The Tata Power Company’s (TPC) decision not to pay heed to the Maharshtra government’s diktat to sell power to RInfra has exposed the state’s lackadaisical approach to the power sector. The state was seen forcing TPC to share its electricity under the garb of ‘consumers’ interest’ even as consumers of the state-owned power entity are facing huge power shortages.

A section of the government officials believe that the state government should not have got involved in a war between two corporate houses. “We (the government) have no reason to meddle especially after the issue was first addressed by Maharashtra Electricity Regulatory Commission (MERC) and then by the Supreme Court. The state’s intervention was uncalled for,” admitted a senior government official. According to this official, the state government ignored dissenting voices on the issue.

As has been reported, the Supreme Court last year upheld the TPC’s contention not to supply electricity to RInfra in the absence of a formal power purchase agreement between the two. The TPC had set April 30 deadline for RInfra to sign a PPA. When the deadline passed with no agreement, RInfra sought the government’s intervention. RInfra claimed that it would be forced to raise tariff if TPC discontinued power supply. The state, fearing the tariff hike may create a “law and order problem”, first directed the TPC to maintain the status quo and later appointed a committee to find a solution.

Experts point out that when the state government decided to step in, it didn’t even try to look fair. “When the government was seen trying to resolve the issue, it should have adopted a balanced approach,” a senior official from the state power utility said. “If the government was keen on playing an adjudicator, it should have asked RInfra to sign a power purchase agreement (PPA) with TPC while insisting the latter to keep the supply on,” this official felt.

Watch it on Youtube: Tata Power, Reliance Infra faceoff

BP PLC (BP, BP.LN) said Monday it supported a decision by India’s highest court in a case involving Reliance Industries to give precedence to government production sharing contracts over other agreements.

India’s Supreme Court last week ruled that Reliance Industries Ltd. (500325.BY) doesn’t have to abide by the terms of a family agreement when supplying natural gas to Reliance Natural Resources Ltd. (532709.BY).
It said a government production sharing contract should take precedence, meaning that Reliance Industries can sell gas to Reliance Natural Resources at a government-set price, rather than at the much lower rate set in a 2005 agreement between the two companies.

Reliance Industries is controlled by billionaire Mukesh Ambani, while Reliance Natural Resources is run by his brother, Anil.

“We understand that the Supreme Court verdict has upheld the sanctity of the production sharing contract. BP strongly supports the notion of the sanctity of contracts–long term stability and regulation–in order to encourage companies to make investment decisions,” a BP spokesman told Dow Jones Newswires.

By underlining its support for government production sharing contracts, the ruling has cleared up uncertainties surrounding such contracts and removed a major concern for international investors, analysts said.
The Ambani feud affected India’s last auction of oil and gas exploration blocks in October, as major global companies steered clear because of worries about the clarity of government contracts, as well as weak global demand.

In a previous auction, BP had signed a production sharing contract in a consortium with Reliance Industries for a deep water exploration block.

Source: Wall Street Journal

When two children are fighting on the same piece of chocolate, how would a mother play a mediating role between them?

Either she will buy a new chocolate for the other child or just divide that sole piece of chocolate into two equal parts to be distributed between both the children. What did Kokilaben do in case of feuding Ambani brothers? Read on…

Equal Distribution of Reliance Group’s Worth

When it came to feuding Ambani brothers, Kokilaben had no other option but to move forward with the latter case scenario of dividing equally the fortunes of the humungous empire of the Reliance Group which was built under the leadership of late Dhirubhai Ambani.

In June 2005, Mukesh and Anil Ambani signed a MoU to reorganize Reliance Industries, in order to take over reins of different assets and businesses of the group under their individual domain.

The most significant aspect of the MoU was that RIL promised to supply 28 million cubic meters of gas for 17 years at $2.34 mmBtu to Anil Ambani’s RNRL. However, the MoU came under dispute subsequently in 2007 on government setting up a price of $4.20 mmBtu for gas contracts in the KG Basin fields.

The core business of the group in the form of energy and petrochemical business was pocketed by Mukesh Ambani, while the junior Ambani inherited Energy, Financial services in form NBFC business and a newly developed but fast emerging Telecom business of the Reliance Group.

At this point in time, during the process of de-merger, the fortunes of the group were distributed equally between the two estranged brothers.

