GAS WARS: CRONY CAPITALISM AND THE AMBANIS Read online

  CONTENTS

  Preface

  Prologue

  I Ambani vs. Ambani

  1. Sibling Strife

  2. Gas and Fire

  3. A 21st-Century Mahabharata

  4. (Reliance) India Natural Resources Unlimited

  II Culpable Connivance, Damning Evidence?

  5. A Storm over the KG Basin

  6. Murky Deals, Muddy Waters

  7. The Insider

  8. A Gas Policy of Hot Air

  III Collateral Damage

  9. The KG Basin is ‘Sinking’?

  IV Nexus Between Big Business and Politics

  10. Indian Style Crony Capitalism

  11. Price of Gas: End-game or New Beginning?

  12. Moily Brazens it Out

  13. Continuing Controversies on Gas Pricing

  14. Politics of Crony Capitalism

  Epilogue

  Appendices

  Chronology

  Cast of Characters

  Abbreviations and Glossary

  Acknowledgements

  About the Authors

  Stop Press

  Endnote

  PREFACE

  Natural gas that lies below the ocean bed in the Bay of Bengal along the southeast shores of India off the basin of two great rivers, the Krishna and the Godavari, has become the subject of considerable controversy. Sections within the government of India, including the office of the Comptroller and Auditor General (CAG) of India, a constitutional authority mandated to oversee public finances, have been sharply critical of the manner in which another wing of the government, the ministry of petroleum and natural gas (MoPNG), designed contracts and tailored rules to favour the country’s largest privately owned corporate conglomerate, Reliance Industries Limited (RIL), headed by India’s richest man Mukesh Ambani.

  Prime minister Manmohan Singh has been accused of changing ministerial portfolios at the behest of the same corporate group, an allegation that RIL predictably denies. There have been claims that the group deliberately ‘squatted’ on reserves of natural gas and curtailed production in anticipation of higher prices that are administered by the government, to the detriment of the interests of the country’s people. Spokespersons of the Reliance group, however, contend that gas output from the Krishna-Godavari (KG) basin (in areas where it is contracted to operate) came down on account of unforeseen adverse geological surprises. The CAG has alleged, among other things, that the contract between the MoPNG and RIL was flawed, thereby encouraging excessive capital expenditure and lowering potential benefits to the exchequer.

  Over and above these claims and counter-claims, there is another unique dimension to the controversy relating to extraction of natural gas from the KG basin by the Reliance group. The business empire controlled by the Ambani family got divided on account of sibling rivalry between Mukesh Ambani and his younger brother, Anil. While many reasons have been attributed to the split in the family, this book argues that the battle between the Ambani brothers was largely about wresting control over reserves of natural gas that are below the ocean bed along the basin of the two greatest rivers of southern India.

  In July 2002, Dhirubhai Ambani, founder of the Reliance group of companies and India’s biggest and one of its best-known industrialists, died. For two years thereafter, his remained the archetypal business family. The patriarch, a first-generation entrepreneur, had died intestate (or without leaving a will). All seemed well until the older of Dhirubhai’s two sons, Mukesh, admitted in November 2004 that he was having differences with his younger brother, Anil, over ‘ownership issues’. The sibling rivalry, earlier fought inside boardrooms, spilled out into the open. It became a pyrrhic family battle, which sucked in many influential Indians, from politicians and corporate leaders to bureaucrats and journalists. The tussles took place in the highest courts of the land, through public advertisements and in hundreds of published articles, features on television and on websites. Almost everyone who was someone in the country took sides in the Great Ambani War, so wide was the spread and influence of the once undivided Reliance business empire.

  The two brothers had fought over many issues, but what sometimes got lost in the din of the battle cries was a simple fact: much of the tussle was over India’s natural resources, about how the resources were intended to be mined, marketed and monetised.

