Ril Vs Rnrl

RIL VS RNRL

What is the dispute all about?

Reliance industries found gas in KG basin in 2002.
It is producing 31 million metric standard cubic metres per day (mmscmd), which is expected to hit a peak of 80 mmscmd.
When the two brothers separated there was an MoU signed between the two brothers.

MoU ( Memorandum of Understanding)
Signed on June 18, 2005.
It entitles REL to 28 mmscd of gas from KG Basin for 17 years at $2.34/mmbtu.
Additionally if the contract b/w RIL & NTPC does not materialise, then Anil’s side will also get NTPC’s share of 12 mmscd.
What does the MoU says?

The Mother’s Role
The MoU signed between the brothers says:
“Kokilabenrecognises that a long-term,stable source of gas from RIL, which has the largest find of gas, was absolutely essential for the growth plans of the Anil Ambani group, and in order to enable Anil to carry REL to even greater heights. Kokilabenhas,therefore specially stressed and impressed upon Mukesh (that he) shall personally ensure that at the time of finalization of the binding gas supply agreement the terms provide the required comfort and stability in these arrangements even if that means some departure from the NTPC standards.

In 2006 she gave her final direction on the MOU which stated that “ there are 2 types of issue pending……… those in the personal domain and those that are in the corporate domain…….. I will not give any decision or direction on the matters which are in the corporate domain since they are public listed companies”

What is the problem then?

Production sharing agreement(PSC)

Fertiliser : Ideal feedstock for urea production.
LPG & Petrochem : Need to boost domestic LPG production to reduce imports.
Power Plants : All sources of energy, included coal and gas, need to be harnessed to achieve 8-10% growth.
City Gas : Vital necessity for urban dwellers
Refineries: Currently using costly alternatives like Crude/ Fuel oil for processing and burning naptha.
Other Industies : Sponge Iron, Ceramic units.
GAS UTILISATION POLICY

RNRL'S GAS NEEDS
ADA Group can get its Dadri and Shahpur plants ready within 30 months of securing gas supply.

MurliDeora Minister for Petroleum said in Parliament “ This (Dadri Power Plant) is neither installed nor Functional”
What Petroleum Ministry has to say on this?

The two prices being well haggled over are $2.34/mmbtu, at which Anil wants to buy 28mmscd over 17 years; RIL wants to sell at $4.2/mmbtu subject to revision after five years.
The difference of just under two dollars in the respective prices can result in profit or losses that run into billions of dollars.
Pricing Issue

The cost of production in the KG basin is $ 1.41 and at $ 4.20/mmbtu RIL will make huge profit.
He feels that the price of the gas should not be above $ 1.5/mmbtu .
$ 4.20 price has been determined by the govt. for its take as a part of PSC.
RIL will make a profit of Rs. 50,000 crore by pricing gas at $ 4.20.
RNRL will lose $ 1 Billion( Rs. 4,800 crore) over 17 years.
RIL is free to sell gas at any price it want to.
ANIL’ S SIDE

Never committed a price since it is subjected to govt. approval. Govt. has rejected the price of $2.34 in january 2006.
$4.22/mmbtu was approved by govt.
$ 2.34 doesn’t compensate for cost escalations.
If govt. values gas at $ 4.2 for its profit share and RIL has to sell it at $ 2.34, it could suffer a loss of $ 5 billion.
The MoU was not shared with the RIL board or its shareholders.
MUKESH’S SIDE

Reliance Industries Limited(RIL) had called for bids from various buyers in 2007.
The average bid made was $4.33/mmbtu.
After minor tweaking the govt. approved the price of $4.22/mmbtu.
Govt.’s profit share will be calculated on the govt. approved price only i.e. $ 4.22/mmbtu.
More the income from gas sales, more the profit.
Why price $4.2/mmbtu?

THREE SCENARIOS1. Government approved price $4.2 Selling Price $4.22. Government approved Price $2.3 Selling Price $2.33. Government approved Price $4.2 Selling Price $2.3

HIGH COURT’S VERDICT“……. Within one month from the date of prouncement of this judgement and order the parties should enter into a ‘ suitable arrangement’ on the basis of quantity, tenure and price as specified and agreed between the parties under the MoU either by renegotiating the terms and conditions of the agreement so as to make it a bankable agreement or revert back to KokilabenDhirubhaiAmbani who had reserved her ability to intervene again if the parties fail to act upon the MoU dated 18thjune 2005 and the Anil Ambani Group may opt for a claim for the damages…….”

Petroleum ministry says that the brothers are fighting over something that does not belong to them.
Article 297 of the Constitution of India lists petroleum as a resource, which Union of India has an authority over.
So Gas is owned by the govt., RIL can’t sell it unilaterally.
Price of $4.20 was approved by EGoM.
Govt. can’t approve of the price lower than $ 2.34 ( as Anil suggested).
Has objections regarding the MoU.
What the govt. is saying?

That the court has lent legitimacy to the family MoU has clearly rattled the government.
“…..Thereafter, for the entire future the balance reserves (including new discoveries of gas from new explorations and/or bids as may be submitted from time to time), the quantity of gas would, at the option of the Anil Ambani Group (exercised from time to time), be split in the ratio of 60:40 with 60% to the Mukesh Ambani Group and 40 per cent to the Anil Ambani Group.” (from the MoU)

The Supreme court will hear the case on 20th october instead of 1 September.

NTPC was to be RIL’s first gas buyer.
RIL has won the bid to supply 12 mmscmd of gas to NTPC at $ 2.34/ mmbtu in 2003.
The contract could never materialises because of dispute over sharing of liablities.
When NTPC bid was made there was no Anil vs Mukesh.
The Petroleum Ministry reprimanded RIL for offering gas in this manner.
NTPC ANGLE

PSC was signed in 2000.
Gas was found in 2002.
Row began in 2005.
In 2006 RNRL filed a case against RIL.
IN october of 2007 the govt. approved the market price at $4.2.
The Bombay high court stepped in on june 15, 2009 asking both companies to respect the MoU.
MukeshAmbani’s company moved to Supreme court.

Chronological order

On 28thjuly Anil Ambani accused MurliDeora of helping MukeshAmbani.
On 28th August SC defers hearing on Reliance gas row till Oct 20.
On 2ndseptember Tried to reconcile Ambani brothers, but failed: Deora
Government tells court it is not against Ambani pact.
On 9thseptember RIL bound to supply gas to us: Anil Ambani firm

Mukesh should compensate the govt. for loss of revenue from the supply of gas to Anil at $ 2.34/mmbtu.
Downside : Power companies currently buying gas at $ 4.20 could object over this.

The Possible Solutions

RNRL gives up its demand for $ 2.34 but continues to have claim on 28 mmscmd gas share from KG Basin as well as 40% share in future discoveries by RIL.
Downside : Government of India has objections over Anil’s claim on future discoveries.

Allow complete freedom to RIL to price gas thereby repealing the govt. approved gas pricing formula.
Downside : RIL could supply gas to certain buyers at a price more than $ 4.2.

The Supreme court could annul the provisions of the MoU. It could ask RIL to compensate RNRL for non-supply of gas at $ 2.34/mmbtu.
Downside : ADA group’s new gas based plants are going to face delays.

Negative impact on the global investment inflow.
Firms like ExxomMobil, Chevron, British Gas & Shell expressed concerns.
Issues like lack of transparency are a cause of concern for the new investors.
Impact on India

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