Anil Excelled in Finance & Mukesh went for Petrochemicals

Anil who had finance-related acumen was more than content while inheriting business of Reliance Capital, apart from group subsidiaries such as Reliance Infrastructure (Power business), Reliance Communications (Telecom business) and not to mention RNRL – somewhat a shell company with interests in marketing of natural gas.

On the other hand, Senior Ambani was happy with the group’s core business of Petrochemicals where Mukesh excelled in terms of technical know-how and interests.

Ambani Brothers Explore New Fields of Business

However, as time passed, both the brothers made efforts to expand and diversify their businesses post de-merger. Anil Ambani had dreams to construct a mega Rs.28000 crore power project at Dadri powered by a cleaner fuel in form of gas, in contrast to coal fuelled projects under the portfolio of Reliance Power.

On the other hand, Anil also diversified with mega-infrastructure projects including metro rail projects under the portfolio of Reliance Infrastructure. The Junior Ambani also became active in the space of Media and Entertainment by acquiring Ad-labs Films Ltd.

However, Senior Ambani moved along the lines of his traditional strength of Petrochemicals business. He came up with a new company in the form of Reliance Petroleum (RPL) and created the world’s most envied Petroleum Refinery in Jamnagar. Later, this company was merged with the parent company Reliance Industries.

Mukesh also came up with subsidiary involved in new-age concept of Retailing under Reliance Retail, Reliance Trends, Reliance Jems & Jewels and Reliance Digital.

At the time of de-merger, both the brothers departed amicably with equal distribution of the Group’s fortunes between the estranged brothers. From here, it remained on both the brothers as to how they expand their individual empires along with the crucial support of their shareholders and other stake holders.

Even as both the brothers started off as equals, their groups under the leadership of individual Ambani brothers have moved forward in their respective line of businesses but in different directions of claiming fortunes.

Recession – A Jolt for Anil Ambani’s Fortunes?

Mukesh has been growing in strength by every passing year, while Anil Ambani has lagged quite a bit over the last 5 years. Mukesh’s wealth has surged to roughly around $29 billion even as Anil’s fortunes are stuck at $14 billion, a whooping half that of his senior brother’s standing.

In fact, before the global recession was witnessed a couple of years back, the difference in fortunes of the feuding brothers stood around $10 billion.

Since then, the market capitalization of Anil Ambani’s Reliance Capital and Reliance Communications has taken a severe beating, even after the current sharp recovery in the Indian benchmark indices. This has widened the gap in the fortunes of both the brothers from $10 billion during pre-recessionary period to $15 billion post-recovery.

Let us have a look at how the individual companies of Junior Ambani’s ADAG group have performed over the last few years:

Reliance Communications

The business under Reliance Communications which was seen as fast emerging telecom business before the de-merger – fared poorly over the last couple of years speaking in line with relative performance in terms of market capitalization of the company on the Indian bourses.

The telecom industry remains completely bogged down by the intense price wars and over-crowded capacity of the sector. The company was also alleged by DoT for misallocation of revenues in its accounting practices.

The stock price of the company is way below the peaks levels of around Rs.800 witnessed during the peak of the previous Bull Run, currently at depressed Rs.150 levels.

Reliance Capital

The business under Reliance Capital has somewhat been the star performer for the Anil Ambani’s group. The company’s insurance business has been one of the fastest growing companies under private insurance space. The premium from the insurance business has surged more than five times over the last 3 years.

On the other hand, Reliance MF is still a leader with nearly Rs.1 lakh crore in assets under management. Reliance Growth scheme of the group still remains one of the most admired mid-cap funds among the retail investors.

More recently, RBI has allowed entry of new players for granting of banking licenses to private sector entities and NBFCs to enter into the commercial banking space. Reliance Capital could be one of the key beneficiaries of this new announcement as it intends to tap pan-India banking business.

However, the stock price of Reliance Capital has remained depressingly low around Rs.700, as against the peak level of around Rs.2500 witnessed during the previous bull phase. This depressing market capitalization levels has exerted pressure on the valuation of the company from pre-crisis levels.

Reliance Infrastructure

At the peak of the previous bull run, Reliance Infrastructure (REL) had come out with the IPO of its power related subsidiary Reliance Power, which saw a huge rush of retail investors to grab on the future power story of the Reliance group.

However, what followed later is no secret to anybody reading this article. The crash in the stock price of Reliance Power has halved the valuation and market capitalization levels of both Reliance Power and REL, in the process disappointing investors with unprecedented losses in IPO of Reliance Power.

After transferring the power related business into its subsidiary Reliance Power, REL shifted its attention and involvement into major infrastructure projects including mega metro rail projects.

