Case: RIL & RNRL

Prepared By:Nirav Katordiya 18Gautam Dua 10

Subject: BPSMUnder Guidance of: Prof. Hiren Patel

V/S

Starting of case

ADAG claims right over 70 per cent of KG-D6's initial output of 40 million standard cubic meters per day after the family split in  in June 2005.

After the split Mukesh Ambani took control of RIL and Anil got financial services, communications and power business of the group through a series of demerger of firms.

As per the MoU, RIL was to supply gas from its KG basin to RNRL for its upcoming 7400 MW power project at Dadri in Uttar Pradesh.

In December 2006, RNRL moved the Bombay High Court asking it to compel RIL to honor the gas agreement. Justice Anup Mohta, who heard the case, asked the companies to settle the matter internally under the June 2005 family agreement. The judge also restrained RIL from selling gas to third parties till the final order.

Starting of case

While asking RIL to arrive at mutual agreement on this line with RNRL, the court also said that Ambani brothers can consult their mother if there is any difficulty in arriving at a conclusion, which is permitted as per the MoU.

Unable to agree on the price, terms and quantity of gas, both firms approached the division bench of the Bombay High Court against the order of the single bench in early 2008. The hearing of the matter continued till February 2009. Thereafter, the division bench came out with an interim order allowing RIL to sell gas to third parties.

The basic argument in the RIL-RNRL case pertained to the pricing and quantum of gas. During the course of hearing, RNRL made it clear that it wanted 28 million metric standard cubic meters per day of gas for 17 years for $2.34 per million metric British thermal unit (mmBtu), while RIL argued that it could not sell gas below the government-approved price of $4.2 per mmBtu.

Please have a read through case

• According to the Gas Sale Master Agreement between RIL and RNRL, the Anil Ambani-owned company is entitled to get 28 million cubic metres of gas per day from the Krishna-Godavari basin at a price of $2.34 per million British thermal unit (mBtu) for a period of 17 years.

• RIL had refused to supply gas at that price for that period. According to RIL, it is ready to supply the gas to RNRL at the government-approved price of $4.20 per mBtu. Anil Ambani-promoted Reliance Natural Resources has filed an affidavit in the Bombay High Court in the case involving Reliance Industries, refuting the petroleum ministry's stand that the government-approved price of $4.2/million metric British thermal unit (mmBtu) is the selling price of gas.

The affidavit, filed on December 4, also stated that according to the Directorate General of Hydrocarbons, the selling price for gas can be lower than the valuation price.

• According to the Gas Sale Master Agreement between RIL and RNRL, the Anil Ambani-owned company is entitled to get 28 million cubic metres of gas per day from the Krishna-Godavari basin at a price of $2.34 per million British thermal unit (mBtu) for a period of 17 years.

RIL had refused to supply gas at that price for that period. According to RIL, it is ready to supply the gas to RNRL at the government-approved price of $4.20 per mBtu.

• "It added that under clause 21.6 of the PSC, the government is only required to approve the formula for determination of the gas price and not determine or fix the sale price.“

As per the NTPC-RIL contract, NTPC is due to get the gas from KG basin at $2.34 mmBtu.

RIL has denied that the contract with NTPC was formalised. NTPC has filed a separate suit against RIL, seeking that RIL execute

the contract of gas supply. Additional solicitor general Mohan Parasaran told the court that

'NTPC will not be allowed to buy gas at less than $4.2 per mmBtu'. He also said that the gas should be sold as per the marketing

priorities as spelt out in the gas utilisation policy of the government. As per RNRL, it is also entitled to get the gas from RIL at the same

price as NTPC. National Thermal Power Corporation would not be 'allowed' to buy

KG-D6 gas at less than $4.20 per million British thermal unit (mmBtu), the union government told the Bombay high court on Tuesday.

Role of

• The government had come up with a gas allocation policy last year which made it difficult for new power plants to get gas from RIL, but this policy did not apply to the RIL-RNRL case since that was already in court.

