RAMESH PATHANIA/MINT

GOING CRITICAL

KEEPING THE LIGHTS

FROM GOING OUT

T
he current state of the Indian energy sector is a story that has
many parts. On the power side, it marks the triumph of the private
sector’s tenacity to set up generation capacities and reach out to an
enormous market suffering under outages and thirsting for electricity.
But it’s also about the failings of the Centre and the states to make the
power sector viable even after 10 years of reform initiatives. All the
stakeholders are walking on thin ice. Will the reforms deliver results
before there are casualties? These and other questions are covered in
the first article in this comprehensive Mint Report on Power by
Balaji Chandramouli.
While renewable energy is viewed as “infirm” power, it’s nevertheless
gaining ground in India. The section on renewable energy explores the
issues that govern its viability, the difficulties involved in setting targets
that are too high, and the problems associated with harnessing the sun
and the wind.
While oil and gas exploration initiatives were launched with high
expectations, India seems to be back at square one as far as that
endeavour is concerned, says the next story.
In conclusion, the report looks at retailing, which has been marred by
populism for decades. And though the government has become gener­
ous with using the D­word (deregulation), there is little conviction
behind this. In the case of the gas distribution sector, the problem of
shortages has been compounded with the government deciding on its
pricing and allocation. We find out what it means and how it will play out.
(feedback@livemint.com)

CLOSING THE CIRCUIT THE SUN, THE WIND

The deteriorating health of state Good intentions are one thing,
utilities hasn’t put off private but harnessing solar and wind
sector power producers >E02 power will take some doing >E05

THE OIL, GAS HUNT THE RIGHT RATE

India’s experience with oil and Political considerations have by
gas exploration has been mixed and large been responsible for
so far. What of the future? >E07 dictating fuel prices >E10

