Power struggle between Ambani bothers halts gas exploration project

At the heart of the row between Asia's richest siblings is the cost of gas from a huge field in the Krishna-Godavari basin in India
Randeep Ramesh in Delhi
guardian.co.uk, Tuesday 18 August 2009 20.58 BST
When Indian officials arrive in the heart of the United States' oil capital, Houston, next week for country's largest ever auction of hydrocarbons – the gas-rich seabed under the Bay of Bengal – they had hoped interest would be high. It will be, but perhaps not because of the supposed treasure beneath the waves.
Instead, what has transfixed investors inside, and outside, India is a bruising public spat between two of the richest men in the world, Mukesh Ambani and his younger brother Anil.
At the heart of the row between Asia's richest siblings is the cost of gas from a huge hydrocarbon field in the Krishna-Godavari basin. Over the last few weeks, Anil Ambani, whose net worth exceeds $10bn (£6.1bn), has gone public attacking the oil minister, an old family friend, for siding with his elder brother and writing to the prime minister with a catalogue of complaints over how his company has been treated.
Last month, in a televised address to shareholders, the younger Ambani said his older brother had "tried every trick in the book, and apparently several outside the book, to back out of its solemn, legal and contractual obligations".
Not only will the rancour cast a shadow over the Indian hydrocarbon roadshow next week, it comes just days before a hearing by the country's supreme court on the dispute between the estranged siblings.
Anil Ambani today raised the stakes again with a series of stinging advertisements on the front pages of the Indian newspapers claiming that the government's stand in the row may lead to a 50% rise in power bills. The adverts were headlined: "Is this in the public or national interest?"
Mukesh Ambani shot back with a statement claiming Anil was "indulging in an orchestrated campaign intended to bring into public debate and prejudge the issues that are pending adjudication before the honourable courts".
Both have been jousting since their mother divided their inheritance, Reliance, India's biggest conglomerate, between them in 2005. Their father, Reliance's founder Dhirubhai, died without leaving a will in 2002.
The division of the company left Mukesh with lucrative petrochemical, oil and gas, refining and manufacturing units. Anil got a smaller portion in the booming fields of telecoms, financial services and power generation.
The brothers, who live on different levels of the same Mumbai tower block but do not talk to each other, had agreed not to compete against each other.
However, their rivalry has led them to accumulate fabulous wealth amid accusations that each is out to undo the other. Some of this appears frivolous. When the older Ambani brought his wife a jet for $52m, the younger brother responded with a gift of a luxury yacht worth $80m for his wife.
In business, however, the family feud is taking a serious turn. Last year Mukesh, ranked by Forbes magazine as the seventh richest man in the world with a fortune of $20bn, blocked a proposed $40bn reverse takeover of the South African mobile group MTN by Anil's Reliance Communications.
But their biggest row now centres on gas. Under the terms of their split, Mukesh's main vehicle Reliance Industries was to supply gas from the vast field in the Bay of Bengal's "D6" block to the younger brother's Reliance Natural Resources at a fixed price of $2.34 per million British thermal units (MBtu) for 17 years. However, Reliance Industries claimed that the price agreed had to be sanctioned by the government. In 2007, ministers set a different price – almost twice the original – of $4.20 per MBtu. Officials said this reflected higher oil prices, ­ market demand and agricultural inputs such as fertilisers, which are crucial for millions of poor farmers in India.
Undeterred by the state, Anil Ambani took the case to court. In June judges in Mumbai upheld the family's original deal and the lower price. The judges also asked for the matriarch of the family to mediate. It was then that the government stepped in – saying that the gas was not the billionaire's private property but belonged to the state that had the concerns of hundreds of millions of poverty-stricken Indians to think about. In India the state collects a share of the profits from oil and gas field operators and the D6 block alone could add $20bn to the country's gross domestic product.
Anil Ambani argued that the government could claim its share of the profits at the price of $4.20/ MBtu – even if Reliance Industries provided gas to the younger brother's companies at the lower price. The bench of the supreme court is likely to need the judgment of Solomon not to offend two of the most powerful men in India.
Behind the debate, say analysts, lies, the fact the younger Ambani needs the gas for an ambitious power scheme. His Reliance Power division had plans to build more than 30,000 megawatts of capacity for energy-starved India within a decade at a cost of $30bn. Thirty percent of the gas was to come from Mukesh's D6 block.
"The real impact will be on [Anil Ambani's] Reliance Power. That project was dependent on the gas from Mukesh's [fields]. So it is not surprising in that respect," said Hitesh Agarwal, head of equity research at Angel Broking.
Foreign investors, too, have been alarmed by the government's "nationalisation" of the gas market. An editorial in the trade publication Upstream last week said that multinationals with stakes in the gas fields of the Bay of Bengal including Britain's BG Group have already complained "that prices should be determined by market forces and not by the government … if the government wants to attract more international companies, there has to be a well-laid policy that also works in practice."
Whatever the outside world thinks, what has surprised many in India is that there has been few repercussions considering the number of family firms listed on the country's stockmarket. This, says Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, is thanks to the resilience of Indian business.
Writing in Newsweek, Sharma says: "At the start of this decade, Reliance was one of five Indian companies with a market value of more than $5bn. Currently, there are 40 such companies, the total value of the market is more than $1tn, and the Reliance Group accounts for less than 10% of the total."