  In May 2010, the elder brother would go on to win a protracted legal dispute that lasted almost six years. A crucial verdict by the Supreme Court of India went in favour of Mukesh Ambani allowing companies under his stewardship to control access to natural gas. Subsequently, even as the siblings claimed they had sorted out their differences, the waters of the KG basin got progressively murkier. News would periodically trickle out, from sources close to Anil, from corporate rivals, from a few conscientious bureaucrats and from a lone ranger Left-aligned Member of Parliament Tapan Sen who was a member of the Parliamentary Standing Committee on Petroleum and Natural Gas. The information pointed to rather questionable deals relating to KG gas and how RIL was fleecing the country in connivance with particular government functionaries.

  By 2010, the CAG had begun conducting an audit of hydrocarbon production-sharing contracts. Few people take an interest in such audits while they are on. The reports are often written in dull bureaucratic language and replete with technical information. In this instance, however, the draft report of the CAG was leaked to the media. The report was, to say the least, damning. The deals were dirtier than alleged. The CAG’s office headed by former bureaucrat Vinod Rai took a firm stand disapproving the production-sharing contract and laid the blame squarely on the government, that is, the MoPNG, then headed by Murli Deora, a Congress politician from Mumbai. The CAG report, tabled in Parliament in September 2011, did not quantify the losses to the state exchequer caused by RIL, but its insinuations were clear: the company had reaped huge profits thanks to the acts of commission and omission of a number of influential ministers and bureaucrats. The exchequer had been cheated because the government had failed to act as an impartial custodian of resources that belong to the people of India.

  In October 2012, when Sudini Jaipal Reddy was removed from the post of Union minister of petroleum and natural gas and made minister for science and technology, opposition politicians alleged that he had been ‘kicked upstairs’ because he had refused to kowtow to the Ambanis. His ministry had claimed that RIL was ‘deliberately’ reducing gas output and exerting pressure on the government to increase the administered price of gas, charges the company denied. The ministry alleged that the fall in gas production had resulted in an estimated loss of $6.3 billion (or over Rs 32,000 crore at that time) to the country and sought to levy a penalty on the company. In June 2013, another Left MP Gurudas Dasgupta went hammer and tongs at Jaipal Reddy’s successor M. Veerappa Moily for over-ruling his own ministry’s bureaucrats as well as those of other ministries to prepare the ground for a hike in the government administered price of gas, describing the episode as a gigantic scam. Unfazed, later that month, a deeply divided Cabinet Committee on Economic Affairs decided to double the price of gas with effect from April 2014. This raised a hue and cry amid allegations that the government had gone out of its way to favour RIL.

  This book is an attempt to unscramble and explain the entire series of controversies relating to KG gas and the battle between the Ambani brothers. It highlights cases of crony capitalism that allowed the RIL group to blatantly exploit loopholes that were consciously retained in the system. In doing so, it underlines instances of policies and procedures that were structured to help increase the fortunes of a few. It points out how, even when laws and pol
icies appeared fair, rational, and reasonable, the way in which these rules and procedures were framed and implemented by bureaucrats acting at the behest of their political masters resulted in crony capitalism.

  This book inter alia seeks to lay bare the manner in which official contracts are made in order to allow enough room for the government to be cheated of revenue and the country’s natural resources to be siphoned off with impunity. Indeed, the government’s role in the still-continuing KG gas epic is one among many instances of ruthless exploitation of natural resources in different parts of the country and the world. The pages that follow tell the story of how a corporate conglomerate, in this case India’s largest, was able to benefit from the way government policies are designed. In doing so, a pattern begins to appear, which epitomises the rise of the Ambanis over the years.