LEAP OF FAITH
MAKING THE CONNECT
The health of
state­owned
distribution utilities
I n late July, Prime Minister
Manmohan Singh sounded
an alarm for the power sec-
tor. He cautioned that the state
is deteriorating, but utilities’ financial health was
deteriorating, dragged down
that hasn’t discouraged by the low tariffs for certain
private sector power consumer segments (read:
producers. They are farmers), losses in the supply
of power (transmission and
betting on the future, distribution, or T&D) and pay-
hoping the state units ment of bills (commercial loss-
es). It wasn’t the first time such
will fix themselves a warning was being delivered.
They are, in fact, voiced at reg-
ular intervals but with little ef-
fect. Electricity is a concurrent
subject, with the Centre having
no role in the distribution of
power to consumers.
Moreover, it can hardly
claim the moral high ground
on the ills of populism. In the
petroleum sector, where its oil
companies control 95% of
sales, the Union government
last year provided subsidy sup-
port to the tune of around `1
trillion, two-and-a-half times
the losses that the states are
likely to notch up this year.
There are, however, a few fun-
damental differences. Oil com-
panies are partially insulated
from this burden by way of
IOUs from the Union govern-
ment that are tradable in the
market, for the issuer is finan-
cially well off. However, the
states’ financial health can
hardly support this profligacy;
not now, or over the last three
decades that this has been per-
petuated in terms of offering
free power to farmers or starv-
ing the utilities of funds for the
upkeep of the distribution net-
work and for augmenting pow-
er capacity. The resource
squeeze finally led to the states
inviting private companies to
enter the generation business
in the 1990s.
Most of these could hardly
move forward, as the lenders
began to apply the brakes from
early 1999. They argued that
the utilities charged tariffs that
hardly met costs; they received
payments for only half the
power they sold, while the rest
were lost to theft or losses due
to the dilapidated distribution
networks that required funds
for restoration. For the reve-
nues that were flowing in, ex-
isting lenders such as Power
Finance Corp. Ltd (PFC) had
already laid claim to it, in the
event of default on their loans.
The reticence to lend was as
much about fear as the convic-
tion that investments needed
to be secured. By the end of
2001, public sector financial
institutions were in the middle
of Union government-bro-
kered negotiations that finally
led them to absorb losses on
the loans given to the belea-
guered Dabhol power project
in Maharashtra.
Around this time, the Union
government performed anoth-
er bailout. It allowed a one-
time settlement of hefty dues
owed by the state utilities to
Central sector power compa-
nies such as NTPC Ltd and
NHPC Ltd. While past dues
were liquidated at a discount,
future payments on the sale of
power were secured with iron-
clad guarantees, reflecting the
prevailing sentiment—a lack of
Facing challenges: Cooling towers
at NTPC’s power station in
Dadri, Uttar Pradesh.
AHMED RAZA KHAN/MINT
confidence in the state govern-
ments, let alone their power
sector. In the event of a de-
fault, the deal allowed the
Central power companies to
lay their hands not only on the
state’s Reserve Bank of India
account, but also claim first
rights on resources that de-
volved from the Centre to the
state. That it was never in-
voked is another matter, but
NTPC did issue a few threats in
the initial years and they
BLOOMBERG
worked.
All this created momentum
for Union government inter-
vention in state power sector
reforms. In 1998, Central legis-
lation led the way for the states
and the Centre to set up regu-
lators. This set the tone, for it
allowed transparent tariff set-
ting, key to restoring the finan-
cial health of the utilities. In
2002, Central funds began
flowing to states as part of the
Accelerated Power Develop-
ment and Reform Programme
(APDRP). Over the next five
years, around `14,000 crore of
taxpayer money went towards
improving power distribution
infrastructure.
It helped. The government
said country-wide average
losses dropped from 38.86% to
29.24% between 2002 and
2007, but they were nowhere
close to the target of 15%. It
was only in 2007 that the Un-
ion government realized things
had gone wrong. They had
gone about investing in the
states without any credible
baseline data on the state of af-
fairs in the distribution busi-
ness—data that would have
pinpointed the leakages in the
supply wires. To that extent,
the investments weren’t direct-
ed with precision. It isn’t just a
matter of data collection but
also that of reporting it, an
area of concern since the state
power agencies don’t have a
good record on this. Until the
early part of the decade, they
passed off theft as agricultural
consumption, a practice that
was curbed only after the Elec-
tricity Act, 2003, nudged them
to “unbundle” the state’s elec-
tricity business into separate
entities for generation, trans-
mission and distribution.
The lack of credible baseline
data was one of the key rea-
sons for the failure of the Oris-
sa distribution privatization
programme. Launched in 1998,
as a part of the country’s first
state reform programme, the
World Bank-funded initiative
assessed losses at a mere 35%,
while in reality they were as
high as 47%. To that extent, the
state power regulator did not
allow tariff revisions and end-
TURN TO PAGE E3®
® FROM PAGE E2
ed up choking private compa-
nies, BSES Ltd and the US-
based AES Corp., the second of
which quit in 2001.
The correction in the Cen-
tre’s reform programme was fi-
nally made in July 2008, with a
decision to invest `10,000
crore in automated informa-
tion technology (IT) systems to
wire up the power networks in
towns having a population
larger than 30,000. The roll-out
of this “investment torch” is
expected to commence only
towards the end of this year.
However, even this delayed
approach by the Union gov-
ernment may not be good
enough to stave off the crisis
brewing in the state power sec-
tor. On the surface though,
things look fine: State power
utilities aren’t defaulting on
payments to power producers.
Not one but two power ex-
changes have been set up and
both function smoothly with
buyers and sellers doing brisk
business in short-term trades
without any defaults. And, pri-
vate sector companies are
keenly responding to the
states’ request for large-vol-
ume, long-term power pur-
chase deals. A study by Prayas
Energy Group, a not-for-profit
organization, reveals as much
as 41,000MW of private power
is in the process of being con-
tracted by states.
But there’s enough rot under
this veneer for the policy man-
darins at the Planning Com-
mission and the power minis-
try to wonder: Is India going to
have another bailout in the
next few years?
Consider this: Over the last
three years, there have been
virtually no tariff hikes in most
of the states despite rising
power production costs. The
regulators have not allowed
hikes citing one reason or the
other. This may have some-
thing to do with the appoint-
ment of regulators, which is
carried out by the political
class of the respective states.
In Haryana, the regulator has
gone so far as to deny even a
return on equity for the distri-
bution utilities on the grounds
that they have a negative asset
base, an inheritance of the
decades-old populist policies
of the state government.
Besides this, states force
utilities to avert tariff hikes by
seeking to create “regulatory
assets”, a euphemism for bun-
dling the additional revenue
requirement into a fictitious
asset that it expects to extin-
guish over time. But the dam-
age that does is evident.
Take the
case of West
Bengal. In the
last seven
The practice of
years, this avoiding tariff
state has vast-
ly improved its hikes by creating
distribution
system. If in- regulatory assets
centives
claimed under
has been on the rise
the APDRP are
a yardstick to
measure the effort made by
utilities to reform, then West
Bengal ranks second only to
Gujarat. But the comparison
ends there. The weight of regu-
latory assets, accumulated
over the last few years, is of the
order of `3,000 crore. This has
choked the finances of the
West Bengal distribution com-
pany to the point, where, for
the first time, in April, it had to
raise a `120 crore loan to meet
working capital requirements.
Where will it find the money
then to improve the distribu-
tion network?
The practice of evading tariff
hikes by creating regulatory
assets has been on the rise.
Tamil Nadu, a relatively well-
run power utility, created as-
sets worth around `7,000 crore
in July this year, while the
neighbouring state of Karnata-
ka has sought to create assets
worth `2,550 crore this year.
effect it has had on private sec-
tor interest in the generation
business cannot be denied.
With the planning process
working in five-year cycles, the
government expects
62,000MW of generation ca-
pacity to be added in the 11th
Plan period (2007-2012), thrice
that added in the previous
five-year plans.
The ownerships profile of
this fresh capacity shows a
sharp rise in private power
generation—four times that in
the Ninth Plan, which has had
the best performance since
power was opened up to the
private sector, and nine times
the addition in the previous
Plan period. Indeed, major
lenders such as PFC are bet-
ting big on private generation
projects, not only now, but in
the future as well. In the cur-
rent Plan period, the private
power portfolio is expected to
be around 23% of their lend-
ing; this is projected to vault to
Meeting demands: The Nava Bharat Ventures Ltd power plant at Palavancha in Kammam district of Andhra Pradesh. over 60% in the 12th Plan peri-
od.
There is no respite from the es soar. Its neighbour Mahar- higher voltage. The political states as part of its reform ini- PFC has relaxed some of its
farm segment either. As many ashtra, on the other hand, fac- yield on this technical invest- tiative, in which it expects to strict terms since the two bail-
as three states—Tamil Nadu, es the wrath of the populace ment is significant, perhaps as spend around `50,000 crore outs in the early part of this de-
Punjab and Karnataka—give despite the fact that overall much as that gained by offer- during 2007-2012, which in- cade—the Dabhol buyout as
free power to farmers, while power shortages are lower. ing free power to farmers. cludes the `10,000 crore IT well as the settlement of dues
the tariff for farm power in This is because Gujarat invest- It is only now that states programme—this is over three owed by state distribution util-
Andhra Pradesh is near zero. ed in a separate feeder net- with large agriculture loads times what the Union govern- ities to Central generation
In 2008, on a countrywide ba- work to supply farmers power such as Andhra Pradesh, Pun- ment spent on state reforms in companies. It no longer insists
sis, utilities sold 28% of their for domestic use. As a result, jab, Haryana and Maharashtra the previous five years. on state government guaran-
power to the farm segment, in Gujarat’s farmers don’t flare are making large investments tees on power sales. While
return for which they received up when the ambient tempera- in the creation of separate The supply fix there are serious doubts about
6% of their total revenues. In ture rises. Besides, they get feeder lines. Taking a cue from While the reduction in dis- the utilities’ quality of assets,
effect, on an average, a utility better quality farm power this, the Union government is tribution losses over the last be it the revenue stream pro-
loses around a rupee for every since, given the separation, the exploring the possibility of decade is anything but impres-
unit of power it sells. In other farm feeder is energized at a funding such programmes in sive or accurate, the salutary TURN TO PAGE E4®
words, the more power the
utilities sell, the more they
lose. This equation might now
begin to hurt like never before.
The Union government esti-
mates that the country will add
around 43,000MW in the next
two years, as much as what has
been added in the last eight
years. What aggravates this sit-
uation further is the renewed
pace of the Union govern-
ment’s rural electrification
programme—the Rajiv Gandhi
Grameen Vidyutikaran Yojana,
which aims to energize the
homes of non-remunerative
consumers. Meanwhile, the
extent of the cross-subsidy
burden borne by remunerative
consumers, the industrial and
commercial sectors, leaves lit-
tle room for any further raise.
Writ large in this poorly im-
plemented, decade-long pow-
er reform story is the lack of
political will in the states to re-
vive the fortunes of the distri-
bution utilities. The Union
government says it plans to
hold a meeting of chief minis-
ters in the coming months to
build momentum that will
help drive up
farm tariffs.
But that will
not be easy, for
all the states
must bite the
bullet. If even
one desists,
competitive
populism will
spell doom for
the political
fortunes of
whoever is running the neigh-
bouring state.
However, dealing with farm
power is not just about wooing
the farmer with free power. In
fact, in the desert state of Raja-
sthan, in the early part of this
decade, farmers made it clear
that they preferred to pay if the
quality of supply was right.
Today there are two classes
of farmers—those who pay a
fixed rate for unlimited power
but are not assured of the
quality, and those who are
willing to pay for quality power
that gets metered. What is re-
vealing is that the power distri-
bution utilities anticipate that
farmers will make a steep mi-
gration over the next four years
to metered supply connec-
tions.
The other noteworthy exam-
ple is that of Gujarat, which
does not face riots in peak
summer when power shortag-

