RIL & RNRL KG GAS

DISPUTE
OIL AND GAS MARKETS
SIIB Energy & Environment
Ankit Anil Gupta
PRN 09020243008

2009-2011
 RIL & RNRL KG GAS DISPUTE 2009-2011

Table of Contents
BACKGROUND ........................................................................................................................................ 3

BRIEF CASE TIMELINE .............................................................................................................................. 3

HOW ISSUE EVOLVED? ............................................................................................................................ 4

WHY GAS PRICE WAS RISEN UP BY THE RIL? ........................................................................................... 5

WHAT WAS RNRL DEMAND? .................................................................................................................. 5

RNRL ACCUSATIONS ON RIL AND ON GOVERNMENT OF INDIA .............................................................. 6

COURT ROUNDS...................................................................................................................................... 6

BOMBAY HIGH COURT ................................................................................................................................. 6

SUPREME COURT ........................................................................................................................................ 6

ROLE OF MODEL PRODUCTION SHARING CONTRACT IN DISPUTE .......................................................... 7

PROFIT AND LOSS SCENARIO….. ............................................................................................................. 8

ANY LOSS TO RIL AT $2.34 ??? ..................................................................................................................... 8

GOVERNMENT IN PROFIT OR IN LOSS .............................................................................................................. 9

REVISED PACT AS PER SUPREME COURT ................................................................................................. 9

CURRENT STATUS OF RIL FOR THE KG GAS ........................................................................................... 10

PICTURES OF KRISHNA GODAVARI BASIN BLOCKS ................................................................................ 11

BIBLIOGRAPHY ...................................................................................................................................... 12

