The Indian Economy Blog

July 8, 2008

Guest Post: Mukesh Ambani Under Fire

Mohit Satyanand

Though I have never invested in the shares of Reliance Industries, my recently gleaned understanding of the world petroleum scenario has made me respect the company’s vision in its refining projects. As I mentioned once earlier, RIL’s existing refinery, and the one nearing construction, reportedly have unparalleled flexibility to process heavy, high-sulphur (so-called sour) crude, especially that emanating from Iran. This crude sells at a huge discount to other crudes; once it is refined into diesel, though, RIL is able to sell the resultant distillates, especially diesel, into a world market which is thirsty for such products.

Most mature consumers, the US especially, have made no investment in refining capacity over the last 2 decades, and strategic thinkers in the petroleum industry go so far as to say that RIL’s investments are changing the pattern of world flows in petroleum and petroleum products.

For this reason, I have recently turned from a bear on RIL to a mildly positive neutral. Until last week, that is. With Mulayam Singh and Amar Singh all but in the ruling coalition, suddenly life has become difficult for Mukesh Ambani. The first salvo across his bows was a minor irritant, namely the questioning of concessional import duty paid on two private jets.

More significantly, there are now calls for a ‘windfall tax’ on profits RIL is making on its refining operations. Nothing could more arbitrary than such a tax; windfall taxes have been discussed in the US, on the extra profits oil companies make when commodity prices suddenly ramp up – the implicit logic being that the companies have done nothing to earn this extra profit. I disagree with such taxes, in any case, since anyone who invests in an industry, resource-based or otherwise, runs the risk of prices being lower than he anticipated – in which case he is not compensated by the exchequer.

But in the proposal that RIL be taxed, all one sees is the vindictiveness of those opposed to him. If RIL is making higher profits than other refineries, this is due to its far-sightedness in investing in a more complex and sophisticated refinery. The profits accruing from such an operation are far from a ‘windfall’, a term normally used to describe a lottery win, for example.
If this nonsensical suggestion is accepted by the government, it will send out a signal that Indian governance is of the banana republic variety.

Mohit Satyanand is consulting editor at Outlook Money

18 Comments »

  1. I quite agree & am sure RIL would challenge the decision…if not(though unlikely)…RIL would trace back to the times they made similiar loses & might ask for compensation simliar to the current exporters one…

    Comment by Gorbachev — July 8, 2008 @ 3:43 pm

  2. Much ado about nothing. All that the Samajwadi bosses are asking for is “where is my comish”. Also look at what Anil is working on. It is a tit for tat game – You screwed my RCOM deal, now I screw with your sweet cake.
    Sorry – no economics here. Just a petty family feud.

    Comment by goldwinner — July 8, 2008 @ 7:52 pm

  3. Politics apart, but when the country’s own economy is in tantrums because of unreasonably high international oil prices, high domestic demand does it make sense for Reliance to export crude fuel outside when domestic demands are suffering.

    You may then blame it all on subsidies and politics of fuel but in the end fuel demand has to be met for energy needs and fuel may well be considered a natural resource so I think case of windfall tax on reliance and other crude oil exporting companies in India is different from that in US.

    I think crude oil may well be declared a natural resource akin to water and air, which no corporate entity can stake claim on. Also citing concept of free market forces and letting market decide what is the best solution to this situation would be akin to saying that if ever water is scarce we should allow Aquafina to be exported to outside countries and let free market forces decide what’s best.

    I may be sounding leftist here, but I am thinking from the perspective of common man.

    Comment by Kamal Tripathi — July 8, 2008 @ 10:11 pm

  4. Kamal,
    you are not just sounding leftist. Your entire statement barring that apologetic stance at the end is leftist. Here is a guy who

    0) had the peak oil forethought 10 years ago and
    a) fought the powers to be and greased them to get a private refinery built
    b) on a day and age when the last refinery built in the western was 20 years ago
    c) had the forethought to build it for multiple models of inputs
    d) finally brought it out to profitability

    All you want is to suck out his profits. He is currently battling the mayawati gang which he forgot to grease. Stop stealing his lunch. Yeah it is a billion dollar lunch but he worked for it. Either go build a refinery yourself (it is just a dumb human task !! right ?) or drive a bicycle to work everyday.