Peak deficit: The generation capacity addition programme still suffers on one count—it’s not enough to meet surges in demand during certain times of the day.
MAKING THE CONNECT
® FROM PAGE E3
jected from the distribution ar-
eas or their claimed invest-
ments, or, for that matter, the
accounting practices, the lib-
eral lending approach does,
however, alleviate the power
shortage in the country. With
the peak shortage still at
around 13% of installed capac-
ity, and the off-peak shortfall
at around 10%, a robust capac-
ity addition programme is es-
sential to the growth and de-
velopment of the country.
With aggressive lenders in
the game, promoters are not
far behind. They have less to
worry; for every `7 that the
lender spends on the project,
the promoter forks out only `3.
Nevertheless, private compa-
nies try to reduce the risk of
payment default by the distri-
bution utility by keeping a foot
in the short-term trading mar-
ket where the prices are close
to twice long-term prices paid
by the utility. For example,
Lanco Infratech Ltd has the
freedom to sell 100MW of its
upcoming 1,200MW project in
Anpara, Uttar Pradesh.
Indiabulls, a group with in-
terests ranging from real estate
to power projects, is setting up
a 1,320MW coal-fired project
in Bhaiyathan, Chhattisgarh,
of which it plans to sell 300MW
in the open market, with the
rest locked up in a long-term
power sale agreement with the
state. What sets it apart from
the rest of the projects is the
extent of support it takes from
the trading portfolio—the
long-term tariff is as low as 81
paise per unit, well below the
cost of production even for a
plant located at the mouth of
the mine.
For that matter, it compares
favourably even with the `1.19
per unit winning bid by Reli-
ance Energy Ltd for the
4,000MW Sasan ultra mega
power project (UMPP). That
project is one of the four
awarded by the Union govern-
ment as part of its UMPP poli-
cy, an initiative to promote pri-
vate power generation.
Under this policy, besides of-
fering a tax holiday on invest-
ments, a Union government
agency, PFC, obtains all the ap-
provals including captive coal
mining rights and auctions the
projects. The competition in
the Sasan project was intense;
so much so, that it spurred a le-
gal battle between the Anil
Ambani-controlled Reliance-
Anil Dhirubhai Ambani Group
and the Tatas. Not only that:
the Tata group, which rarely
challenges a government deci-
sion, has done so over a bid in
which it did not even partici-
pate. And, precisely for this
reason; it questioned the gov-
ernment’s decision last year to
allow Reliance Power Ltd to
use excess coal from the cap-
tive mine-based Sasan project
to fuel another greenfield proj-
ect, and that too at a higher
tariff. The Tatas contend that
had they known about the
spare coal, which comes to
twice what the Sasan project
needs, it would have partici-
pated in the bid. Tata Power
eventually won a UMPP—the
imported coal-based Mundra
project in Gujarat.
With an incremental de-
mand of 100,000MW during
the 12th Plan period, PFC is
currently working on eight
more of such projects. The ca-
pacity addition programme
has raised investor interest in
the equipment business: four
new players are setting up do-
mestic production facilities—
Larsen and Toubro Ltd and
Mitsubishi Heavy Industries
Ltd to produce critical boilers
and turbo generators (TGs),
Bharat Forge Ltd and Alstom
Projects India Ltd to produce
TGs, Toshiba India Pvt. Ltd and
Jindal Steel Works Ltd for TGs,
and Ansaldo STS India and GB
Engineering Enterprises Pvt.
Ltd for boilers.
The generation capacity ad-
dition programme, however,
still suffers on one count—in-
adequate generation capacity
to meet surges in demand dur-
ing certain times of the day,
also called peak power. This is
a role that coal, the staple
power fuel in India, funda-
mentally cannot fulfil since a
coal plant takes six-eight hours
to start up. Technically, hydel
and gas-based plants best fit
this role. Hydel is the preferred
option in the Indian context
given the potential in the north
and north-eastern parts of the
country and the lack of large
gas finds in the country.
While the track record of the
Central public sector compa-
nies is poor—the 11th Plan
projections have been halved
primarily due to them—the
states’ hydel policies for pri-
vate investments are myopic to
the extent that they are skewed
towards promoting local de-
velopment and shoring up
state revenues through large
allocations of unpaid power
from the projects. As a result,
private capacity addition dur-
ing the 11th Plan period that
concludes in 2012 is expected
to be a mere 2,460MW.
However, over the last two-
three years, besides the largest
private hydro player, Jaipra-
kash Hydro-Power Ltd, large
private companies such as
GMR Infrastructure Ltd, GVK
Power and Infrastructure Ltd
and Reliance have entered this
segment aggressively and the
capacities are expected to be
commissioned in the 12th Plan
period. As much as hydel pow-
er offers stable inexpensive
tariffs, with free fuel (water),
powering it, the projects are
fraught with risks.
The construction risks owing
to geological surprises in
mountainous terrain are good
enough to inflate project costs
considerably. The Union gov-
ernment-prepared shoddy
project reports are partly to
blame for this—it takes two
years to improve them and
make them reliable, otherwise
companies are likely to end up
overshooting initial capital
costs. In one of the large pro-
jects (over 1,000MW capacity)
currently under execution in
the North-East, the capital cost
has soared from `4.2 crore per
megawatt to more than `7.5
crore per megawatt precisely
for this reason. With less than
modest demand for power in
the North-East, these capaci-
ties will need to find their mar-
ket in other parts of the coun-
try. This play, through spot
trades as well as long-term bi-
lateral agreements, is still in
the works.
Trading as an activity in the
power sector was born when
the electricity laws were con-
solidated, spruced up with
some provisions for reforms,
and introduced in 2003. A key
provision in the law that has
helped nurture this business is
one that pushes states to allow
HEMANT MISHRA/MINT
retrievably as states could well
end up using this provision to
curb power transfers from
multi-state UMPPs. For states,
it’s not just a matter of maxi-
mizing supply, but also keep-
ing its paying consumers from
taking flight to other power
Nuclear power a serious sources.
Tamil Nadu walks this thin
contender after treaty line by allowing industry to
buy power from the two power
exchanges—the Indian Energy
A tomic power began to be considered seriously as a source of energy in
India in 2008, following the Indo­US civil nuclear agreement. It paved the
way for access to nuclear fuel from the world market after a gap of 34 years.
Exchange and the Power Ex-
change of India—that offer a
tariff for the power sale a day
Until then, the industry needed to depend on covert purchases from friendly ahead, but no more. However,
countries such as the erstwhile Soviet Union to fuel the 4,000MW, or 2 .5%, of the markets have little to re-
India’s installed generation capacity. joice about. The nature of in-
With fuel access now looking like it’s more or less in place, the government tervention by the states to
is considering the addition of 1,590MW in the 12th Plan period—2012­2017. To shore up supplies for their
access the global equipment market, the government last month put in place consumers has only deterio-
legislation that caps the liability of equipment suppliers in the event of an rated; they now issue informal
accident. Armed with this, the state agency, Nuclear Power Corp. of India Ltd instructions to power plants
(NPCIL), is in talks with private companies such as General Electric Co., with spare capacity not to go
Hitachi Ltd and Alstom SA for the supply of equipment at five sites. outside and seek the highest
While private ownership is not on the cards as yet, the government is look­ price for their power.
ing at options including that of floating a new company under the department To escape the tyranny of
of atomic energy where it sells 49% equity or divests a stake in NPCIL. state power utilities, industry
What has made nuclear power attractive is that it lasts twice as much as has, over the years, gone ahead
coal­fired plants, has ecological merit since it does not emit greenhouse gases, and set up captive units. The
and offers a stable competitive tariff, drawing from low uranium costs as well installed capacity as of 31
as the charge to convert the commodity to fuel grade. However, with the West March 2008 was 25,000MW,
embracing nuclear power since it is the cheapest route to greenhouse gases close to 15% of the installed
mitigation, the price of uranium ore has shot up in the last few years, rising as generation capacity in the
high as $140 (around `6,400 today) per pound in 2007. The price today is country. However, with large-
around $47. scale capacity additions expec-
While the above strategy is one leg of the government civilian nuclear pro­ ted in the coming decade, the
gramme involving conventional reactors, it is also moving ahead with fast­ utilities will have less room to
breeder reactors and eventually thorium­based reactors. This strategy is built hold them to ransom.
around the fact that India has large reserves of thorium.
Transmission
With fuel resources located
large consumers access to al- draw at the penalty price of in one region of the country,
ternate power sources. Free- `8.75 per unit, especially dur- the coal belt in the east and
dom comes at a price. They ing the election season. hydro units in the north and
need to pay the state utility the With the average trading North-East, a robust transmis-
cross-subsidy borne by them price hovering around `5-6 per sion system holds the key to
as well as the transmission unit, it is evident that the harnessing them and thereby
charges involved in carting states are feeling the pinch. To ensuring that consumers bene-
power from the new supplier. ensure that the delinking is ce- fit from correctly priced power.
Over the last few years, pow- mented, the Central Electricity Central to this theme is a ro-
er trading activity has risen to Regulatory Commission bust inter-state transmission
as much as 4% of the country’s (CERC) in May further raised system. Power Grid Corp. of In-
annual generation. As much as the penalty to `12.25 per unit. dia Ltd has a virtual monopoly
the trades help reduce short- Power-deficit states such as in this business. The only pri-
ages and improve the produc- Karnataka, Andhra Pradesh vate participant is Tata Power
tivity of industry, they also re- Maharashtra and Tamil Nadu Ltd in the Tala transmission
flect the stresses of the utili- are resorting to invoking emer- system that hauls power from
ties. Till two years back, the gency powers under section 11 Bhutan to the northern and
price of the power traded was of the Electricity Act to block western regions of the country.
determined by a penalty levied the export of power from their The transmission business is a
by the regulator for over-draw- state. The latest case is that of low-risk game, insulated from
ing power. Since power flows Karnataka, which applied the the vagaries of the distribution
like water, from a higher po- ban in April. One of the trig- business. In the 11th Plan peri-
tential to a lower potential, gers was Jindal Steel Ltd’s deal od, the transmission capacity
and the states are all linked up to sell power to Tamil Nadu. As addition is well below target—
through transmission high- a result, both the states went to 70% in the case of high-voltage
ways called the grid, any devi- the Supreme Court before set- direct current lines and 48%
ation from the utilities’ sched- tling on a compromise. for 765 kV lines. The shortfall
ule of power drawal set the The issue has far-reaching has little to do with Power
previous day endangers the consequences for the power Grid’s failings, but while trans-
grid. Rather than tightening sector; CERC, which regulates mission systems dovetail into
their belt during shortages, the inter-state sale of power, generation capacity, the tar-
utilities under pressure from has argued that the instrument geted generation capacity has
their political masters over- could hurt the power sector ir- failed to materialize.
HOLDING PROMISE