• RNRL has also averred that the ministry had concealed the most important fact from the court earlier that the price formula approved by the government on September 12, 2007 has no impact on the agreement or commitment to supply gas by RIL to RNRL at $2.34/mmbtu as the decision was "without prejudice the RNRL vs RIL and NTPC vs RIL court cases" as stated in government's press note of September 12, 2008.

• The ministry had also said that the supply of natural gas from RIL's KG basin D-6 field would be made at a selling price of $4.2/mmBtu for all customers across all sectors, as decided in the Empowered Group of Ministers' meeting held in September 2007.

Role of Government

Role of Government The government in an affidavit filed in the RIL-RNRL case on

November 14 had stated that sale at a price less than $4.20 per mmbtu is not envisaged by the EGoM in accordance with provisions of the PSC.

The ministry decided to allot gas to the Dabhol power plant, operated by Ratnagiri Gas and Power, from the KG basin owned by Mukesh Ambani's RIL on a priority basis to help ease electricity shortage in Maharashtra. The government will have to buy gas from RIL at $4.20 per mbtu for Dabhol.

The government has intervened in the case, essentially supporting RIL's stand that price of gas should be subject to government approval and it cannot be less than $4.20 per million British Thermal Units.

India needs to build fresh capacity of around 25,000 MW each year till 2031-32 if it wishes to sustain an 8-10 per cent GDP growth.

• The problem here is that the $4.2 price was based on a restricted bid where RIL invited just 10 companies to bid. The short point is RIL structured the bids in such a way it has virtually no downside (even if oil prices fall from $105 per barrel to $45, prices of gas fall from $4.43 per mmBtu to just $4.07) and restricted bidding is not permitted under the PSC.

• Sticking to the $4.2 price means RIL's cash inflows remain high (how high will depend upon what the capital expenditure is, since the government's share of the RIL gas under the PSC really becomes significant only after RIL has recovered 2.5 times its capex . . . this is a subject best dealt with in a separate piece).

• But more than that, it raises prices of electricity (a $4.2 price means consumer prices rise by at least a rupee a unit) and fertiliser and hence government subsidies will also rise sharply. RIL got the $4.2 price by structuring its bid in a particular fashion and deciding who it would invite to bid -- if this is acceptable, ONGC ,GSPC and others who find gas will also be free to structure their bids as they want. In other words, India can get caught in a high-cost gas spiral even at a time when, like now, global gas prices are lower.

Judgment of high court

• The Bombay high court on Monday June 15,2009 ordered Mukesh Ambani's Reliance Industries Ltd (RIL) to assure gas supply of 28 million metric standard cubic metre per day (mmscmd) from Krishna-Godavari (K-G) basin D6 block to Anil Ambani promoted Reliance Natural Resources Ltd (RNRL) for 17 years at $2.34 million metric British thermal unit (mmbtu).

• Shares of RNRL surged 20 percent at Rs 105.60 while RIL shares fell 6.40 per cent at Rs 2,260 in todays trade.

In the Supreme Court

• 8 Jul 2009 ... RIL-RNRL dispute: Over to Supreme Court. Well, the drama has now shifted to the Supreme Court of India.

• The Supreme Court on Monday 20july 2009 asked Mukesh Ambani-run Reliance Industries Ltd. and Anil Ambani group firm Reliance Natural Resources Ltd. to reply to the government's prayer for declaring 'null and void' their family agreement on gas supply, and posted the matter for hearing on September 1.

Loses to RIL

Mukesh Ambani-promoted Reliance Industries (RIL) will loses around $1 billion (Rs 4,300 crore) a year if it sells gas to the Anil Ambani’s Reliance Natural Resources (RNRL) at the agreed price of $2.34 per million British thermal unit (mBtu).RIL has already invested Rs 30,000 crore for developing its assets in Krishna Godavari basin and wants to trade gas at the government-approved price of $4.2 per million mBtu, which has been arrived at through an arm's length formula.RIL fears that RNRL would trade the gas that it gets from RIL at a cheap price to a third party as it does not have its own power plant.

Thank You

Any Quires Please???