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Double jeopardy

Source : BUSINESS_STANDARD
Last Updated: Thu, Oct 03, 2013 22:08 hrs
Undated handout photo of India's Reliance Industries KG-D6's facility

Reliance Industries Limited (RIL) has reportedly complained that it is being penalised twice over by the government for low gas output from the Krishna-Godavari (KG) fields that it is exploiting - and that too for not sticking to projections of output that were not part of the contract. On this, RIL may actually have a point. The government - in particular, the Union petroleum ministry - has said it will levy a $1.8 billion penalty, by way of disallowing costs incurred by the company in the last three fiscal years. Over these years, gas output from the RIL fields decreased considerably, leaving various power and fertiliser plants that were dependent on the KG fields without fuel. The ministry also disagrees with RIL as to whether low output was a breach of contract. RIL says the penalty is "double" because the government also intends to force the firm to produce the originally stated level of gas and sell it at the earlier agreed price of $4.2 per million metric British thermal unit (mmBtu). This is in spite of the report from a committee headed by a senior member of the government, C Rangarajan, that suggests a new price from April 2014 for gas, based on a complex formula. Most estimates of the higher gas price under the Rangarajan Committee report suggest that it will at least double the amount paid per mmBtu. But the government intends this new price for gas to come into force only once the originally projected amount was produced and sold at the old price of $4.2 per mmBtu.



Overall, the government's treatment of RIL's ambitions in the KG fields has been far too indulgent. It has erred, above all, in accepting a pricing formula for use after April 2014 that is eminently questionable in that it yields a price that, excluding transport costs, is among the highest in the world. Given that RIL has not produced sufficient gas for several years, and now will face a higher price just as it appears that production is beginning to pick up, several important questions are being asked about the benefits being handed out to the giant group. A course correction was certainly needed.

But the method by which the government has attempted to remedy the problems with the private-public structure it had established for RIL in the KG fields appears misguided. In doubly penalising RIL - once by denying it the advantages of a mandated high price and then by, in effect, fining the company - the government merely lays itself open to a charge of arbitrariness again. The answer to the gas pricing conundrum is to charge a price for gas that is comparable to well-head prices in similar fields elsewhere. Once the government has sadly failed to do that, it does not behove it to try and recover losses in other, less direct ways. The government is correct in insisting that the new price for gas should come into force only after the originally projected amount was produced and sold by RIL at the old price of $4.2 per mmBtu. But its demand that RIL also pays a penalty for not meeting the projected production commitment is unfair. The reputation of the government in dealing unfairly with companies of late did not need this kind of bolstering. An investment-unfriendly government will be punished by business. Does the United Progressive Alliance, still wandering India and the world in search of investment, really wish to add to its reputation for being cavalier with corporate bodies in disputes? If not, it should look into RIL's concerns - which, regardless of the other problems with the KG basin, do not seem too far off the mark.

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