THE SUN AND THE WIND

There’s no doubt that
TIBOR BOGNAR/AFP

renewable energy
needs to be a key
B elladonna, also known
as nightshade, is a plant
with bell-shaped flow-
ers and shiny black berries
power source in the that’s been of use to human for
centuries. In large doses, it is a
future. But harnessing poison that can kill; in lesser
the sun and the wind dosages, it has a hallucinogen-
efficiently is going to ic effect that made it a thing of
great utility in witchcraft and
take some doing devil-worship in medieval Eu-
rope. Highly diluted, it serves
as a homeopathic drug to rem-
edy headaches and fever.
Solar energy in the Indian
context is a bit like nightshade.
Energy from the sun costs
around `13 per unit, over five
times that of conventional
power. In large doses, it will
drown the financially fragile
state power utilities that are
reeling under heavy losses of
at least `40,000 crore per year.
Yet, its virtues cannot be dis-
missed, nor can its backers. On
the eve of the inter-govern-
mental climate change confer-
ence in Copenhagen in De-
cember 2009, the Indian gov-
ernment launched its pro-
gramme, Solar India, to boost
solar generation capacity to
20,000MW by 2020. The gran-
diose plan has been started
with a modest first phase of
1,000MW in the first year. The
government has invited bids
for 650MW as a start.
Of this, 150MW of capacity is
to be based on solar photovol-
Huge potential: Wind turbines in Rajasthan. Wind energy is the taic panels, with each player
largest component of renewable energy capacity in the country.
TURN TO PAGE E6®

