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RIL's Ambani: Selling gas
is as difficult as searching for it |
The
cat is finally out of the bag. Mukesh Ambani controlled Reliance
Industries Ltd (RIL) recently informed the government that it
wants more money for the natural gas it had committed to sell
to power producer National Thermal Power Corporation (NTPC). This
would otherwise pass off for as a rational business decision,
given the rising global gas prices, but for the fact that RIL
had bid a price that was a significant 30 per cent lower than
the next lowest bidder, Malaysian gas major Petronas, two years
ago. Not only that, this price was also lower than the prevailing
open market price (public sector gas continues to be sold at controlled
prices), that too in a country where only 50 per cent of demand
is met.
If RIL had then decided to change its mind,
the cost of exit would have been a mere Rs 20 crore, an amount
Ambani could recoup from sale of gas at the then prevailing market
price in less than a fortnight. But he chose not to. Rather, RIL
sought a review of the draft contract and insisted that NTPC drop
a key clause that ensured that in case of 'no supply', RIL compensated
the cost of alternative fuel, naphtha, which could be a very expensive
affair, as it turns out in present times-the price of naphtha
is seven times the gas price offered by RIL. Interestingly, this
clause did not deter Petronas from bidding a competitive price.
Anyhow, protracted negotiations between RIL and the power major
fell through on this count and NTPC went to court in December
2005. Interestingly, all this while, RIL did not rake up the 'price'
issue.
So, for RIL to now raise the bogey of the
gas price, rather late in the day, raises a few questions: Did
RIL misread competition in NTPC's tender? Or did it misread the
global gas market that, on the one hand, witnessed an explosion
in capacity creation, and on the other, heated up on account of
the rising oil prices? After all, the prevailing price is well
over twice that offered by RIL to NTPC.
Or, further still, was it an ingenious strategy
that worked up to a point-till the brothers parted ways? When
contacted, RIL refused to comment on the issue.
Proponents of this argument point to the
exploration policy that allows the explorer to share profits with
the government after recovering costs involved in finding the
hydrocarbon reserves. Evidently, profit share is a key determinant
in the award of exploration blocks by the government-higher the
profit share, better are the chances for an explorer to win a
block. All this assumes that the explorer will sell gas at the
highest price and not undertake anything less than an arms-length
transaction that would depress the market price. For instance,
for the discovered gas block in the Krishna-Godavari basin, RIL
has offered to part with 28 per cent of profits up to the point
where revenues swell by a factor of two-and-a-half times the investment.
Anything beyond, and government's take spikes to 85 per cent,
whilst RIL's returns pare to 15 per cent.
Critics of the RIL-NTPC deal argue that by
quoting a price well below the then prevailing market rate, RIL
set a benchmark that it hoped to replicate in other ventures of
its own-power as well as petrochemicals, where the product price
is delinked from costs. The gambit, if it were at all, is a fine
one, for NTPC would consume only 25 per cent of RIL's gas production.
The rest of it would enjoy the benefit of realising market value
without having to pay proportionate profits to the government.
However, that was not to happen, as the Ambani
empire split. Consequent to this was born a gas contract between
the brothers, cloned on the NTPC deal, except that it was a year
later (middle of 2005), even as gas prices rose further.
Evidently, this was no demonstration of affection
by the elder brother, for a market-linked gas price would only
benefit the government.
The government recently took note of this
and questioned whether at all the transaction between the Ambani
brothers was 'arms length' in nature, for the draft contract was
drawn up prior to the actual split.
Selling gas in a starved market, quite surprisingly,
is turning out to be as difficult as discovering it several kilometres
below the earth's surface in choppy high seas.
Size
Matters
Anil Ambani wants to build the world's
largest power plant.
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R-ADAG's Ambani: Big is beautiful |
They
begin with $10 billion (Rs 47,000 crore) these days. A few weeks
ago, Mukesh Ambani, Chairman, Reliance Industries (RIL), announced
a total outlay of Rs 50,000 crore for his retail project and a
special economic zone in Haryana. Last fortnight, younger brother
Anil, now Chairman of Reliance-Anil Dhirubhai Ambani Group (R-ADAG),
announced he will be putting a 60,000-mw coal-fired power plant
in Orissa. The proposed investment? Rs 60,000 crore (Rs 50,000
crore for generation, and Rs 10,000 crore for transmission and
evacuation). To be located in Hirma in Jharsuguda district, work
on the project is expected to start in a year and the first phase
of the 18,000 mw has a timeline of five years. At a press conference
in Bhubaneswar, Ambani said: "This will be the largest investment
in a single-location power plant anywhere in the world."