  PROLOGUE

  The landscape below changes dramatically within a few minutes of the helicopter leaving Rajamundhry airport. The verdant palm groves and paddy fields of coastal Andhra Pradesh make way for brown salt pans and shallow water bodies where prawns are cultivated. This is where the Godavari, India’s second-longest river after the Ganga, ends its nearly 1,500-kilometre-long journey to the ocean, a journey which begins from Maharashtra in western India and cuts through central and southern India. As it nears the ocean, the swirling muddy waters of the biggest estuary in the delta of the Godavari are seemingly held back for a brief while by a long stretch of land that appears to be blocking the river’s journey into a great expanse of water. This is Hope Island, whose sandy beaches with waves lapping on them, neatly divide the brown river from the greenish-blue Bay of Bengal. The continental shelf is relatively narrow off the southeastern coast of India. The depth of the ocean suddenly plummets and this becomes evident when viewed from above: within a couple of kilometres, the colour of the waters changes from blue-green to deep, dark aquamarine. What hope does the vast bay beyond Hope Island hold for the energy security of India?

  The rigs then come into view: metallic structures in the middle of the blue-nowhere. First, the ones which have been constructed on stilts that can be embedded into the ocean bed because these are situated relatively close to the shore. This is where the gas extracted from under the ocean bed is processed before it is transported through pipelines. As one travels more than 20 kilometres into the Bay of Bengal, the larger rigs are seen. Each is a huge structure that floats on the surface of the ocean but because of its weight and size, the rig hardly seems to move. We are told that work on these rigs has to be almost completely stopped for more than four months in a year as the ocean becomes excessively turbulent during the monsoon when violent cyclones lash the country’s eastern coast along the states of Odisha, Andhra Pradesh and Tamil Nadu.

  The helicopter lands gently on the rig and we are suddenly transported into a different world. The fishing boats surrounding the rig on the ocean below seem like children’s toys, the sailors in them smaller than midgets. We climb up and down and through a maze of metal ladders surrounded by a veritable jungle of pipes, ducts, cables and machinery. A small proportion of the gas that is extracted from the ocean bed is used to generate electricity to meet the requirements of the equipment installed on the rig and for the people who work on it. And the people, well they come from across the globe, from faraway countries in distant continents. The facilities, I am told, are world-class and I have no reason to disbelieve our guides. The conference hall could have been inside a luxury cruise liner or, for that matter, a fancy hotel. Special cameras are used to click photographs—the cameras don’t use a flash to ensure that there is no possibility of sparking a fire. The snacks are mouth-wateringly good. Who could have imagined that one would be partaking of such tasty tomato sandwiches, chicken cutlets and fried fish in the middle of the Bay of Bengal? A video film is played on a large television screen; a power point presentation activated to explain the engineering behind the installation of the rig and how it operates.

  A brief primer on natural gas may be useful at this juncture. What is natural gas? Where is it found? And what is natural about such gas?

  Natural gas is a mixture of naturally-occurring hydrocarbons that comprise methane, carbon dioxide, nitrogen and hydrogen sulphide in varying proportions. Natural gas, an increasingly important source of energy in the world and in India, has a variety of uses including generation of electricity and the manufacture of fertilisers. It is used as a fuel for vehicles, for cooking and heating and as a chemical feedstock in the production of plastics and commercially-important organic chemicals.

  Natural gas is found in deep underground rock formations or associated with other hydrocarbon reservoirs in coal beds. Crude petroleum oil is another resource that is often found in proximity to, and with, natural gas. Most deposits of natural gas were created over many centuries by two mechanisms: biogenic and thermogenic. The second mechanism entails creation of thermogenic gas from buried organic material and such gas is typically found deep in the earth and under the beds of seas and oceans, as in the Krishna-Godavari basin in the Bay of Bengal. Before natural gas can be used as a fuel, it must be processed to remove water and other ‘impurities’. The byproducts of processing include ethane, propane, butanes, pentanes, higher molecular weight hydrocarbons, hydrogen sulphide, carbon dioxide, water vapour and sometimes, helium and nitrogen. Natural gas is often simply referred to as gas, especially when compared with other sources of energy such as other petroleum products or coal.