MBA Energy & Environment, SIIB Page 2

Background
Krishna-Godavari basin the first thought
which comes to in our mind is of the KG-
Gas, RIL and RIL and RNRL issue over the
case which was the First Modern
MAHABHARAT over the gas in the Indian
21st century. What is the KG Gas or rather
the where does the origin of KG basin and
the KG gas comes. It all started in April
2000 when under the NELP when on the 12
blocks the bid was won by the RIL and D-6
block becoming the heart of the issue. To be
precise we can say that the PSC of the D-6
block which was made in between the
Government of India RIL & NIKO (NIKO
was partnering RIL in 2000) is the main
issue of this dispute. KG basin has
importance because of its geographical wide
spread i.e.., onshore; the KG basin has an
area of about 28,000 sq km, while the
offshore area is estimated at 21,000 sq km
till a depth of 200m and another 18,000 sq
km between 200m and 3000m. But in the
year 2002 there was sad demise of Mr.
Dhirubhai Ambani, who was the one man
army of the reliance but later as company
has to progress Mr. Mukesh Ambani became
the CMD of RIL and Mr. Anil Ambani
became the Vice - President of RIL.
But Later in 2005 reports started to arise
regarding the fracturing relationships of
Mukesh and Anil in RIL. Hence a family
separation was made in which Ms. Kokila
Ambani was the key member and distributed
the business among the two brothers.
Brief Case
Timeline
2002: RIL found the biggest discovery of
the year in natural gas
June/July 2004: RIL wins NTPC tender
quoting USD 2.34 per million British
thermal unit price for KG-D6 gas
Jan 10, 2006: RNRL files a case against
RIL over Krishna Godavari (KG) basin
Nov 7, 2007: Government approves market
price determined by RIL at above 4.20
dollars/unit
Dec 2007: RIL and RNRL file separate
appeals against judgment
Jun 2009: Bombay High Court asks RIL
and RNRL to honor the 2005 MoU
Jul 4, 2009: RIL files petition in SC, seeks
stay on earlier order
Jul 18, 2009: Government files petition to
nullify Ambani family MoU
July 28, 2009: Anil Ambani alleges
 RIL & RNRL KG GAS DISPUTE
Petroleum Minister is helping Mukesh
Ambani
Oct 27, 2009: Arguments by the
government and RIL against the HC ruling
begin in the SC
Nov 5, 2009: Justice Raveendran withdraws
from the case as his daughter works for RIL
Dec 16, 2009: Arguments end in the
Supreme Court (SC)
May 7, 2010: Supreme Court rules in favour
of Mukesh Ambani and observes that the
family MoU was not legally binding.
June 25, 2010: Revised pact signed.
How Issue
Evolved?
When the Reliance group was still a unified
entity with both brothers sharing
management responsibilities, RIL had
announced in 2003 that group company
Reliance Energy Ltd (REL) would be setting
up a gas-based power plant at Dadri in
western Uttar Pradesh, for which gas would
be supplied from RIL's KG basin
production. In 2005, however, the group
broke up with each brother acquiring control
of different business areas. While the oil and
gas business went to elder brother Mukesh,
Anil had control of the power business. As
MBA Energy & Environment, SIIB
2009-2011
part of the division of the group, RIL was
demerged and Reliance Natural Resources
LTD (RNRL) was formed to act as a conduit
for the gas from the KG basin to REL. All
RIL shareholders were made RNRL
shareholders, except that Mukesh's holding
in the parent company was substituted by
Anil in the new firm. Thus, RNRL was part
of the Anil Dhirubhai Ambani group
(ADAG).
In 2005, RNRL and RIL signed a
memorandum of understanding (MoU) on
the terms under which gas would be
supplied for the Dadri project. This MoU
specified that the price at which the gas
would be supplied would be the same as the
price at which RIL would supply gas to an
NTPC project. NTPC had invited global
bids for supply of gas in 2003 and RIL
finally won the bid and was issued a letter of
intent by NTPC in June 2004. The price
quoted by RIL in its bid was $2.34 per
mmbtu (million metric British thermal
units).
But due to the various reasons the price was
changed from $2.34 to $ 4.2/mmbtu, which
shocked to RNRL because due to rise in the
gas by almost 100% will increase the
operation cost of Dadri power plant by
several hundred times so this is where all
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 RIL & RNRL KG GAS DISPUTE
dispute started. RNRL argued that
international gas prices have historically
been much higher than Indian prices and so
that can't be a benchmark. Further, the bid
price for the NTPC project must be followed
under the MOU irrespective of whether or
not RIL and NTPC have finalized their deal.
Finally, that the government only has the
right under the PSC to fix the price at which
gas will be valued for the purpose of
determining the government's share of
revenues from the project. RIL, it insists, is
free to sell its share of the gas at whatever
price it decides.
And to add expensive fuel to fire of disputes
the EGoM. passed the RIL revised version
of gas price in Nov 2007.
Why Gas Price
was risen up by
the RIL?
The main reason by the RIL which drive
them to increase the price were as
1. Since from 2005 the time of signed MoU
the prices of gases were sharply
increased
2. In May 2007, RIL invited bids from
various gas users like power and
fertilizer companies and on that basis
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2009-2011
arrived at a price of $4.2 per, which was
then approved by the petroleum ministry
as a market-determined price. Hence
RNRL alleges that this was eyewash and
an orchestrated auction between small
time users and that the ministry has been
partisan towards RIL in the whole issue
3. Also according to the PSC which was
signed by the RIL and Government of
India and RIL, the government has the
final say on what must be the price of
the gas for the sale and also to whom to
dedicate or to supply the gas.
4. Also RIL has not till now concluded
that deal with NTPC since there were
some issues which remained unanswered
by them in contract from NTPC some
issues pertaining to damages it would
have to pay in case of failure to supply
the agreed quantity of gas. Hence, it
says, there is no NTPC price to be
followed as per the MOU with RNRL
What was RNRL
Demand?
RNRL was demanding 28mmscmd of gas
from KG-D6 for 17years at US$2.34/mmbtu
for its planned Dadri power plant. RNRL
also claims its right to get additional
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 RIL & RNRL KG GAS DISPUTE
12mmscmd of gas if gas sales agreement
with NTPC for 12mmscmd does not
materialize.
RNRL accusations
on RIL and on
Government of
India
As per the terms of the PSC, if RIL gets a
higher sale price from RNRL base, on the
price the Petroleum Ministry wants to fix for
the first few years, 99% of all revenues and
profits will go to RIL, and only a measly 1%
will accrue to the Government! Of the
initial revenue of Rs 50,000 crore, RIL gets
almost all, i.e. Rs 49,500 crore v/s. the
government‘s Rs 500 crore.
By making and publishing the various
advertisements the entire issue was brought
into eyes of citizens of India so that they
might too feel the heat of high price rise in
the power, fuel and agriculture for this
reason, and hence a direct loss to
government and to consumers also.
MBA Energy & Environment, SIIB
2009-2011
Court Rounds
Bombay High Court
Bombay High Court Ordered RIL to supply
the gas as per the original statement
 The Bombay high court directed the
parties to honor a June 2005
memorandum of understanding (MoU)
between companies. It asked the parties
to complete the contractual nitty-gritty
and enter into a ‗suitable arrangement‘
within one month so that RNRL gets an
assured supply of 28 mmscmd gas from
RIL‘s KG basin at $2.34 per mmBtu for
17 years for its power plant.
 The Bombay High Court allowed
Reliance Industries to sell gas from KG
basin at the government-approved price
of USD 4.20 per mmBtu as an interim
measure, while reserving judgment on a
case brought by RNRL
Supreme Court
The Honorable Supreme Court has, inter-
alia, held that:
1. MoU amongst the family of the promoters
does not bind the corporate entity RIL.
2. The terms of the PSC shall have an over-
riding effect;
3. The parties must restrict their negotiations
within the conditions of the Government
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 RIL & RNRL KG GAS DISPUTE
policy, as reflected inter alia by the Gas
Utilization Policy and EGoM decisions.
In simple terms that PSC overshadows the
MoU stand in the case and RIL will
renegotiate the gas supply agreements with
RNRL in the manner and within the
timeframe stipulated by the Hon‘ble
Supreme Court.
While the MoU may be kept in mind during
the process of renegotiation, it is clearly held
that the MoU is not binding. RIL has always
held that it is bound by the provisions of the
PSC and everything else would be
subservient to this overriding agreement
with the sovereign. The Supreme Court has
unambiguously upheld this consistent stand
of RIL.
The judgment has defined the extent of
marketing freedom that RIL enjoys in the
area of sale of natural gas produced. In view
of the findings of the judgment, RIL can sell
gas only at the price approved by the
Government and only to the entities that
have been allocated gas under the Gas
Utilization Policy. RIL has no ability to
deviate from price, quantity and tenure as
determined under Government‘s policies, or
to discriminate amongst various consumers.
MBA Energy & Environment, SIIB
2009-2011
Role of Model
Production
Sharing Contract
in dispute
The government‘s stance in the RIL case
against RNRL is that the agreement between
RIL-RNRL to supply gas has no legal
sanctity since RIL had to get the contract
approved of by the government first. The
Production Sharing Contract (PSC) which
governs the rights and obligations of both
the government and winning bidders like
RIL is quite clear on this. The model PSC
issued for 8th round of NELP-VIII, Clause
21.3 says the contractor has the freedom to
market the gas ―as per Government Policy
for utilization of gas among different
sectors‖ and 21.3.1 elaborates on this,
saying ―the Government may from time to
time frame policy for utilization of gas
among different sectors‖.
The problem, however, is that this is not the
PSC that RIL signed with the government in
2000. That contract, under the NELP-I, gave
unrestricted freedom to the contractor (RIL)
to sell and the government‘s role was
restricted to ensuring it got its proper share
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 RIL & RNRL KG GAS DISPUTE 2009-2011

