A press release from analysts at Datamonitor in Hyderabad reports that lack of transparency and consistency in regulatory guidelines has left investors skeptical about investing in E&P. The comments follow hoopla surrounding government intervention in the latest conflict caused by these market limitations, which the analysts believe could have far-reaching consequences for the activities of domestic and international E&P players. The big news story currently circulating in the Indian energy sector is the natural gas supply dispute between Reliance Industries Ltd. (RIL) and Reliance Natural Resources Ltd. (RNRL). The dispute has resulted in natural gas production rates from the Krishna Godavari (KG) basin being significantly below initial targets, which in turn has held up projects at various stages of execution. This situation forced the Indian government to intervene and claim its sovereign rights to the natural gas assets (which belong to the country), in the process reminding companies that they are mere operators/contractors involved in bringing gas to the surface and supplying it to end customers. In 2005, RNRL, led by Indian billionaire Anil Ambani, signed a memorandum of understanding (MOU) with RIL for the supply of 28 MMcm/d of gas for a period of 17 years, at a price of $2.34 per million British thermal unit (MMbtu). This is the same price at which RIL won a bid for supplying gas to National Thermal Power Corp. (NTPC) in 2004. This problem is that other fertilizer and power companies have to pay the government-regulated price of $4.20/MMbtu for gas from the huge KG D6 field off the country’s east coast. Karan Ahuja, energy senior analyst explains: “The rise of fuel prices in the international market and an increase in operational costs has now forced RIL to dishonor its contracts with RNRL and NTPC, stating that it will not be possible to provide the gas at the pre-established price. RNRL has contested this decision and has laid the grounds for what is set to be an epic legal scuffle.” All this has led RIL to cut down its targeted production rate. Customers with signed gas allocation contracts are panicking. Delayed and lower production also means reduced or delayed revenues for the government, which is the primary reason the Indian government has intervened. The government says gas and oil are national assets and that operators are responsible only for bringing it to the surface and supplying it to end users. Furthermore, the government declared the MOU between the two parties null and void. Soumya Sen, energy analyst says: “Ideally, the operator and purchaser should sign a contract and establish a price that is either mutually decided or fixed as per the competitive pricing mechanism.” The government should not be party to such contracts; it should formulate policies that provide a transparent and clear set of guidelines. It should intervene only in cases where policies or contracts are violated. This arrangement would reassure international E&P operators engaged in India that while the government is interested in the timely extraction and delivery of the fuel to its entitled customers, the prices that customers are charged are competitive and based on free market dynamics. Although some multinational corporations operating in India may worry about the fact that the government is trying to involve itself in the pricing issue and in selecting customers of gas, given that the stakes are high (the KG basin is touted as one of the key solutions to India’s energy needs), the government’s intervention seems to make sense. The pricing dispute between RIL and RNRL is jeopardizing production from KG blocks and raising serious doubts about the regulatory policies governing the pricing across fossil fuel blocks in India. This could dampen investors’ appetite for investing in Indian. The final verdict from the Supreme Court of India will be a crucial one: upholding the lower price would definitely have a negative impact on investors, forcing them to sell gas at a rate much lower than the existing market price. On the other hand, fixing a price that is near the current market price (i.e. $4.20/mmbtu) would establish a competitive pricing system for the Indian fuel exploration and marketing industry. The analysts contend that it is also important that there be a flexibility clause, where prices can be reviewed from time to time with the mutual consent of the parties involved. Datamonitor believes that the outcome of the epic battle over national assets will set a benchmark for the Petroleum Ministry as well as the Directorate General of Hydrocarbons. It will steer them in designing across-the-board policy guidelines for fuel pricing and other similar conflicts. This will go a long way toward securing investors' confidence and consolidating India's position as an energy-secure nation. The safest bet for potential investors, of course, is to wait and see.
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