This is not the first announcement from Ambani
as far as the power sector is concerned. Earlier, Ambani-before
the Reliance demerger-announced plans for setting up a 3,740 mw
gas-power generating station in Dadri in Uttar Pradesh. The investment
for Dadri at that stage was Rs 11,000 crore (today, it is in excess
of Rs 15,000 crore). With the Orissa project, Ambani surely has
his hands full both in terms of timelines and also raising the
money for these mega projects. According to an analyst tracking
the sector, the thumb rule for the sector as far as raising finance
is concerned is 70 per cent from debt and the rest from equity.
"This means that for the Orissa project alone, Ambani's debt
requirement will be over Rs 40,000 crore," he adds. On the
power scenario at a more macro level, the deficit is close to
13 per cent with demand at 95,583 mw and supply just over 83,309
mw.
Interestingly, Ambani proposes another investment
of Rs 1,500 crore in Orissa, which will go towards setting up
a hospital and putting in place the "Dhirubhai Ambani Institute
of Communication Technology", which will be housed in Bhubaneswar.
For Orissa Chief Minister Naveen Patnaik, it is raining investments:
L.N. Mittal recently announced a Rs 40,000-crore investment for
his new steel plant. Sterlite Group's Anil Aggarwal had also announced
a Rs 15,000-crore investment to set up a university project last
fortnight. For Ambani, Hirma assumes huge significance since the
Dadri project has not moved much since the demerger. The bone
of contention has been on the supply of gas for the project, which
will have to come from Mukesh Ambani's RIL.
The Hirma unit will be coal-based.
-Krishna Gopalan
Concrete Buyouts
The race for domestic capacity hots up among
global giants.
Overseas
cement majors are bullish on the Indian cement story and are in
a bit of a rush to either enter the market or strengthen their
presence. There's Lafarge, which bought the Tatas' cement unit
in 1999, there's Swiss giant Holcim, which has acquired a 24 per
cent stake in Gujarat Ambuja and also owns 33 per cent in acc.
And there's Italcementi, which has a JV with the Zuari Group.
Now, German cement giant HeidelbergCement has bought a 51 per
cent stake in the S.K. Birla-owned Mysore Cement. Earlier, Heidelberg
entered into a JV with the S.P. Lohia-owned Indorama Cement. Heidelberg
accounts for about 68 million tonnes (MT) of the total global
capacity of nearly 1.5 billion tonnes. The top three cement producers
globally are Lafarge, Holcim and Cemex. With Mysore Cement in
the bag, Heidelberg's capacity in India goes up to 3.5 MT. Holcim
currently has 33 MT, Italcementi 2.2 MT and Lafarge has 5 MT.
For Heidelberg, the deal with Mysore Cement
gives it a significant entry into the Indian market. The deal
will involve the German major acquiring a 51 per cent stake in
Mysore Cement for $100 million (Rs 470 crore). This will be in
two tranches, which will have Mysore Cement making a preferential
issue of 6.65 crore shares that will be followed by the S.K. Birla
Group selling 1.34 crore shares. Heidelberg, has in fact, just
made an announcement to the shareholders of Mysore Cement for
the 20 per cent offer.
For Heidelberg, the deal brings to the table
Mysore Cement's 2.2 MT capacity, which is spread across its plants
in Central and southern India. This, with the existing grinding
plant-this is with Indorama-will take Heidelberg's capacity in
India to over 3 MT. Not large compared to the Gujarat Ambuja-ACC
combine or the Aditya Birla Group's UltraTech Cement, which have
capacities of over 30 MT. Obviously, Heidelberg has not ignored
the fact that the Indian cement industry is growing at over 9
per cent per annum on the back of some huge infrastructure projects.
While there has been talk of valuations-Heidelberg's deal with
Mysore Cement was stuck at about $120 (Rs 5,640) per tonne-being
on the higher side, the justification is the potential in the
Indian market. "GDP is growing at about 8.5 per cent per
annum, which has been accompanied by increasing valuations in
infrastructure," points out Ravi Menon, Managing Director
and Co-Head (Investment Banking), HSBC. Evidently, players like
Lafarge, Holcim and Italcementi are looking at that closely.
-Krishna Gopalan
Distress In Dabhol
Overruns and fuel uncertainties persist at
the project.
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Ratnagiri Gas & Power: No gas, no
power |
The
ghost of the beleaguered 2,184-mw Dabhol power project refuses
to rest in peace. Close to a year after hammering out an expensive
settlement with foreign lenders and equity holders, domestic lending
agencies SBI, IDBI Bank and ICICI Bank have yet again knocked
on the government's doors. They warn of an impending second round
of settlements, where not only will the domestic lenders suffer
further losses, consumers in Maharashtra too will pay a higher
price for power from the project. The reason: Time and cost overruns
coupled with the uncertainty over availability and price of fuel,
which ideally constitutes around 60 per cent of power cost.