    Comment by goldwinner — July 9, 2008 @ 8:35 pm

  5. Don’t sweat guys!
    The Saudis have just declared that they will be building four new, modern large refineries in the next three years. Kuwait has already started building a mega fourth refinery. The Saudis have declared that in future, they will export only petroleum and allied products NOT crude oil, which is logical. So where will he get sufficient crude when these new refineries come up? Venezuela? The freight costs would be too high. Will he build one in Venezuela or Peru? The region is famous for inviting foreign companies and then “nationalizing”, once they are on stream. Hence long term having a refinery with no captive crude supply is simply unviable, similar to having a mega steel plant with no mines for ore.

    Comment by Cool Head — July 9, 2008 @ 10:04 pm

  6. Cool Head,
    do you know how long it takes to build a refinery. The Saudis are flush with cash and don’t know what to do with it. Hence they are building stuff that nobody needs. By the time they complete building their refineries, we would have moved beyond the peak oil debate with dwindling Saudi supplies. I would bet on the Bania survival skills over any machinations coming from the middle east.

    Comment by goldwinner — July 9, 2008 @ 11:00 pm

  7. 1. The first RIL refinery was built within 18 months.
    2. The second one took more time because it was more complex and they started building it at the start of an economic boom, when there was not enough manpower & materials available.
    3.The Kuwaitis and Saudis have enough cash to see to it that they do not waste time in building theirs. I know because my classmate was one of the fellows who was part of the Kuwait team.
    4. Peak Oil is just a theory, there are some who passionately believe in it and there are some who are equally passionate that it is a myth. The result is as yet inconclusive.
    5. The middle east folks are not fools compared to the banias. They were always very smart businessmen and they always had lots of moolah from ancient times.

    Comment by Cool Head — July 12, 2008 @ 8:09 pm

  8. Goldwinner,

    Your statement on the Ambanis , ” fought the powers to be and greased them to get a private refinery built” is perplexing.

    You make it appear as if the Ambanis favoured lesser mortals like the citizens of India by greasing the powers who were resisting their “vision” too get a “mega-refinery” built.

    Ambanis are credited to have bypassed the-then import duty structures & greased the members of oil-price regulation committee (however illogical they may have been at that time) , and other government officials for

    1. Massive underinvoicing of imports of equipment .(well documented in Indian Express)
    2. Fix the price of oil they would sell to their major customers (goverment refineries)

    Thats a clear case of unfair advantage gained by breaking the laws of the land.
    I don’t think any amount of “learned” economic/management jargons can ever camouflage such acts .

    Comment by Curious — July 13, 2008 @ 10:32 am

  9. IN this Ambani vs Ambani battle the ultimate loser is all the companies of Reliance – since Mukesh wouldn’t let MTN Reliance Com. deal to go through and Anil would try mighty hard to impose ‘windfall taxes’ on RIL through dear friends Amar Singh and their SP party.
    What a paradox : An illiterate ungraduate made a large fortune, and his ‘Ivy-League graduated’ sons have messed up the company and eventually divided it!!

    Comment by Chirag Jain — July 14, 2008 @ 7:27 pm

  10. Regardless of our personal biases, I would like us to leave the speculation as to what the Kuwaitis/ Saudis will do, who is smarter, the bania or the Arab out of this. None of us can predict the future, the price of Oil, the way things are going to turn out in 2050, etc.

    I’d like to state my views as under.

    1. The Ambanis have built a world-class refinery and it now makes money for them and their shareholders. If this had been a bad call and they had lost money, no one would have compensated them and hence however much we may envy them, the money is theirs.

    2. There is probably some bad blood over the Rcom-MTN deal leading to this orchestration of a demand for a windfall profit tax. I personally think it is bad economics to take away profits that can be better invested for good returns by the enterprise when the profit is just reward for good planning, execution and daring risk-taking.