THE SUN AND THE WIND
AHMED RAZA KHAN/MINT
® FROM PAGE E5
allowed to apply for 5MW ca-
pacity. In the case of the more
conventional solar thermal
technology, the government is
bidding out 500MW, with a
single player allowed up to
100MW.
This homeopathic dose is
unlikely to hurt the utilities
since it will be “diluted” with
inexpensive coal-fired power
belonging to state-owned
NTPC Ltd and sold by its trad-
ing arm, NTPC Vidyut Vyapar
Nigam Ltd (NVVN), which is
also undertaking the bidding
process.
If the response to the pre-
bid conference held on 28 Au-
gust is any indicator—around
300 companies came forward
for a mere 650MW, with sever-
al of them making their first
pitch in the power sector—it
appears to be a gold rush. Per-
haps, that’s not far from the
truth—the solar companies
are insulated from the risk of
directly selling power to the
distribution utilities. Besides,
the Central Electricity Regula-
tory Commission (CERC), the
power sector regulator, has
approved a very generous tar-
iff cap of over `19 per unit.
The bidding process is expec-
ted to bring about a more so-
ber tariff.
Nevertheless, the entry of
solar power is today grounded
in subsidies. In this case, the
burden will be borne by NTPC,
a state-owned company listed
on the stock exchanges. Going
forward, the solar mission is
relying on two factors to cata-
lyse the growth of solar power
in the country. First, a reduc-
tion in the price of equipment
and second, a stiff dose of reg-
ulation to support forced pur-
chases by the utility until solar
fares favourably against coal, a
point that the solar mission
hopes will be achieved by
2022.
Regulation in this direction
is already in operation. Power
regulators in as many as 16
states have specified renew-
able purchase obligations
(RPO) on the utilities—this
leaves the choice of renewable
energy to the utility. The solar
mission is seeking to carve out
a separate 0.25% RPO for solar
projects in the initial years go-
Bright future: (top) Engineers optimizing the solar panel configuration
at GE’s Green Lab; (above) Suzlon windmill power generation plant in
Jaisalmer, Rajasthan.
ing up to 3% in 2022.
The private sector has
evinced a fair amount of inter-
est in the solar business owing
not only to the renewable RPO
regulations, but also strong fis-
cal incentives such as acceler-
ated depreciation.
Furthermore, the Central
government is working on a
system to create Renewable
Energy Certificates (REC). The
REC system that is currently
being developed allows for re-
newable energy to be sold in
two components—a green at-
tribute and the electrical ener-
gy. For instance, while a state
such as Tamil Nadu has huge
wind resources, Delhi does
not. So, once the REC system is
in place, Delhi can buy the
green attribute certificate of
renewable plants located in
Tamil Nadu to meet its RPO
obligations.
Wind energy is the largest
component of renewable ener-
gy capacity in the country. Its
growth has come about, to a
large extent, because of the
preferentially higher tariff that
regulators have allowed it. In-
dustry too has embraced it.
Kalyani Forge Ltd, an engi-
neering firm that is energy in-
tensive, has wind farms—while
the tariff is more than the aver-
age cost of purchase for a utili-
ty, it is still lower than the
higher tariff charged by the
utility from industrial and
commercial consumers.
Wind energy has one major
drawback—it is not reliable. In
Spain, where wind accounts
for close to 40% of capacity,
forecasts mitigate this risk. The
potential for wind energy in
India, however, cannot be ig-
HEMANT MISHRA/MINT
HARIKRISHNA KATRAGADDA/MINT
nored. States such as Karnata-
ka, Gujarat, Andhra Pradesh
and Rajasthan have immense
untapped potential. And un-
like solar power, which boasts
of higher potential but is still a
distance away from the mar-
ket, wind has made the cut. In
the 11th Plan period, wind en-
ergy is expected to record a ca-
pacity addition of 9,000MW of
the total renewable kitty of
11,829MW.
Indeed, regulation drives re-
newable energy business like
few others. However, the busi-
ness of creating new capacity
could well prove to be as re-
munerative as saving it. The
government is working on a
mechanism to create a market
for energy efficiency called
perform, achieve and trade
(PAT). The agency which is de-
veloping this mechanism, the
National Mission for Enhanced
Energy Efficiency (NMEEE),
shares a common parent with
the solar mission, the National
Action Plan on Climate
Change (NAPCC), which was
unveiled by the government in
2008.
PAT is expected to be imple-
mented sometime in June and
industries will be given time
till 2014 to implement the
standards set by the Bureau of
Energy Efficiency, the imple-
menting organization. If they
exceed the benchmarks, they
are rewarded with energy sav-
ing certificates, and, if they
don’t, they need to buy them
from the two energy exchang-
es, the Indian Energy Ex-
change and the Power Ex-
change India Ltd (PXIL),
where the high achievers can
sell their units.
ON THE BLOCK

