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August 18, 2009

Consequences of the fracas over gas

CNBC-TV18 journalist Menaka Doshi has an interesting blog post on the latest feud between the Ambani brothers.
After years of hard work and tens of thousands of crores of rupees invested, Reliance Industries is about to reap a rich harvest from its gas fields - 80 mmscmd by 2010. The KG-D6 find is one of the biggest of its time and a block-buster profit earner for the company. Except that the Government of India has stepped in to decide both the price ($4.20/mmbtu for 5 years) and the customer list. What was meant to be a market determined price (that’s what the NELP promised) is now a government determined rate. And while today some may claim that it favours Reliance Industries , tomorrow it may not! Infact I’d like to argue that the government’s interference in gas pricing is going to hurt, not just Reliance Industries in the long run, but also India’s ability to attract investors in exploration.

...Instead, some misplaced sense of benefaction has turned a business-family fight into a national resources battle. Now, no matter which way the Government goes, either brother can accuse it of bias, creating an even bigger international scandal (already the international press is having a field day laughing at how the Indian Government is stuck between two brothers). Reliance shareholders can rue the day the company found gas and the rest of us will never know how our taxes are spent (eventually that’s the revenue that funds subsidies).

If only the two brothers had stayed together…there’s a good chance they would have ensured market pricing for the gas. The Government could then provide fertiliser companies a direct subsidy to offset the gas price. Power and steel companies would pay market rates for the gas - so if international gas prices decline, we would all benefit from lower power bills and cheaper goods. If international prices increase, so would our bills - but atleast we would know what we’re paying for as opposed to paying higher taxes, a large portion of which is lost in translation. Not to forget, market pricing would have considerable brightened the prospects of finding international investors for future NELP rounds. More investors, more exploration. More exploration, maybe more oil and gas finds?

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in