of the profits. In other words, it would Post-Well Expenditure Cost

appear that the government changed the ($/MMBTU)
model PSC (the changes first came about in RIL‘s development Exp. (Capex) in 0.54118
NELP-VII in 2007) terms around the same KG
time that the RIL-RNRL fight was heating Production (Operating) Exp. 0.2211
up — this is when the petroleum ministry Interest Cost 0.1316
said it had the right to reject the RIL-RNRL Total post-well exp. 0.8945
contract under the PSC. If the ministry has
this right, the RIL-RNRL case goes for a
Pre-Well Expenditure Cost
toss — while RIL maintains it cannot sell
($/MMBTU)
any gas from the KG Basin without the
ministry‘s explicit approval, RNRL Exploratory Exp. (Capex) 0.144

contends the ministry has no such rights Production Exp. (10% of Capex) 0.17

under the PSC. Total pre-well Exp. 0.314

Royalty @ 5% on margin ($4.2- 0.02

Profit And Loss $0.314)

Scenario…..
TOTAL NET COST OF 1.43
Any loss to RIL at $2.34 ??? PRODUCTION
 Compared to $4.20, they do
Table 1: Breakup Cost of RIL for KG Gas Production by RIL
 RIL‘s cost of producing gas, according in 2003

to the DGH (Directorate General of

Hydrocarbons), is $1.28 per mmbtu but
according to the RIL it was coming
about $1.43 per mmbtu, so it doesn‘t
really loss at $2.34 though it does earn
less