THE HUNT FOR OIL AND GAS SANTOSH VERMA/BLOOMBERG

India’s experience with
oil and gas exploration
has been mixed thus
T he story of enterprise
and entrepreneurship in
the Indian oil and gas
business begins with the eco-
far. The country is still nomic crisis of 1991, when In-
dia hardly had enough foreign
on the learning curve exchange to pay for three
months of imports. Nudged by
the World Bank, a key lender
during this troubled period,
the government accelerated
the pace of private participa-
tion in the oil exploration busi-
ness. As a result, producing oil
and gas fields owned by state-
owned Oil and Natural Gas
Corp. Ltd (ONGC) were farmed
out to private companies. Even
though private companies had
been invited to develop oil and
gas fields in India since 1982,
this was the first time that In-
dian companies could actually
enter the sector.
While Videocon Industries
Ltd, a company founded only a
few years before, in 1987,
joined hands with Command
Petroleum Ltd, an Australian
exploration company, and Building infrastructure: Two
bought 25% equity in the Rav- workmen walk from an oil
va field in 1993, a consortium platform under construction for
of Reliance Industries Ltd and ONGC at a Larsen and Toubro
yard at Hazira, Gujarat.
TURN TO PAGE E8®
Successful scorecard: A Reliance Industries petrochemical plant at Jamnagar in Gujarat. In 2010, it had an impressive scorecard—41 discoveries from 29 blocks acquired in eight rounds of Nelp auctions.
THEHUNTFOR OIL AND GAS
® FROM PAGE E7
Enron Oil and Gas India Ltd
(EOG) won a 70% stake in the
Panna, Mukta and Tapti (PMT)
fields in 1994.
All the stakeholders pros-
pered—estimates of reserves
swelled as private explorers
bettered ONGC’s finds. The
PMT and Ravva experience
boosted private sector interest
in the exploration business in
India.
Meanwhile, Bill Gammell, a
Scottish entrepreneur who had
entered the exploration busi-
ness as recently as 1980, was
on the lookout for acquisitions
in Asia after selling out his
North Sea assets. India was on
his radar and he went about it
by acquiring Command Petro-
leum in 1997. He backed Com-
mand Petroleum geologists
who did not share ONGC’s
modest outlook on the block.
Two years later, Cairn India
Ltd met with its first success in
India, striking gas in the Ravva
“satellite” fields.
Seizing this underlying bull-
ish sentiment, the government
began auctioning out explora-
tion blocks in
1998 under the
New Explora-
tion Licensing
For Reliance, the
Policy (Nelp). aggression has been
It had plenty of
tax incentives justified—it has
for investment
in the sector demonstrated
besides an ele-
gant produc-
performance with
tion-sharing
contract with
the KG basin D6
the state that find and beyond
mitigated con-
tractual ambi-
guities, trans-
lating into lower investment
risks. This was badly needed to
attract investments in a busi-
ness fraught with risks, so
much so that lenders don’t
provide funds at the drilling
and exploration stage.
Sure enough, Cairn partici-
pated and won a few blocks. So
did Reliance, having entered
the business with the PMT
fields. However, that didn’t
give it the experience needed
as the company wasn’t ap-
pointed as the operator of the
fields. That would have given it
technical experience, be it de-
lineating the fields for efficient
recovery of oil and gas or dril-
ling to locate more of it.
Reliance got to work on the
big haul of eight deep-water
blocks in the Nelp 1 auction
with a motley crew of ONGC
geologists, choosing Ravi Bas-
tia as the chief. Before he came
on board, Bastia had been lan-
guishing at ONGC, in charge of
its data room at Houston, Tex-
as, among other such tasks, far
removed from the hot job of
identifying drilling locations in
search of oil and gas reserves.
What followed was a period
during which the prospects of
finding oil and gas in the coun-
try heightened, accompanied
by events that defied conven-
tion.
In 1994, Chevron Corp. exit-
ed an exploration block in the
Krishna-Godavari (KG) basin,
declaring it to be a failed ba-
sin. In 2001, three years after it
won a KG basin block in Nelp
1, Cairn struck gas, 38km off
the coast of Andhra Pradesh.
This doubled its reserves and
boosted the stock, which out-
performed the UK oil sector in
2001 by 25%. In 2002, Reliance
struck gas in an adjacent field
in the KG ba-
sin that
proved to be
no less than
the largest gas
discovery in
the world that
year at 15 tril-
lion cu. ft (tcf)
of reserves,
enough to fire
a 15,000MW
generation ca-
pacity that
could meet
the power
needs of three
large states in the country. It
dramatically altered the gas
supply-demand equation in
the country. In the year of its
discovery, against a domestic
supply of a mere 66 million
standard cu. m per day (msc-
md), demand was as high as
117 mscmd. In 2009, when the
gas finally reached consumers,
the gap narrowed—against a
demand of 225 mscmd, supply
was to the tune of 142 mscmd.
Of this, Reliance accounted for
60 mscmd, with production
scheduled to rise to 80 mscmd
in 2012.
In the oil sector, the story
was similar, except that the en-
trepreneur was a Scottish ex-
plorer, Cairn Energy Plc. When
it took over Command Petro-
leum in 1997, beside a pres-
ence in Ravva, it also had a sig-
nificant holding a field in Bar-
mer, Rajasthan, where its part-
ner, Royal Dutch Shell Plc, was
busy studying the geological
maps and looking in the south-
ern reaches of the field. Shell
did strike oil in Barmer, but
the reserves were not promis-
ing enough to warrant invest-
ments to raise the crude oil
from below the ground.
Cairn bought out Shell over
the next two years. Its chief ge-
ologist Mike Watts held a view
that was contrary to that of his
former colleagues at Shell, a
company with a grand legacy—
it started in 1897, a mere 38
years after oil production com-
menced in the modern world
and on average had produced
a 10th of global oil production.
The Barmer hydrocarbon
chase was reduced to a simple
question in geological par-
lance: what was the direction
of the millennia-old geological
rivers? That held the key to the
sediment deposits that get
converted into hydrocarbon
reserves. Watts argued that
they flowed in the opposite di-
rection, from north to south.
And he was right. In 2004,
Cairn drilled in the northern
reaches of the field and struck
oil. It was a significant find: In
2009, when production com-
menced, it accounted for 20%
of the country’s domestic pro-
duction that has seen, if any-
thing, stagnant domestic sup-
ply since ONGC’s mega find off
the coast of Mumbai in 1985.
The Reliance and Cairn suc-
cess stories drove up investor
interest in the exploration
business in India. This was re-
flected in the subsequent Nelp
rounds. Large established
firms such as BP Plc, BG Group
Plc and BHP Billiton Ltd made
a beeline for the auctions.
Crude oil prices, which began
their steep ascent in 2002, also
helped.
However, the sentiment did
not last long, even though
crude oil prices kept firm
through most part of the de-
cade. Auctions were largely re-
duced to a two-legged race,
with ONGC and Reliance pick-
AHMED RAZA KHAN/MINT
ing up most of the blocks. Why
did this happen? To begin
with, a brief look at the two
companies offers some insight.
For Reliance, the aggression
was justified—it had demon-
strated performance with the
KG basin D6 find and beyond.
In 2010, it had an impressive
scorecard—41 discoveries
from 29 blocks acquired in
eight rounds of Nelp auctions
that are at various stages of ap-
praisal and development. It is
not as if all of them will con-
vert to producing fields; in
some cases, it might not be
commercially viable to lift the
reserves to the surface. How-
ever, the prospects are promis-
ing. Reliance has informed the
government that it expects to
achieve 35 mscmd of gas pro-
duction from these discoveries
in 2016. If you add this to the
D6 production, Reliance would
account for close to half the
country’s domestic production
that year.
ONGC, on the other hand,
has had little or no success
since 1985, when it discovered
gas in the South Bassein fields,
in the western offshore regions
of India. As a result, ONGC’s
domestic gas production has
been stagnant at around 55
mscmd over the last two-and-
a-half decades.
It wasn’t a case of lack of
funds; the deregulation of
crude oil prices in 2002 left the
company awash with capital.
So much so that its chairman
in 2002, the late Subir Raha,
billed the company’s explora-
tion programme, Sagar Sam-
riddhi, as the world’s largest
services contract that year. It
primarily involved hiring rigs
to scour the ocean floor for oil
and gas.
The company’s best perfor-
mance in the Nelp blocks is
hardly a reflection of good
technical skills in the explora-
tion business—it bought into
the block in the KG basin
where Cairn struck gas in 2001
and hopes to bring the gas to
shore by 2016. If anything, this
offers a comparison: Reliance
struck gas in an adjacent block
in 2002 and got into produc-
tion in 2009, which itself is just
about par for the course for a
field located in harsh terrain.
TURN TO PAGE E9®
® FROM PAGE E8
However, the failures dwarf a
larger problem that it created
as a consequence of its partici-
pation in the Nelp auctions—
one of reckless bidding that
turned away several foreign
companies. The Confederation
of Indian Industry (CII), a lob-
by group, has raised this issue
with the government on several
occasions in a veiled man-
ner—it has sought a cap on the
number of blocks that public
sector companies can bid for.
Even V.K. Sibal, a former head
of the Directorate General of
Hydrocarbons, the petroleum
ministry’s technical arm, made
the same point.
There were other issues as
well. Towards the middle of the
decade, ONGC complained
that the blocks were not big
enough to hold its interest.
While initial blocks such as Re-
liance’s KG-D6 block were over
6,000 sq. km in size, area fell
with the passage of every Nelp
round. Moreover, the pace of
seismic studies offering credi-
ble data needed by exploration
companies to help make their
bets was lethargic.
Amid all this, foreign compa-
nies also saw a major hurdle
that clouded their outlook on
the Indian exploration busi-
ness. The fight between the
Ambani brothers over gas from
the D6 block spilled over into
government policy, giving birth
to a gas utilization policy in
2008 that implicitly limited the
free pricing of gas discovered
by explorers. The policy listed
critical sectors of the economy
that enjoyed supply preference
over others, such as fertilizers
and power.
What hurt investor sentiment
more was the finance minis-
try’s decision in the 2008 bud-
get to decision to “clarify” and
retrospectively take away the
seven-year tax break given to
exploration companies when
the Nelp policy was formulated
in 1998. Foreign companies in-
cluding BP protested to the
government while the Nelp 7
round was delayed thrice on
this count. Queering the pitch
further was the delayed rig
moratorium policy— with
crude oil prices rocketing well
above the three-figure mark, a
shortage of drilling rigs gripped
the international market, af-
fecting work programme com-
mitments that were given by
contractors. A delayed policy
saw three leading players turn
their backs on the Indian mar-
ket—Petroleo Brasileiro SA
(Petrobras), Statoil ASA and
ENI SpA, Italy.
Despite this, the Nelp 7 re-
sults were only marginally low-
er in outcome than the Nelp 6
round in terms of bids per
block. This was primarily be-
cause the government offered
“S-type” blocks that were locat-
ed in discovered areas and
which saw very high investor
interest.
The Nelp 8 rounds held last
year were a disaster. However,
the government has chosen to
blame the recessionary envi-
ronment for the poor re-
sponse—out of 70 oil and gas
blocks and 10 coal bed meth-
ane blocks on auction, the gov-
ernment received bids for only
44 blocks. It argued that de-
spite this, the minimum invest-
ment in Nelp 8 at $1.34 billion
(`6,164 crore today) surpassed
Nelp 7 at $1.36 billion.
The recession did its bit, but
the poor investment environ-
ment played havoc as well.
Things may not have changed
much.
Regarding Vedanta Re-
source Plc’s plans to buy a
controlling stake in Cairn India
for $9.6 billion, petroleum min-
ister Murli Deora’s initial re-
sponse was that the London-
based company did not have
any prior experience in the oil
and gas sector, an argument
that could have been used
against other companies as
well.
While the government is
drawing comfort from the ris-
ing financial commitment of
bidders in the Nelp rounds,
what is more relevant to stri-
king oil and gas is an environ-
ment that fosters entrepreneur-
ial abilities of the kind demon-
strated by Reliance and Cairn
in the early part of the last de-
cade.
In the Ambani gas row case,
the courts have endorsed the
government decision to ap-
prove price and allocate gas, a
decision that may not go down
well with investors who will
participate in the forthcoming
Nelp round.
The search for hydrocarbon assets abroad
W ith global crude oil prices rising since 2001, the hunt
to acquire oil and gas acreage has intensified like
never before. In this domain, only Oil and Natural Gas
Corp. Ltd (ONGC) and Reliance Industries Ltd have been
active.
ONGC has mainly shopped for discovered assets, hoping
the gains will come from the operator finding new
discoveries in the asset, or the lure of a discount owing to
the disturbed political environment—as in Sudan, in 2002,
where the asset was bought from a US­registered explorer
who found the risk too high. The Sudan property was one
of two assets (the other one being in Sakhalin, Russia)
bought before crude oil prices firmed up.
Its recent acquisition of Imperial Energy Corp. Plc, a
UK­based company that had assets in Russia worth $2.58
billion (`11,868 crore today) in 2009, has attracted much
criticism—it is coming to terms with the lower estimates
and the stifling regulatory environment in Russia that
forbids a market price for gas. Moreover, the deal was
negotiated when crude oil prices were hovering around
the $140 mark, but finally consummated at the same
valuation when prices were around $50 per barrel. ONGC is
currently looking to acquire BP Plc’s assets in Vietnam in a
joint venture with Vietnam Oil and Gas Group
(Petrovietnam).
The decade­long investment in overseas oil acreages
has earned it 9.5 million tonnes (mt) of oil equivalent of Acquisition spree: A control and raiser platform at
which a good part is sold in the international markets. Reliance’s field in the Krishna­Godavari basin.
Reliance, on the other hand, has shopped for
undiscovered oil and gas properties, where the yield State­owned NTPC Ltd, the largest power producer in the
investment is the highest when discoveries are made. It country, expects to import around 15 mt of coal this year,
has, however, not met with much success in its overseas enough to fuel around 4,000MW of its installed coal­fired
ventures. Recently, it bought into three shale gas capacity of around 32,000MW. NTPC failed to buy out any
companies in US, a marked departure from its earlier coal company despite trying in several African countries as
approach. Though at a nascent stage, the exploration of well as Indonesia.
shale gas is a high­technology business since it seeks to Meanwhile, Adani Enterprises Ltd, the country’s largest
suck out gas that is well dispersed. That said, this frontier importer of coal, made its second acquisition in August this
technology game is as serious a business as finding oil and year, when it purchased the coal assets of Linc Energy Ltd,
gas in the deep waters of the ocean. an Australian firm, for $2.7 billion. With this, Adani hopes to
At a broader energy level, Indian companies have been fuel 13,000MW of capacity that it is currently
scouting for coal mines overseas for quite some time. implementing in India.

