Thursday, July 09, 2009

Reliance Gas deal - the squabble continues

Mukesh Ambani would never have thought that finding a massive gas would continue to cause him so much problems; maybe, to make huge amounts of money, you need to have massive problems at the same time. A few years back, Reliance had participated in the Oil exploration scheme of the Government, and got allotted some of the deep sea blocks of the Krishna-Godavari basin fields, and in some time, struck a massive gas field. This promised untold riches to the company, and to the Government of India, since the Government of India owned the gas field and Reliance was the operator. As per the agreement, the Government controls who can get the gas, and at what price; and since the Government gets a cut of the price, the Government has a key stake in the price.
The Ambani brothers got into a huge dispute, which was eventually resolved after a settlement involving the division of the family controlled business. As a part of this agreement, the more complex agreement involved the provision of gas from the RIL to the Anil Ambani controlled RNRL at $2.34 mmBtu for 17 years from the setting up of the Dadri power plant. This price was based on the then decided price (the same price at which the gas was to be then provided to the Government run power utility). This was an agreement between the 2 brothers and their controlled entities, and did not seek any approval of the Government, which after all, owns the gas.
However, with the revision of the gas price upwards all the over world, Reliance eventually refused to supply the gas to RNRL when the gas came online last year. The Government also refused to hold the agreement as valid, since it was not consulted and the price was deemed to be decided by the Government. The case, as everybody knew it would, went to the court (and everybody knows that the case would go to the Supreme Court). Reliance also has a lot of political power, which means that for the Government to decide in favor of either brother, would mean that it would have to take the risk of alienating the other brother (and the political power wielded by the brother). Further, if the Government sided with either side in a way that seemed to lose money, the opposition would attack it very strongly (along with the media).
Amidst all this, the High Court in Mumbai ruled that the family agreement was valid, and that RNRL was entitled to get the gas at the low price. This was a shock to RIL, since this would mean a lower earning, and also meant that the gas available for the Government to allocate to fertilizer and energy units would be that much reduced. Now, the case heads to the Supreme Court; will it decide in favor of the family agreement, or will it hold that the gas is owned by the Government and it has the right to decide on the price and allocation.

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posted by Ashish Agarwal @ 10:57 AM