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.

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.

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