The market capitalization of REL is way off from its peak levels of around Rs. 2200 witnessed during the frenzy of Reliance Power IPO.

Reliance Natural Resources & Reliance Power

I’ve taken the analysis of both these companies together as their fortunes are somewhat linked with each other.

Reliance Power has plans to built 35000 mega watt of green-field power generation projects. Anil Ambani has planned the biggest power project of all at Dadri, with expectation of supply of gas through RNRL, originally sourced from RIL, at $2.34 mmBtu as per the MoU signed in 2005.

However, in its recent verdict the apex court has directed that the private MoU signed between the feuding Ambani brothers cannot be upheld against the PSC agreement signed with the government, the owner of the gas.

This verdict has come as a big jolt to the junior Ambani camp whose costs for their ambitious power project could escalate dramatically to $4.20 mmBtu as per the price fixed by the EGoM.

Specifically speaking about RNRL, if the case would have been gone their way, it could have translated into a profit of Rs.3000 crore a year for this gas company. However, the negative verdict renders this company into a near shell company with some coal based methane blocks under its portfolio.

To conclude, post de-merger and to some extent even recently witnessed global crisis, the valuations of all the ADAG group companies have been a laggard in terms of market valuations and even performance wise.

On the other hand, the performance of Mukesh’s RIL has remained stable and sound all this while except that the company’s Gross Refining Margins (GRM) took a small hit on account of recessionary impact of fall in demand of crude oil. However, the demand and GRM are likely to scale higher gradually, as optimism returns in the global markets.

Will Anil Ambani’s ADAG Group of companies recover any time soon?

Source: http://trak.in/tags/business/2010/05/11/reliance-ambani-brothers-past-present-future/

Highlights

• The Indian Supreme Court just released its long awaited verdict on the gas price dispute between Reliance Industries (RIL) and RNRL, ruling by 2 to 1 in favor of RIL. It was ruled that the government PSC takes precedent over all other agreements as RIL does not have absolute rights over the gas.

• As such, the original MOU signed between the Ambani brothers in 2005, in which RIL agreed to sell gas from the D6 field to RNRL at price of $2.34/mmbtu was agreed, was deemed non-legally binding as the MOU was not made public and no government approval was obtained on the agreed gas price of $2.34.

• The verdict did not however conclude what price RIL should sell the Dhirubhai gas to RNRL. Instead the court has given a period of 6-8 weeks for RIL and RNRL to renegotiate new contract terms. The agreed gas price will then have to be approved by the Indian government as the resource owner.

• Expectation- the final gas price will be as per the Indian government’s Gas Utilization Policy established in 2008, in which the gas price was fixed at $4.20/mmbtu for 5 years. While the ruling is positive for RIL in the short term, it is clear that gas prices will remain regulated by the Indian government in the long term.

Conclusion

India’s Supreme Court ruled today by a margin of 2:1 in favor of Reliance Industries in the long running gas pricing dispute with RNRL. The key points from the ruling are that the PSC takes precedent over the MOU and that the government has the right to decide the price of gas under PSC contracts. While the parties have 6 to 8 weeks to agree contract terms (including the price) of gas supply, we do not expect RNRL or RIL will have much scope for negotiation. Fundamentally, RNRL must effectively abide the terms under the gas pricing utilization policy which stipulates a price at the beach of $4.20/mmbtu fixed for 5 years. If the parties fail to agree, the government will mandate the official price or RNRL will lose supply rights. In the short term this is clearly a positive for RIL and its partner Niko in the D6 block. In the longer term the key point is that the government will become the de facto regulator of both onshore and offshore gas prices.

Reliance Industries Limited (RIL) announced it’s fourth oil discovery in exploratory block CB-ONN-2003/1 (CB 10 A&B) located onland in the Cambay Basin and awarded under NELP-V round of exploration bidding.

The well, CB10A-F1, was drilled to a total depth of 1605 m in Part A of the block with the objective of exploring the play fairway in the Miocene Basal Sand (MBS) of Babaguru formation. Two hydrocarbon bearing zones were identified from 1397-1407 m and 1378- 1382 m. Conventional production testing was carried out in one of the zones in the interval 1397-1400 m. The well flowed at a rate of 300 barrels of oil per day (bopd) through 6 mm bean with a flowing tubing head pressure of 250 psi. The Discovery is significant as this play fairway is expected to open more oil pool areas leading to better hydrocarbon potential within the block.

