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IT'S ALL ABOUT GAS IN ANDHRA PRADESH
By M H AHSAN
He was banking on cheap gas from K-G Basin to spawn industrial development in AP. But as that is not likely to happen, andhra pradesh chief minister Y S Rajashekhar Reddy is set to launch a political battle. The good news is that Andhra Pradesh and its immediate neighbourhood are sitting on a huge pile of gas reserves worth billions and billions of dollars. By conservative estimates, the gas already discovered amounts to 21 trillion cubic feet (tcf) enough to produce 20,000 MW of power annually for 20 years. This would be 4000 MW of power each year for hundred years and truly with this discovery, Andhra Pradesh has the potential to be the energy hub of the country.
But now for the bad news: Though located on its land and the seas close to it, in the Krishna Godavari (K-G) Basin, the state has no access to this gas. It has to queue up before the producers like any other consumer, and what is more will not be able to secure subsidised prices for its needs. Many companies: Reliance Industry Limited (RIL), ONGC, and Gujarat State Petroleum Corporation (GSPC) have struck gas in this area. But it will be Mukesh Ambani’s RIL that would go on stream first: by the middle of 2008.
The elder Ambani scions’s RIL’s gas find is estimated to be valued at a staggering $35 billion by Goldman Sachs. This is more than half of the present market capitalisation of the Ambani empire. As per the present plan, RIL—which has struck gas in 14 of the 15 wells that it drilled in the K-G Basin, some of them in the deep seas—will invest up to $6-7 billion by next year. The idea is to produce 80 million cubic feet (2.8 billion cubic feet) per day of gas, though RIL will start with 40 million cubic foot. This is equivalent of 4,50,000 barrels of oil or 25 per cent of India’s current daily oil imports.
A part of the gas is to be used by RIL itself and will be transported through a 1,400 km pipeline from Kakinada to Ahmedabad. From Ahmedabad it will be taken to Jamnagar. RIL has signed two contracts to transport the gas with GSPC.
A couple of months ago, Andhra Pradesh chief minister Y S Rajasekhara Reddy had taken up the issue of gas supplies with Mukesh Ambani. But Rajashekhar Reddy found no positive response from the top businessman. It was pointed out that the development cost of D6 (the block in K-G Basin from where RIL would mine the gas) was very high. Moreover, the terms and conditions of the new oil exploration licencing policy (NELP) under which the area to be explored was given to RIL, allows the company to charge international prices. This incentive is available to all companies who explored in the area. “Oil and gas exploration is a matter of chance with no guarantee that the billions of dollars spent will at all fructify in any discovery whatsoever. Once oil and gas is discovered, development of the wells would itself cost another few billions. So if producers are not allowed to fix the prices why would they gamble their billions ?” asks an analyst.
All that is little succour to Y S Rajasekhara Reddy who had been planning for mega industrialisation of the state based on the mega discoveries in K-G Basin. For the chief minister an additional problem are the string of gas based power plants planned in the state. The power plants are ready, but there is no gas to fire them. Interestingly, the prosperity from gas was also one plank of Rajashekhar Reddy’s anti-Telangana plank: he had been appealing to Telanganites that they should not seek a separate state when unprecedented prosperity would come its away in the wake of the gas discovery in the K-G Basin in Andhra Pradesh.
When confronted with the problem that he would be unable to secure gas, Rajashekhar Reddy as a powerful Congress chief minister did what he could do best: he started courting the powers that be in the Union government assiduously. But to no avail, not surprising considering that Mukesh Ambani wields considerable clout in the corridors of power. Finding this state of affairs, Rajashekhar Reddy has now started writing long letters to the Prime Minister on the issue of gas pricing. In the month of June, Rajashekhar Reddy penned three letters on the subject to the Prime Minister: three of them were drafted on the same day, Friday last. The copies of the letters are freely available, meaning that Rajashekhar Reddy is seeking to create a strong local support base from the public on the issues that he is writing upon.
