Economics · Governance · Public Policy

Reliance and its Oil

The Oil/Petrol/Diesel Price hike is killing all of us but it is happening due to the richest man in India. Reliance first exploited the loopholes in government policies regarding extraction of oil and then it colluded with the government to allow it to claim and further sell the oil at exorbitant prices. the process worked out in a convenient manner.

To extract oil, a company has to submit a bid to get permission for the extraction. The bid is awarded to the company that has the lowest operating cost and the highest profit to the government.

Once the company is awarded the bid, they don’t have to pay anything to the government till they recover their fixed costs (called CAPEX, an acronym for Capital Expenditure). Post that, a certain share of profit goes to the exchequer.

In 1990s, Cairn- a Canadian company found oil in the Krishna Godavari basin. To smoothen this process and allow more competition (and therefore profit), the government formulated the New Exploration and Licensing Policy (NELP). NELP was formulated to give out licences via open bidding.

Reliance teamed up with another Canadian company called Niko and got its first contract in 2002 for a period of 17 years with NTPC Ltd (formerly National Thermal Power Corporation). Two big changes happened post this:

1st: Rise of price in global oil prices. This wasn’t due to any thing else but OPEC, essentially a cartel, which decided to increase the prices.

2nd: Split between Mukesh (Reliance Industries Ltd., hereafter RIL) and Anil (Reliance Natural Resources Ltd., hereafter RNRL).

RIL, which was under Mukesh, got the bid in the year 2000 at $ 2.34 per mBTUs (million British Thermal Units). This meant that RIL would explore the oil fields. If they didnt find gas, the fields would be returned while if they did – they would recover CAPEX and then give a certain share to the government. Post that, they would sell the gas at the bidding price to the NTPC.

After the split between the Reliance brothers, Anil wanted gas for his energy project RNRL at the same price of $2.34 per mBTUs which was the price being sold at to the government. And he got it.

Reliance tried to increase its profit share and thus approached the then Union Minister for Petroleum and Natural Gas, Jaipal Reddy. They tried to manufacture a deal to increase the price to $4.20 per mBTU(from 2.34). When asked for a sound reason, Reliance claimed it was due to higher operating costs. But, reports show that the extraction cost was $0.894 per mBTU. But, Reddy knew that Reliance were bluffing and did not give in.

Thus, strings were pulled, ministers were replaced and the Petroleum and Natural Gas minister now was Murli Deora. Allegedly, Murli Deora accepted RIL’s reasoning and thus under the aegis of Pranab Mukherjee, a new empowered committee was setup to deliberate and decide ont he issue. Unsurprisingly, they allowed the price rise to happen.

Thus, everyone at a loosing end, which was pretty much Anil and NTPC went to the last resort- the Supreme court where the case is still pending.

RIL got Mani Shankar Aiyar to approve a Capex of $2.39 billion in 2004. Which meant that they were showing their fixed costs at this price and they wouldn’t have to pay a nickel till they recovered this cost.

In 2006, Murli Deora came back and approved a further capex of $8.80 billion for RIL. Which meant they will not a pay a single penny to the government on the first 8.80 billion that they make from this project.

Recently, RIL wanted to go beyond the grave. It asked our new minister Veerappa Moily to increase it already inflated price of $4.420 per mBTU to $8.80 per mBTU.

With the CAPEX already exhausted and no significant rise in the OPEX, Reliance has been successful in claiming its riches from the pockets of the mango people. The government has been actively assisting the same. Mr. Kejriwal of AAP wrote a letter to the EC to defer the price rise.

The Congress continued to defend the price rise and BJP has joined suit in the game.

About the Author

Prakhar Misra_PhotoPrakhar Misra is currently a Teach For India fellow in Mumbai, prior to which he completed his Engineering and founded a social media marketing company called ADDO. On a regular afternoon, you will find Prakhar sipping coffee, contemplating the baritone voice of Johnny Cash, and mostly answering the question – ‘How do you get yourself out of your own way?’

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