Sunday, June 24, 2007

Answers to some shout-box queries -5

19 Jun 07, 22:43

Sreenadh: Sir, what's the brouhaha over natural gas pricing?and dispute between Reliance Bros

Reliance Industries Limited has discovered lot of natural gas off the East Coast in K-G Basin. Krishna-Godavari basin. The discovery amounts to about 14 tcf – trillion cubic feet. The Reliance brothers (Mukesh Ambani and Anil Ambani) parted their ways after this discovery. So, as part of the settlement the elder brother (Mukesh Ambani) got the petroleum and natural gas business. As part of this settlement, it was agreed by the elder brother to give the younger brother (Anil Ambani) about 28 MMSCMD at a price of $2.34 per mmBtu. It appears that the original development plans of this discovery were envisaging the daily production of about 40 MMSCMD (Million Metric Standard Cubic Meters Per Day) of gas. So keeping those plans in mind they had agreed upon a share. But it appears that the elder brother (Mukesh Ambani) has decided on very aggressive development plans and hike the capacity to 80 MMSCMD. When the plans are so aggressive, obviously the interests of the younger brother do get affected. Will there be a corresponding raise in his share? That is, will his share go up from 28 MMSCMD to 56 MMSCMD? What would or should he do if the capacity goes up like that? Should he take delivery perforce? Will he be free to sell off the excess share to a third party? And so on.

The deal between the brothers envisaged this share to be given at a price of $2.34 mmBtu (Million Metric British Thermal Units). But the Government of India, being the owner of the natural resource, would be interested in getting higher profit petroleum. So it naturally wants a better price than the agreed price of $2.34 between the brothers for the quantity of gas being exchanged. But discovering market determined price of a commodity like natural gas, that too in a country like India (with is current development of natural gas markets being very nascent) is not going to be easy. There will be claims and counter-claims. So at the behest of the Government of India, Mukesh Ambani got down to the business of discovering the market price through an open bid process. The price that was discovered through this method was found to be $4.33 per mmBtu. The government seemed to have developed cold feet even with this price. So it constituted an EGoM to look into the issue. This EGoM came out with a price of $4.20 per mmBtu based on a number of factors. This is the minimum price at which the natural produced at this KG basin discovery is to be traded. Even if the actual price turns out to be lower than this, Mukesh Ambani will have to pay the Government of India profit petroleum calculated at this rate.

In complex business transactions like this, it is very difficult for any stakeholder to understand the true import of every step of the transaction. At a given point of time, one will appear to be losing while another will appear to be gaining. A certain amount of give and take is inevitable. Now the younger brother has approached the Bombay High Court contesting the development plans of the elder brother. The Bombay High Court has asked the brothers to renegotiate the deal as it has run counter to the family settlement.

Updated on 16.10.2007.