Letter dated July 13, 2009

Visakhapatnam   
July 13, 2009             

E.A.S.Sarma         
14-40-4/1 Gokhale Road                       
Maharanipeta
Visakhapatnam 530002
Tel. Nos. 0891-6619858/ 9866021646
 
To
 
Dr. Manmohan Singh
Prime Minister

Dear Dr. Manmohan Singh,
 
Subject:- Pricing of Reliance Gas

I have enclosed below my last letter dated 30-6-09 on the subject for your ready reference.

I have come to know that the Reliance Group has already disclosed to the Director General of Hydrocarbons (DGH) the unit cost of production of natural gas from its fields in KG Basin to be around 80 to 90 cents per MMBTU. Such a disclosure is required under the terms of the Production Sharing Contract (PSC) entered into by the company with the government. I have separately requested the Director General of Hydrocarbons (DGH) to provide me accurate information on this under the provisions of the Right to Information Act, 2005. I have also requested the Cabinet Secretariat under the RTI Act to provide me the details of what had transpired at the meeting of the Group of Ministers (GOM) some time ago, when the GOM had recommended the price at $4.2 per MMBTU.

I presume that the Cabinet Secretariat that had processed the proposal of fixing the price of the KG Basin gas was in the know of the unit cost of production of the gas as available with DGH.

If the above information is correct, it raises several important issues regarding the intention underlying the decision of the government to fix the price of the gas at $4.2 per MMBTU.

Was it the intention of the government to permit the Reliance group to earn a return that is far in excess of what can be deemed to reasonable? On the total quantity of the gas expected to be produced and sold by the Reliance group from its KG Basin fields, a difference of $3.4 per MMBTU would imply billions of dollars of unearned profit for the company. Have the people of this country been informed about this?

As I had repeatedly been saying, the gas markets are highly fragmented and it is difficult to call any price a market driven one. The nearest one could get to this is the price offered by the Reliance group to NTPC in an internationally competitive bid format. The price on this basis worked out to $2.2 per MMBTU or so. I am sure that it is not the intention of the government to gag the voice of NTPC in this matter. If one were to adopt the price offered by Reliance to NTPC as the basis, the GOM-fixed price of $4.2 per MMBTU would still imply huge unearned profits for the company. The recent judgement of the Hon’ble Mumbai High Court corroborated this order of magnitude of the price.

Natural gas belongs to the people of this country and it is held in trust by the government and its statutory agencies. Its allocation and pricing should therefore be carried out in such a way that it serves the public interest. I am afraid that the government has not carried out the process of price fixation in a manner that is transparent to the public. The very fact that the government had earlier framed the Petroleum & Natural Gas Regulatory Board Act of 2006 and precluded the regulator from the function of fixing the price of gas casts doubts on its intentions. The manner in which the political executive had taken over this power and determined the price at $4.2 per MMBTU has only corroborated these doubts.

I request the government to review the price and the allocation priorities for natural gas in general and for the Reliance gas from the KG Basin in particular in a manner that is reasonably transparent to the public. Otherwise, some of us may have to seek judicial intervention in the public interest.

I am confident that you will intervene in the matter urgently.

I will appreciate a line in reply, acknowledging the receipt of this letter.

Regards,

Yours sincerely

(E.A.S.Sarma)
Former Secretary to GOI