The rechristened Ratnagiri Gas and Power
Project Ltd (RGPPL) was expected to be commissioned in October.
The latest deadline set is now March 2007. The delay is primarily
due to the inability of GAIL, a 28 per cent equity holder brought
into the project by the government with the main objective of
sourcing gas, to deliver the fuel of choice to power the plant.
As a last resort, GAIL is in the process of constructing a pipeline
that will connect the project to Petronet LNG Ltd's (PLL) receiving
terminal in Dahej, Gujarat. And even this gas supply is available
only for two years, till 2009, while the power project has a life
of 15 years.
The lenders have pointed out that the financial
restructuring of the project was on the assumption that the power
unit as well as the liquefied natural gas (LNG) receiving terminal
would be completed at a cost of around Rs 870 crore. This cost,
they fear-and, not without reason-will rise further. For instance,
GAIL has mooted a proposal that might not be critical to the power
plant operation, but would certainly help it trade gas across
the country from the spare LNG terminal capacity (over 50 per
cent). The gas transportation monopoly, based on GAIL's consultants'
report, has suggested construction of a 'breakwater' at a cost
of around Rs 300 crore as it would enable round-the-year berthing
of ships for supply of LNG.
The lenders, however, have not placed all
their cards on the table; during the restructuring process, they
have provided for a small degree of cost escalation. But one thing
is fairly certain: It does not add up to the Rs 1,465 crore estimate
staring RGPPL in the face.
Ironically, the RGPPL project is saddled
with the same problem that was partly responsible for the demise
of its disgraced parent, Dabhol Project Company: Operation on
naphtha, an expensive fuel. The only reason that the project has
managed to operate for the last 55 days, thanks to government
intervention, is that a good part of the fuel relates to naphtha
stocks that have been capitalised in the project cost itself at
the time of restructuring of the project. Furthermore, the consumers
in Maharashtra pay nothing more than the fuel cost amounting to
a significant Rs 4.35 per unit, with none of the project sponsors
earning anything. Had commercial terms been applied, the power
cost would have risen by another rupee per unit. Not surprisingly,
in their communication to the power secretary, the lenders have
objected to this inequitable disposition, in which only Maharashtra
gains.
While the project will achieve some degree
of stability once it fires on gas from PLL's Dahej terminal, there
still remains the issue of the cost of the pipeline that feeds
the project. While GAIL is quoting a price that would ramp up
the power cost by around 30 paise per unit, the lenders argue
that this very pipeline can be used by GAIL to trade gas from
RGPPL's spare LNG terminal capacity, once the gas major manages
to tie up a long term gas contract.
Clearly, the genesis of RGPPL's problems
lies in the government's decision to nominate government agencies
as equity holders rather than selecting bidders on the basis of
their ability to deliver gas and complete the integrated power
and LNG project in the quickest possible time.
-Balaji
Chandramouli
When Bad Is Good
CIBIL tracks bad assets, ARCIL collects them.
Rs
22,000 crore-that's the value of distressed assets that the Asset
Reconstruction Company (India) Ltd (ARCIL) is sitting on (which
is 9 per cent of the market for bad assets). But ARCIL isn't complaining,
because as its name suggests, it's the country's only bad asset
recovery company. A few hundred metres away from ARCIL's headquarters
in Mumbai's commercial district of Nariman Point is housed the
Credit Information Bureau of India (CIBIL), which is privy to
the credit history of 60 million retail borrowers, of housing,
credit card and other consumer loans. CIBIL is the country's only
public institution that revels in such data. "CIBIL will
help reduce NPAs (non-performing assets) over a period of time,"
believes S. Santhanakrishnan, Chairman, CIBIL. CIBIL gets its
data updated on a monthly basis by banks, who are also its biggest
customers.
Whilst CIBIL collects retail lending data,
ARCIL collects corporate assets, via banks. Says S. Khasnobis,
Managing Director & CEO, ARCIL: "I see small NPAs coming
into the system in a big way in the next couple of years."
The bulk of NPAs with ARCIL are from the commodity sector, but
the new NPAs in the system could arrive from real estate or other
bubble sectors. "NPA percentage may go down going forward,
but the absolute number will go up due to lending growth,"
he adds. The three-year-old company made a profit of Rs 30 crore
in 2005-06. But competition is inevitable-from foreign banks as
well as the Reliance-Anil Dhirubhai Ambani Group, which has lured
former ARCIL Chairman Rajendra Kakkar into its fold. Bad assets
never had it so good.
-Anand Adhikari
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