    3. What will happen to Mukesh Ambani’s refinery in future is pure conjecture and does not add value to the discussion.

    4. There are arguments that the Ambanis curried favour, bought-off politicians and bureaucrats, etc. Despite my personal distaste for this style of doing business I must say this- even if this is true, the appropriate way to pursue this is through the legal route by prosecuting them for any wrong-doing. This has nothing to do with the demand for this windfall tax.

    5. If we believe that the Ambanis are too powerful for such routes to work, we need to work to change our system. Our Govt. and our institutions are endogenous to our society and we must be the change we wish to see- there is no other way. To compensate for our inability to limit illegal business activities, we cannot insist on an “improper” tax.

    6. If we believe that national interests must come first, we must stop policies that work against this. Irrational pricing/ control of petroleum products and misdirected subsidies only end up incentivizing waste, saving money for the already rich through subsiding diesel in cars and promoting adulteration. Although I am no expert on this, many economists have established that direct cash transfers or vouchers are a better way of achieving targeted subsidies for the poor and needy. If we work towards freeing up pricing, we do not need to sermonize Mukesh Ambanis, we do not need to blow up absurd sums distorting our economy. Fundamentally, people, businessmen, societies, etc. respond to incentives. All we need to do is put in place the right incentives to achieve the end we desire.

    7. What the Ambani bros have done is nothing new. Family quarrels and splits are as old as the hills and will continue as long as mankind exists. They have split the business assets and to all accounts and purposes they are running these profitably with increased market capitalization. The split is in fact allowing greater focus. What is unfortunate is the continued feuding between the brothers that erodes attention from other pressing priorities for them and society at large. However, it is at best an inconvenience in the larger scheme of things and has no relevance to this windfall tax issue.

    8. I cannot claim to know the priorities of the US Govt., their societal composition or their strategy for their economy. So I would divorce any action on similar taxation in the US from a decision that we have to take for India and Indian businesses

    Comment by little Ram — July 16, 2008 @ 11:08 am

  11. GoldWinner,

    I may be sounding leftist but I think my perspective is for common man not for some shrewd bania who greased some palms and got a profit-generating refinery for his company. I am not discrediting him for this work.

    But going by economists arguments, we should leave everything to market forces, free an fair play as they call it. Then why don’t u explain me, we are talking about climate change these days. It is because everyone exploited natural resources without caring for its effects and didn’t even bother to do damage control. If only everyone was so responsible!!

    Why do you think mines were nationalized in India, after all everything was driven by fair play, isn’t it? What would you call that? Or would u simply say that some guy took pains to remove forest cover around and discover the mine so he’s entitled to all profits he generates keeping his employees in any condition.

    So as it stands out, no one individual/company wants to do any damage control for any damage they do to other being/natural resources. Call it cynicism but this is what was with Pepsi who had contaminated ground water and with Reliance as well. They may not be pollution per se but they are exploiting and natural resources of any country are the sovereign property of its people not some rich guy who has money to build a fortress around it.

    You forced me to explain this case in midly leftist cum socialist way, but in this case it is the practical approach. Now article mentioned wind-fall tax was discussed in US and they didn’t go for it. That doesn’t make it an abominable term altogether. What they found illogical might work for us, US and India are 2 diff economies. In the end I think the name may be the same but I think if a company is exploiting natural resources of a country and then exporting it outside when the country dearly needs it, some taxation on the profits it makes is justified.

    Comment by Kamal Tripathi — July 18, 2008 @ 2:36 pm

  12. I thought following would be interesting to the ongoing debate in the comments here

    WASHINGTON (Reuters) – The White House on Thursday threatened to veto legislation being considered by the U.S. House of Representatives that would force oil companies to give up undrilled federal leases and ban the export of crude drilled in Alaska.

    The bill, which the House was to vote on later on Thursday, has a “use it or lose it” provision that requires oil companies to diligently develop their existing federal leases or turn them back to the government before they could obtain new acres to drill.

    “By blocking some firms from competing for new leases, this legislation would further increase gasoline prices that already exceed $4 per gallon and result in unintended consequences due to litigation,” the White House said in a statement.