The block CB-ONN-2003/1 is located at a distance of about 130 kms from Ahmedabad in Gujarat in the Cambay basin. The block covers an area of 635 sq km in two parts viz., Part A & Part B. RIL, as Operator, holds 100% Participating Interest (PI) in the block.

While the entire block was covered with 2D seismic, about 80% of the block area has 3D seismic coverage. Of the fourteen (14) exploratory wells drilled in the block by RIL so far, 10 of them are located in Part-A and the remaining 4 nos. in the Part B of the block. RIL is continuing further exploratory drilling efforts in the block.

This Discovery, named ‘Dhirubhai–47’, the fourth oil discovery in the block so far, has been notified to Government of India and Director General, Directorate General of
Hydrocarbons. The potential commercial interest of the Discovery is being ascertained
through more data gathering and analysis.

This Discovery supplements RIL’s understanding of the petroleum system in the Cambay basin in general and this block in particular. Based on interpretation of the acquired 3D seismic campaign in the Contract Area, several more prospects with upside potential have been identified at different stratigraphic levels.

About Reliance Industries Limited

Reliance Industries Limited (RIL) is India’s largest private sector company on all major financial parameters with a turnover of Rs. 2,00,400 crore (US$ 44.6 billion), cash profit of Rs. 27,933 crore (US$ 6.2 billion), net profit of Rs. 16,236 crore (US$ 3.6 billion) and net worth of Rs. 1,37,171 crore (US$ 30.6 billion) as of March 31, 2010.

RIL is the first private sector company from India to feature in the Fortune Global 500 list of
‘World’s Largest Corporations’ and ranks 117th amongst the world’s Top 200 companies in terms of profits. RIL ranks 75th in the Financial Times FT Global 500 list of the world’s largest companies. RIL is rated as the 15th ‘Most Innovative Company’ in the World in a survey conducted by the US financial publication-Business Week in collaboration with the Boston Consulting Group.

In a fossil fuel-dominated market a weaker appetite for energy may save the planet from the global warming chaos

Every time you start your car engine, you’re making the planet warmer. Environmentalists have already screamed their throats sore warning about the dangers of climate change and failure to curb CO2 emissions, but rallying widespread support has been extremely difficult.

The efforts such as the “Anti-Smog Day,” which on Feb. 28 featured more than 30 Italian cities blocking non-emergence traffic for a day are commendable, but changing the big picture requires more than that. Having said this, we shouldn’t forget that motorists stay away from the road in order to put a lid on pollution, whereas fighting the global warming is a “by-product” of their agenda. Impacting the problem globally requires a concerted effort on a far bigger scale, involving the governments of the world’s biggest energy spenders.

Following in the footsteps of the Kyoto Protocol, one such attempt was made at the UN Climate Change Conference (COP15) in Copenhagen last December. Expectations were high, but results were moderate, to say the least. Instead of yielding a firm, binding agreement participating nations exited the nine-day forum with a piece of paper that entailed no formal obligations, pledging instead to keep the rise of global temperature below 2 degrees Celsius. The signatories recognized the need for “deep cuts in global emissions,” but such a vague formulation can hardly please energy experts who warn that we are on course for a 6-degree temperature rise which could wreak environmental havoc.

The International Energy Agency’s “450 Scenario” asserts the 2-degree goal is achievable if carbon concentration is kept within 450 ppm. However, in the absence of a legally binding deal, the energy mix will still be dominated by fossil fuels, the difference being that almost the entire growth in energy would come from outside the industrialized world, namely from China, the Middle East and India. According to environmentalists, the fossil fuel-dependent market is a major threat to fighting climate change and the major reason behind their calls for a quicker switch to cleaner, alternative fuels.

“The energy sector is at the heart of climate change. More than two-thirds of the emissions causing climate change come from the energy sector,” IEA chief economist Fatih Birol told the audience at Moscow’s Oil & Gas Outlook Russia 2009 forum last December. “The domination of the fossil fuels – oil, gas, coal – will bring a temperature increase of 6 degrees Celsius in the decades to come. It is a catastrophic rise in terms of its effects on climate, agriculture and even the rise of sea level. If that happens, the entire equilibrium of our planet will be changed with catastrophic consequences.”