Some of these letters are fairly long and raise highly emotive issues. Sample the following: “..whatever may be the legal meaning... for the vast majority of people living in AP, the gas found in K-G basin is indeed a gift of nature to Andhra Pradesh..a legalistic interpretation at this stage.. would be perceived by the people of Andhra Pradesh as a great loss, which the government could not protect its people from...”
At another place Rajashekhar Reddy argues: “... the natural gas in K-G Basin has the potential to substantially improve the economic fortunes of our state, in the same way as North Sea gas has done to UK....the people of Andhra Pradesh are quite aware of the extraordinary benefits reaped by Gujarat out of the natural gas from Bombay High, South Bassein and Hazira.. and naturally we have great expectations of this KG Basin gas transforming the economy of our state...”
At other places, the Andhra chief minister uses cold logic: he points out that ONGC and Gas Authority of India have been supplying the Bombay High gas at Rs 3.20 per standard cu metres or $1.95 per mmbtu and even at that price both the organisations have been making substantial profits. On the other hand, Rajashekhar Reddy points out that RIL which will be using “market discovered prices” is finding the price to be in the range of $4.5 -$5 per mmbtu plus transportation charges which works out to a price of Rs 8.20 per standard cu.m. Of course Rajashekhar Reddy’s argument glosses over the fact that the Bombay High discoveries were made decades ago, which means that the exploration and development costs were much lower.
Rajashekhar Reddy goes on to argue that while market economics had come to stay, privatisation is expected to lead to competition which would mean protection to the consumers. But in this case (of KG Basin gas), government monopoly is being replaced by a private monopoly, “that is highly dangerous and runs counter to public interest.”
But analysts say that all these arguments of Rajashekhar Reddy will not help because Mukesh Ambani is going by the book. In this dismal scenario, those in the know of things say that apart from waging a political battle based on protecting the interests of AP, Rajashekhar Reddy’s government might ultimately take the case to court. The argument: in an earlier case of ‘market discovered prices’ for coal (the same procedure that is being used for gas and which involves obtaining price bids from selected parties interested in buying), the Supreme Court had struck down the process observing that the pricing of such commodities must be based on the touchstone of public interest and not merely on the profit motive. Rajashekhar Reddy’s government would bank upon the apex court to give an encore judgment.
Before going to court, Congress’s Rajashekhar Reddy also seems to be getting into an unwritten strategic alliance with Anil Ambani who is also battling brother Mukesh Ambani for securing gas. In a recent order, the Bombay High Court has declared that RIL besides utilising the gas for its own use, should sell it only to Anil Ambani and NTPC. The legal battle is likely to be prolonged.
In an effort to unlock the hydrocarbon potential in the country and derisk the exploration process, which was otherwise the domain of national oil companies (NOCs) like ONGC and Oil India Limited (OIL), the government introduced the New Exploration Licensing Policy (NELP) in 1997.
The policy brought in private companies into the business of exploration and provided a level-playing field by making the NOCs compete with private players. The fields identified with potential oil and gas reserves have been allotted to these players through a bidding process. So far, six rounds of bidding have been completed and the seventh round is at an advanced stage.
Considering the inherent risk in the exploration activity, the government has offered several incentives to these companies that include income tax holiday for seven years from the start of commercial production, zero customs duty on imports for operations and freedom to the contractor for marketing of oil and gas in the domestic market.
In addition and this is important, companies including ONGC and OIL have to be paid international price for oil discoveries made in the blocks offered under NELP. So far, there have been significant discoveries in the Krishna-Godavari basin in Andhra Pradesh and Rajasthan. Contractors like Reliance in the K-G basin are expected to start production of gas during mid-2008. Other companies like Cairn Energy, GSPC and British Gas have other production schedules.
To arrive at the price at which the companies would have to sell the gas, they have to follow a specified procedure for “price discovery and marketing”. According to the initial guidelines, the companies will have to cater to the demand in the domestic market first before trying to sell it overseas. The companies will have to pay royalty to the government in addition to allotting a share in the product either in the form of cash or kind (in this case the product).
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