  In the nineteenth century, natural gas was usually obtained as a byproduct of extracting crude oil since the light gas carbon chains would come out of the extracted fluids as these underwent pressure reduction while moving from inside the reservoir to the surface—a process akin to the release of carbon dioxide as the cap of a soda water bottle is removed. During the nineteenth century and even for much of the twentieth century, there was no market for natural gas. Gas was an unwanted byproduct that was burnt or flared at the wellhead. Since then, technology has evolved considerably and the once-unwanted gas is nowadays transported through pipelines to different sets of consumers. In certain instances, the ‘unwanted’ gas associated with crude oil extraction is returned or ‘injected’ back to the reservoir to await a future market. Where it is not economically feasible to transport the gas through pipelines, the gas is processed and converted into liquids known as liquefied natural gas that can be stored and transported in tankers.

  Some of the world’s biggest gas reserves are located in Russia, Iran, Qatar, Saudi Arabia and the United Arab Emirates. According to the government of India’s ministry of petroleum and natural gas, India has an estimated 1.5 trillion cubic metres of gas reserves in various locations in western India (including off the coast of Mumbai or Bombay High and Gujarat), Assam (in eastern India), besides the Krishna-Godavari basin in Andhra Pradesh. India also imports liquefied natural gas from countries like Qatar. Natural gas accounted for roughly one-tenth of the country’s total energy requirements in 2012–13. Gas comprises over three-fourths of the total feedstock of raw materials used by fertiliser companies to manufacture nitrogenous fertilisers, urea and ammonia.

  India’s oil and gas exploration and production sector used to be dominated by two government-owned companies, the Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL). The public sector Gas Authority of India Limited (now GAIL) effectively controls much of the transportation of natural gas in the country. From the early-1990s onwards, private companies have become increasingly important in this sector. Reliance Industries Limited (RIL) is one of the biggest players in the natural gas sector since the discovery in 2002 of substantial reserves of natural gas in the KG basin.

  By the time the helicopter has returned to Rajamundhry airport, I realise that I have just had an extraordinary experience. Like the muddy waters of the Godavari’s estuary, my head was swirling with information and opinions. My hosts at RIL had laid out the red carpet for me. An American technical expert had accompanied me for the better part of
two days to patiently explain details to a lay person like myself. Located in what was once a typically Indian rural environment, the onshore facility in Gadimoga (near the port of Kakinada in Andhra Pradesh) could have been situated in any large city in India or, for that matter, anywhere in the world. We were shown models depicting the entire coastal area—from the shore to the depths of the ocean, from the zones where drills from the floating rig platform penetrate the bed of the ocean to the platform where the gas is processed and then transported through pipelines. Inside a large hall, engineers, scientists and technicians were poring over computer screens that were supposed to be monitoring each and every aspect of the complex operations: from gas extraction, to processing and transporting.

  We sat back on comfortable couches to watch a short film titled Samudra Manthan or the ‘Churning of the Ocean’. In ancient Indian mythological texts, the gods churn an ocean of milk to extract nectar that gives life. How appropriate was this analogy, I wondered?

  My brain was cluttered with questions and counter-questions, claims and counter-claims. Why did gas output from the block in the KG basin where RIL is operating come plummeting down to barely a quarter of what had been projected a few years earlier? How did the grandiose dream of energy security promised by India’s ‘biggest gas discovery’ come to be described later by some as a nightmare for the country? Was the fall in gas production purely on account of adverse geological surprises? Or was it because the operator did not dig enough wells? Was there a deliberate attempt by RIL to ‘squat’ on gas reserves till the government increased the administered prices of gas from April 2014 when the ministry’s earlier agreement with RIL got over? Or was it technically impossible? Did the government structure its production sharing contract with RIL in such a manner that the private company was encouraged to splurge on expensive capital equipment, a phenomenon derogatorily described as ‘gold-plating’, because it had nothing to lose and everything to gain by spending more? Were national interests adequately protected? Or was the need to ensure that a private company’s operations are profitable made subservient to larger considerations of public interest?