any gas producer in India
be linked to the market price
of gas elsewhere or be priced in dollars? After all, this
gas is underground in Indian territory and does
not change in any
way with the rise or fall of the rupee. If gas production
needs costly raw
materials, one can understand then its link to the market.
This is also not the
case – the prospecting and developing the gas fields are one
time investments.
So why should Indian gas be priced based on market prices


current price of gas fixed by the government is based on the
Committee’s report. The Rangarajan committee suggested that
Indian gas prices
be pegged to a 12-month average of the price of LNG imports
to India
and the prices prevailing in the US, Europe and Japan.
Why should gas produced
in India

be pegged to
the market price of imported gas or to gas prices in
Japan and Europe who import all their gas? No logic has ever been
given for this. After
all, gas found in India
in India‘s
zone in the seas is Indian peoples’ property. If we give a
license to
a private or a public sector company to develop such gas
fields, yes their
costs including reasonable profits should be compensated.
But why should they
make wind-fall profits merely because the international
price of gas rises in Japan? Or in Europe? In what way is the
price of gas in the
international market linked to the cost of producing gas in


answer to this is purely ideological – it is the belief of
successive governments
that all prices should be determined by the market. This is
not based on
anything other than a near religious belief in the markets.
That is why when
the gas contracts were signed, the price of gas was supposed
to be determined
by a market mechanism, which would then constitute the basis
of gas pricing.
Since no such mechanism exists – gas is bought and sold in a
restricted market
where the administered prices 
are in use
– therefore the decision to link it with prices in Japan,
LNG landed price in India,
European prices, etc.


other argument of Moily that unless we give import parity to
Indian gas
producers, there will be no investment in Indian gas fields,
is again
empirically wrong. We have given import parity to oil
producers for the last 10
years; it has produced no rush of foreign investments either
in prospecting or
developing Indian oil fields.


third argument that Moily has produced is even more absurd
than his other two
arguments. He claims that unless we double the internal
price of gas, we will
have to pay a higher price for imported gas than for
indigenous gas. Somehow,
he believes that paying a higher price to Ambani also would
make the Indian
people feel better. We import gas because we have a
shortfall of gas. Why would
hiking the price of indigenous gas to imported levels help
either the Indian
consumer or the Indian government? A number of gas fired
power plants are lying
idle or unable to produce at full load precisely because of
high price of
imported gas. If all indigenous gas is also priced at this
level, it is bidding
goodbye to 28,000 MW of gas-based power plants. Or adding to
power subsidies.




may be misjudging Moily. May be his argument is that
Reliance would produce
more from its gas fields if the price is raised and not
otherwise. Many people
have charged Reliance with deliberately withholding
production in order to
blackmail the government. Is that what Moily is saying –
that since Reliance is
blackmailing us and cutting back on production, we are
forced to import
additional gas and pay in dollars. Why not then give the
increase to Reliance
in rupees instead of giving it in dollars to these pesky
foreign suppliers? In
other words being blackmailed by Reliance is preferable to
paying foreign
suppliers in foreign exchange.


brings us to the other question, what should the government
do when it is
blackmailed by suppliers withholding supplies? The answer is
a simple one –
take over the blackmailing companies. This is what any
government with any
self-respect should do, instead of caving into blackmail.
This is what the
government should have done also with Tata and Adani, who
withheld supplying
electricity from their Mundra plants. Instead, we have
succumbed to their
blackmail also and promised them an increase in prices from
the contracted
price. Even though such post facto modification of the
contract is illegal.


interesting sideline on gas pricing is the studied silence
of BJP and its prime
ministerial candidate Narendra Modi. The BJP’s economic
policy has always been
that they will provide not an alternative but only a cleaner
version of
Congress policies. This is of course in the belief that
people have short
memories and will not remember the BJP Raj where VSNL, IPCL
and Centaur had
been sold at throw-away prices, and the major telecom scams
were seeded. Nor
will people look at the Karnataka mining scam which has cost
the country about
Rs 100,000 crores. Or Modi’s record in Gujarat – where the
Modi government gave
away 10% shares in a KG basin
block holding trillions of dollars of gas to a six-day old
company formed with
$64 equity capital incorporated in Barbados.
Subsequently, this
contract had to be cancelled under public pressure. Not
Yeddyurappa is now back in the BJP fold.


The key issue is how
to price our natural resources.
This is what we need to discuss. It is here that both the
major parties – BJP
and the Congress have a unity of views. Both believe that
markets should rule.
What we have seen from the AAP – its decision to file an FIR
against Moily
aside – is not any different. Kejriwal has also talked about
the sanctity of
the markets. If we take market pricing as our logic, scams
are inevitable as in
a whole range of commodities, there are no markets. This is
true for power,
this is true for gas and it is true for telecom as well. It
is market
fundamentalism that is the problem. And here, the Congress,
the BJP and the AAP
do not appear any different.