FUEL RETAILING
GETTING THE PRICE RIGHT
Regulatory hurdles: Though retailing gas is a very lucrative business, the allocation policy curbs the entrepreneur’s intent to pursue this business or any other that offers higher returns.
Political considerations
had by and large
dictated fuel pricing
until recently when
petrol was decontrolled.
Diesel, however, is a
different proposition
Freeing markets: A file photo of people queuing up at a petrol pump in New Delhi. The Union government deregulated the price of petrol recently.
E lection manifestos offer
an invisible subtext to
those who come to pow-
er and plan to hold on to their
positions. Petroleum minister
Murli Deora understands this
well. When his officials prompt
him to push for fuel price hikes
to stem the financial bleeding
that oil marketing companies
suffer, he goes on the defen-
sive and quotes the Congress
manifesto, which promises en-
ergy supply to poor families at
“affordable prices”. His direct
efforts to reduce prices are re-
stricted to letters to state gov-
ernments, asking them to re-
duce the incidence of taxation,
which adds up to as high as
20%.
He prefers to foist such sen-
sitive decisions on a group of
ministers. On 25 June, an em-
powered group of ministers
(eGoM) met. The debate was a
larger one: decontrol of trans-
portation fuels—petrol and
diesel. The political class
would not let go of the controls.
Nevertheless, public sector
oil companies that control 95%
of the market, were allowed to
raise prices of fuels; in the case
of petrol, it came close to what
it would otherwise cost to im-
port the fuel, or the import par-
ity price. For sure, this raises
the hopes of the only two pri-
vate retailers, Reliance Indus-
tries Ltd (RIL) and Essar Oil
Ltd, that are interested in the
domestic retail market. The
third, Shell, is looking to sell its
outlets. RIL and Essar, which
have large refineries and a
strong foothold in a healthy
domestic market would like to
improve their profits. They pre-
fer the domestic market to ex-
ports provided the state-owned
retailers are not forced to sell
at subsidized prices.
Despite the rigours of the
marketplace, the two firms ha-
ven’t been fence sitters, except
during very stressful periods.
This includes 2008, when
crude prices soared above the
three-digit mark. If anything,
they got the public sector re-
tailers to pull their socks in the
first two years of operations,
with RIL notching up a diesel
market share of more than
10%. Not only that, the adul-
teration of fuels sold by the
state-owned companies de-
clined and the service im-
proved—with the gas station
attendants donning uniforms
in some instances for the first
time and greeting customers.
Essar and RIL, however,
went about the business differ-
ently. RIL spent a good sum of
money, spruced up its outlets
that flanked the national high-
ways and linked up the sta-
tions with technology that al-
lowed online monitoring of
RAMESH PATHANIA/MINT
supplies. It cut deals with
trucking companies to offer
them competitive prices on
bulk purchases, well below
what the state-owned oil-mar-
keting companies charged.
Essar on the other hand,
preferred a low-cost “fill and
fly” model which served small-
er cities and towns across In-
dia. This meant no-frill gas sta-
tions unlike the full-featured
outlets that RIL set up to pull
in customers.
All this worked fine till crude
oil prices began their climb,
reaching as high as $148
(around `6,882 today) per bar-
rel. The retail outlets only re-
opened early last year, when
crude prices softened. Essar
claims that its low-cost ap-
proach helped them quickly
restart their operations in less
than a month and gain from
the higher retailing prices that
the state-owned oil-marketing
companies were charging, be-
ing slow to correct them in line
with the falling market.
As a result, they could re-
claim 60% of losses. Such tales
of minor gains in times of tran-
sition, however, pale before
the larger policy issue of the
deregulation of the price of the
mass transportation fuels that
petrol and diesel are.
While the companies are
chanting the deregulation
mantra, the hard reality is that
with diesel accounting for 40%
of petroleum products sold in
the country, there is little room
to allow it a free float, especial-
ly given its knock-on effect on
inflation, among other aspects.
Of the total volume of diesel
consumed in the country,
trucks account for 40%, follow-
ed by passenger cars at 15%,
buses and agriculture at 12%
each. And if the government
has to gather its courage and
bite the bullet on this issue, it
has limited time. Another year
down the line, the govern-
ment’s tenure will go past the
ANKIT AGRAWAL/MINT
half-way mark, giving it less
room to take hard decisions.
However, deregulation in
the only transportation fuel,
aviation turbine fuel, has done
little to improve competition.
In a recent bid for aviation fuel
at the privatized Delhi airport,
all the firms, Hindustan Petro-
leum Corp. Ltd, Bharat Petro-
leum Corp. Ltd and Indian Oil
Corp. Ltd, quoted the same fig-
ure, provoking the Competi-
tion Commission of India to is-
sue the firms a notice.
Ironically, the cooperation
stops there and not where it
ought to be. The petroleum
ministry is visiting issues in-
volving sharing of the oil com-
panies’ infrastructure such as
tankages, for in several cases,
they share the same boundary
wall. This is symptomatic of a
larger malaise where the gov-
ernment, in the first place, has
not let these companies func-
tion freely and has treated
them as a subsidy sharing in-
strument.
In the case of the gas sector,
until RIL commenced com-
mercial gas supplies last year,
the shortages were severe. Re-
tailing of city gas was driven
largely by the judiciary which
insisted that public transport
in large cities such as Delhi
and Mumbai should operate
on compressed natural gas
(CNG) to reduce pollution.
Currently, even with RIL’s 60
mscmd gas supplies, the sup-
ply at 142 mscmd is well short
of the demand of 225 mscmd.
But while retailing gas is a very
lucrative business, the alloca-
tion policy curbs the entrepre-
neur’s intent to pursue this
business or any other that of-
fers higher returns. RIL, which
has pursued a three-decade
long policy of backward inte-
gration, wherein it travels the
chains of input materials, had
to contend with less than 3
TURN TO PAGE E11®
 PRADEEP GAUR/MINT