It Takes Oil to Produce Oil

One of the major concerns, though, is while demand for oil is likely to grow and will mainly be driven by the developing world, 2009 saw a dramatic decline in oil and gas investments – last year, global upstream spending (Fig. 1) was budgeted to fall by over $90 billion or 19 percent over 2008, recording the first drop in a decade. According to Birol, the main reasons behind that plunge were the “difficulty in accessing the capital as well as the loss of producers’ appetite for investment at a time when the demand is uncertain.” The reluctance to invest, coupled with a potentially strong growth in oil demand – which could be driven by an economic rebound – may spearhead further growth in oil prices, posing a major risk to global economic recovery.

Speaking in Moscow Birol warned that depletion of the resource base is another serious concern for the oil industry. “The bulk of global oil output today is coming from the so-called giant and supergiant fields and a big portion of them is in decline. They are declining at different rates, but globally it’s a strong decline,” he said.

In practical terms, this means that oil output has to be increased in order to compensate the decline in existing fields and to meet the growth in demand.
It won’t be easy. According to Birol, even keeping the current global oil output of 85-86 million barrels per day in 20 years’ time may be a tough challenge. “If we assume that the oil demand would be flat, at zero growth, and in 2030 we want to produce the same 85-86 million barrels per day, we would have to increase production by 45 million barrels per day just to compensate the decline in existing fields. So that’s additional oil we need to bring onstream just to be able to stay where we are today. And 45 million barrels per day means finding four new Saudi Arabias,” he said.

Global Gas Market Will Need Four New Russias

The gas sector is going through a similar phase, says IEA. Conventional production in many fields in North America, North Sea, Western Siberia, Iran and elsewhere is shrinking and today’s output of 3 trillion cubic meters per year will be halved by 2030. “To compensate that decline and meet the growth in demand, we need to deliver 2.7 billion cubic meters to the market, which means we have to bring four new Russias onstream so we can just stay where we are today. In other words, by 2030 about 60 percent of production would need to come from the fields that are not producing today,” explained Birol.

Russia with its current production of 650 billion cubic meters per year and an expected increase to 760 billion by 2030 will retain the role of a key supplier in the global market, but may be in for a rocky patch in the next few years in the face of a seemingly inevitable gas glut.

Its plans – as well as those of existing and potential LNG exporters in the Middle East and North Africa – to ship LNG to the U.S. market, have been dealt a serious blow by what experts call a “silent revolution” in U.S. shale gas production. Its low cost (an IEA analysis rates it at $5 per Mbtu) combined with a 10-percent return rate promises a growing role of shale gas in the U.S. energy mix, at the same time largely reducing its needs for imported LNG. This and the biggest drop in gas demand over the last 40 years (in 2009 it fell by 4-5 percent globally) is expected to bring a gas glut of some 200 billion cubic meters by 2015.

Finding the Exit

IEA forecasts that fossil fuel use will peak around 2020, whereas the big environmental impact should be made by the zero-carbon fuels: wind, hydropower, biofuels and nuclear energy. Under the “450 Scenario” the current 18-percent share of renewables in the energy mix should double by 2030 (Fig. 2). In a wider context, the global strategy to limit greenhouse gas emissions rests on four pillars: energy efficiency, renewables, nuclear energy and carbon capture and storage (CCS, which aims to bottle up CO2 emissions by large polluters such as fossil fuel-fired power plants).

Of the 190 participants of the Copenhagen summit, six share the biggest responsibility for fighting global warming: the United States, Russia, China, Japan, EU and India. Moscow and Washington have already declared CO2 reduction targets of 25 and 17 percent respectively, but these pale in comparison with the commitment made by China, which promised to cut down its emissions by 1 Gigaton!

“It is about one-fourth of the emissions we need to reduce worldwide and this puts China at the forefront of combat against climate change. The image of China as a dirty country with a lot of coal may change over the coming decades,” said Birol, adding that China’s switch from coal to gas could boost the current level of Beijing’s gas imports from 10 billion cubic meters per year to 90 billion in the future, making China an important market for gas exporters. “Many developing countries like China are traumatized by $147 oil and don’t want to have the same experience again or their economies to be vulnerable – that is why they approach energy security very seriously.”

No less important in fighting climate change is the effort to use energy more efficiently. Russia has pledged to improve its energy efficiency  by 50 percent over the next 20 years (Fig. 3). It is a tall order in an energy-devouring world plagued by consumerism, but then… how much of a choice do we really have? Getting back to where this story started, do think twice before turning that ignition key. Keeping it in your pocket may be the “small step for man, but one giant leap for mankind.” To make your mark in history today, you no longer need to fly into outer space.