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 RIL & RNRL KG GAS DISPUTE
Government in
Profit or in Loss
The government‘s gain/losses were more
complicated. If gas prices are raised,
fertilizer and electricity prices also go up
and consumers end up paying more – to
keep them at the same level, the hike
required in government subsidies will be
much more than the increased profits it gets
when the gas is priced at $4.20
The Mumbai High Court had given a verdict
in favor of NTPC and RNRL for 2.34 dollar
gas price! It brought down the approved
price of 4.2 dollar to 2.34 for all consumers
or only two plants of NTPC which have
been bided for gas by RIL will enjoy 2.34
dollar price of gas while all other power
plants pay 4.2 dollars for the same gas.
The government knew that such an
eventuality may not arise at all as they have
already prejudiced NTPC‘s case by
approving 4.2 dollar price for RIL. On top of
that, Deora has decided that the cost of gas
of PSUs – ONGC and OIL – which is now
priced at 1.79 dollar per unit, as per
administrative pricing mechanism, will be
increased to 4.2 dollar per unit, but this was
MBA Energy & Environment, SIIB
2009-2011
not for the sake of financial health of ONGC
& OIL. It was the case of deception to help
the favored contractor i.e. RIL. Actually
customers i.e. power producers and fertilizer
producers which were vying for low cost gas
from ONGC and OIL. Deora wanted to
ensure that RIL‘s market and hence the
decision to enhance ONGC & OIL gas price.
The government has taken the whole nation
for a ride. Increasing the ONGC and OIL
gas price to 4.2 dollar means an additional
burden of not less than around Rs 100,000
core to power and fertilizer sector. So, the
whole burden which comes to subsidiary
markets which are directly or indirectly
associated to it is around to Rs 120,000 core
plus Rs 100,000 core i.e. a whopping Rs
2.20 laces core! This entire burden was
passed on to consumers while the favored
contractor would be immensely satisfied.
Revised Pact as
per Supreme
Court
RNRL signed a revised gas supply
agreement with RIL, and resolved the
dispute that had been started long back from
2006. Due to this announcement Reliance
Natural shares went up by 7.5 per cent,
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 RIL & RNRL KG GAS DISPUTE
while Reliance Industries rose 1.1 percent,
and it also helped the government decision
to raise state-set fuel prices and expose them
to market forces during the end of June
2010.
The companies did not disclose the terms of
the pact under which Reliance Industries
supplies Reliance Natural Resources. In the
new pact RIL will supply 28 million metric
standard cubic metres a day of gas for 17
years to RNRL at a government-set price of
$4.2/mmBtu.
The previous agreement between the two
companies was based on a price of $2.34 per
mmBtu, the brothers agreed on in 2005.
The brothers, who five years ago split the
business empire they inherited from their
father, had since taken a step towards
reconciliation, ending an agreement that
banned them from competing on each
other's turf.
MBA Energy & Environment, SIIB
2009-2011
Current Status of
RIL for the KG Gas
Reliance Industries has written a letter to
the Petroleum Ministry on 15th September
2010 seeking a revision in gas price from its
Krishna Godavari block by $1 per mmbtu
from current $4.2 per mmbtu, say sources.
Among the reasons cited by the company is
that as the cost of production is rising,
customers are ready to pay higher price of
gas.
The difference between the domestic gas
price and imported gas price is still over $2
per mmbtu.
ONGC also told the oil ministry earlier this
year that "This ($4.2 per mmBtu) is not a
viable price for making future investments.
Nobody in the world makes investments at
these price levels"
Analysts say that if oil ministry approves the
gas price hike of $1 per mmbtu then it could
add $500 million more to RIL's profits
According to government estimates, for the
XI plan period the natural gas demand
would grow to 279.43 mmscmd in the year
2011-12. The domestic gas production is
still at about 140 mmscmd
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 RIL & RNRL KG GAS DISPUTE 2009-2011

Pictures of Krishna Godavari Basin

Blocks

MBA Energy & Environment, SIIB Page 11

Bibliography
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you-want-to-know-about-gas-row/articleshow/5901125.cms
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3. Directorate General of Hydrocarbon
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dispute.html
5. RIL's affidavit in reply to RNRL's affidavit IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION SPECIAL LEAVES PETITION (CIVIL) NO.
14997 OF 2009
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2
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month-to-supply-gas-at-2-34.html
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JURISDICTION CIVIL APPEAL NO. 4273 OF 2010 (Arising out of S.L.P. (C) Nos.
14997 of 2009)
10. RNRL AGM Chairman's statement pdf copy
11. Statement from Reliance Industries, Media Release, May 7, 2010