    “Even though new leases will take years to develop, oil markets are forward-looking, and an expected decline in future supply will raise prices today,” the White House said.

    The White House also said it opposed the bill’s language banning the export of crude oil produced in Alaska. The Congress allowed exports of Alaskan oil in 1995, but virtually none of the state’s crude has been shipped to other countries in the past eight years.

    “Such a ban would make virtually no additional oil available to U.S. consumers, and would not lower oil prices that are set in a world market,” the White House said. “At the same time, such export restrictions are detrimental to the efficient operation of global energy markets and would send the wrong signal to our trading partners who may face pressure to impose similar trade restrictions.”

    Comment by Dhaval — July 19, 2008 @ 12:37 am

  13. While it may be said that you cannot plainly negate the necessity of imposing windfall taxes on RIL, the justification that is given to slam it on them is grossly irrational., To levy or not to levy , this question is best answered in the light of economic interest of the nation as a whole. All the mishandling-of-government-officials and family feud issues have to be kept aside and so should be the foresightedness of RIL. No rewards and no punishment; only justified decision in interest of our nation. This may be socialistic but that’s where the true nature of mixed type of economy comes out

    Comment by Malkesh Adesra — July 19, 2008 @ 10:23 am

  14. Kamal/ others,

    Let us understand a few things that most of us would have learnt in Econ 101-

    1. Markets usually work very well to produce very efficient outcomes

    2. Intervention by way of public policy is necessary when markets are not efficient in producing desired outcomes.

    This is the case with climate change as with other issues where we have not structured markets to deliver good outcomes. There is no contradiction here.

    If anyone disagrees with these tenets of economic thought, I am willing to stand corrected.

    Applying this to the correct question-

    If we wish certain outcomes (lower oil prices for some consumers or improved conservation) we would be better off intervening in the right manner (by freeing pricing and targeting subsidies in a rational manner) rather than controlling pricing and then creating further distortions (Windfall profit tax) to correct the resulting outcomes. I am all for ensuring that the economically weaker sections of our society, those that need certain fossil fuels and access to energy to improve their lives, get it at affordable rates. Controlling prices for all is the just the wrong way to do this. This only benefits some one like me who can afford to spend on gasoline to move around in personal transport, etc.

    Incidentally, any windfall tax is hardly going to resolve the issue of oil prices very much if you do your arithmetic as very wisely mentioned by SK Behuria- MD, IOC in a recent interview.

    Comment by little Ram — July 20, 2008 @ 3:49 pm

  15. I agree with your position on the windfall tax, but your assertion that in times of hardship the US govt does not and will not step in is erroneous. Try bailout’s subsidies, and our most recent example of allowing private investment banks during this to borrow from the Fed’s discount window. For a more consistent example we can look no further than to US agricultural subsidies given to corn and other commodity farmers, portions of which are marked as to support farmer’s against periods of low commodity prices.

    Comment by Vishaan — July 22, 2008 @ 9:55 am

  16. In India, “political rulers” and “big business” are two sides of the same coin. Thats one thing that banias like Ambanis (among others) have understood and exploited to their advantages from time immemorial.

    Now that the vote of confidence in the Lok Sabha is over thanx to some 15 odd crossvoting & absentees; in all probability ,the Ambanis will not hear the term “Windfall Tax” for atleast a year.

    Comment by Curious — July 22, 2008 @ 10:01 pm

  17. Well, now that oil has gone back to $63 a barrel and still going down, despite production cuts, no new foreign funds flowing in to support the Ambanis as yet announced “pie in the sky” projects, perhaps we need to again analyse the original topic of discussion here?

    Comment by Cool Head — October 26, 2008 @ 9:40 pm

  18. Rotten post. Makes no attempt to inspect the great deal RIL has got from the government. When refining margins are high, sell in liberal market abroad, when low, sell in bulk to PSU marketers based on the customs difference between wholesale crude and products, and make the marketers take the hit on administered prices!

    Comment by bunty — November 15, 2008 @ 3:02 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment

Powered by WP Hashcash

Powered by WordPress