Discovery programme: After RIL’s D6 find, there have been no large discoveries. Also, the largest addition in the next five years will come from D6.
® FROM PAGE E10 The projection paints a rath- petroleum ministry as late as ing in the petroleum sector.
er dismal picture—after RIL’s July this year, forwarding Anil The government expects a slew
mscmd of gas against its re- D6 find in the Krishna-Goda- Ambani’s application for more of pipelines to be commis-
quirement of 20 mscmd, even vari basin, there have been no than 26 mscmd of gas, enough sioned that will result in con-
though it produces the gas. large discoveries. Not only to generate 6,000MW of power. necting states that have had
Till July this year, regulation that, the largest addition in the The eGoM on gas allocation, little or no gas supplies so
too stood in the way of growth next five years will again come which met in late August, de- far—Tamil Nadu, Kerala, Kar-
in the pipeline from the D6 cided to put in place a formal nataka, Punjab, Haryana, Raja-
business. Al- block where, framework for applications sthan, Orissa, West Bengal, Bi-
though set up
in 2006, the
The larger Reliance is ex-
pected to in-
and utilization. It has asked
the petroleum ministry to in-
har and Jharkhand.
Meanwhile, with new gas
government question before the crease produc- form the fertilizer and power discoveries, though less mod-
allowed the tion from 60 ministries of the gas available est than the Reliance D6, likely
Petroleum and government is mscmd to 80 “in the coming years” and for to take place in the coming
Natural Gas mscmd in the the consumer ministries to set years, the government is plan-
Regulatory that of allocating next two years. out their priorities. The final ning to frame a mechanism
Board, the pe-
troleum regu-
gas in the future Beside this,
Gujarat state-
decision will be taken by the
eGoM.
that insulates consumers from
the shocks of fresh pricing.
lator, to issue owned GSPC However, there is a larger At the end of the day, given
licences only will be chip- impending issue that is facing that a fuel such as natural gas
in July. ping in with around 8 mscmd the government, which is akin can replace the liquefied pe-
The larger question before of gas from its block adjacent to what’s happening in the troleum gas (LPG) cylinders in
the government is that of al- to that of RIL in the KG basin. power sector. The govern- homes, the issue of being able
locating gas in the future. The The challenge for the gov- ment’s rural electrification to substitute one fuel for an-
production estimates are fairly ernment now lies in allocating programme is double- other comes down to its pric-
reliable on a five-year horizon, the additional gas without edged—it raises the aspira- ing, which, in turn, depends on
the time it takes for an explorer seeming to be partisan. The tions of rural India when it the subsidy and the taxes that
to get into a block, make a dis- rumblings are already being comes to power supplies, the the government levies. But
covery and bring the hydrocar- felt. Anil Ambani is also in the absence of which will trigger these are just the two things
bon molecules to the surface queue for the resource. The serious discontent. that the government seems to
for commercial sale. power ministry wrote to the A similar situation is brew- have little control over.
AHMED RAZA KHAN/MINT