Ambani brothers' feud over gas prices hits energy-starved India

India's Supreme Court began hearing arguments in the Ambanis' faceoff over the price of gas extracted from the country's biggest-ever discovery. The argument could jeopardize operations and may discourage foreign investment.

Two of India's wealthiest men appeared in India's Supreme Court Tuesday to hammer out a family spat that could have repercussions for the entire country.

Anil and Mukesh Ambani, siblings and business rivals, are fighting over the pricing of gas from one of India's most important gas fields.

The field is the biggest ever discovered in India and is expected eventually to double the energy-starved country's gas output. But there are concerns the Ambanis' very public row could slow production and may have already deterred foreign investment.

The dispute centers on the pricing of natural gas from the Krishna Godavari (KG) basin off the east Indian coast. In 2005, the brothers agreed that Mukesh Ambani's Reliance Industries, which controls the basin, would sell gas from its Dhirubhai-6 block to Anil Ambani's Reliance Natural Resources firm at $2.34 per million British thermal units (BTU), a below-market rate.

In 2007, the government stepped in, nearly doubling the price to $4.20. But in June, Bombay's High Court upheld the terms of the original agreement. So Reliance Industries, which NOW argues it cannot produce the gas at the lower price because of increased costs, appealed the judgment in the Supreme Court.

The Reliance group, which the Ambanis inherited from their father and is India's biggest conglomerate, was demerged in 2005 and divided between the siblings. Ever since, they have been at each other's necks.

Last year, MTN, a South African cellphone operator, pulled out of talks on a multibillion-dollar merger with Anil Ambani's Reliance Communications after his big brother's firm said it had the right of first refusal over any sale of the telecoms company.

But their latest battle may be more damaging to India.

Basin's development key for India

The importance of the KG basin to the country, which imports most of its oil and is anxious to develop domestic sources, cannot be overstated.

"We're talking about a significant amount of power," says Hitesh Agarwal, an analyst with Angel Brokers in Mumbai (Bombay). "It's a big boon for the economy and could help tide India over."

But the brothers' combativeness threatens to jeopardize operations at the basin. Anil Ambani's company says a plan to build more than 30,000 much-needed megawatts of capacity within 10 years, taking a third of its gas from his brother's block, has been repeatedly delayed by the price row.

And, under the terms of the brothers' 2005 agreement, Reliance Natural Resources has the right of first refusal over 40 percent of future discoveries, which raises the specter of future disputes.

Their latest spat has been very publicly played out in the media. In August, Anil Ambani's company ran a series of front-page advertisements that accused the oil ministry of favoring his brother over the pricing. This is thought to have been the first time a business has publicly criticized the government.

Government sale of exploration rights undermined

The timing could not have been more unfortunate for India's government, which in August kicked off a two-month marketing campaign for its biggest-ever sale of oil and gas exploration rights, which it hoped would attract foreign bidders.

This month, Industry experts said the sale had been lackluster. While the global economic downturn almost certainly played its part, the Association of Oil & Gas Operators has written to the prime minister, Manmohan Singh, complaining that Anil Ambani's media campaign had damaged India's corporate image.

Madhu Ninan, editor of Petrowatch, an industry newsletter, says that although the government has always approved oil and gas prices, its involvement in the Ambani case might well worry investors.

He, like other analysts, says the government should reassure investors by making the guidelines on setting gas prices clearer.

A verdict is expected within days – but experts warn the discord between India's most fractious siblings could go on for weeks or even years.