by Dr. Michael Economides

India -- poised to become the third largest economy in the world in the not too distant future -- has the potential to find a large portion of the energy that will be necessary for the country’s ascendancy just off its coasts waiting to be tapped. While development of these resources won’t likely transform the country into an energy superpower, it would go a long way to bolstering their national security by helping India from becoming overly dependent on imports from unstable regimes like Iran.

Indeed, late last month a delegation from India's oil ministry flew to the U.S. to meet with potential investors, working to raise $4 billion by auctioning drilling rights in the Bay of Bengal. But a legal attack that business tycoon Anil Ambani has launched against his brother Mukesh Ambani is giving potential investors pause. India can be a huge player on the energy scene, but only if it puts this legal struggle between two of the country's biggest industrialists behind it and soon. The Reliance Industries empire built by their father was divided between the two sons in 2005. Mukesh controls oil and gas interests while Anil controls the power generation division that relies on natural gas. Anil is insisting, per an agreement brokered by the sons' mother, that Mukesh's company, Reliance Industries (RIL), supply gas to Anil's Reliance Natural (RNRL) at half the government mandated price. This is part of an audacious plan by Anil. He is demanding gas from his brother at a price of US$2.34, which was to be his for firing a power plant. He hasn't built the plant yet, so he will trade the gas and pocket the difference between US$4.20, the government mandated price, and US$2.34 - a clever arbitrage. There are several problems with this. Anil's plan will do nothing to encourage greater exploration and production. Indeed, even the government mandated price of $4.20 is now arguably much too low. The gas at stake is located in the massive Krishna Godavari basin. The volume is such that the gas from just the east coast of the basin is expected to significantly boost India's GDP and decrease its dependence on imports in the coming years. Estimates indicate that production would produce 80 mmscmd (2.8 billion cubic feet per day) of gas per day. As BBC News reported, that's "four times the gas and 30% cheaper than the gas India would have received through the much-delayed Iran-Pakistan-India pipeline." Utilizing the energy resources from Krishna Godavari would enable India to add at least 10,000 megawatts to its power output -- more than enough energy to cut its current peak power deficit in half. (Right now, India's power supplies fall short of peak demand by 16.6% and more than 400 million Indians are living without electricity.) Consequently, development of the basin's natural gas resources would directly impact the country's economic development. But this is a serious and tricky deep-water project, one whose costs, even for the most sophisticated firms, are significant. The payoff might be great, but the investments are large and risky. Anil points to the Henry Hub price when making his case. This is laughable. The idea of choosing a single price based on a market exchange in New York City is problematic, since the globe's various natural gas markets all behave differently. Asia typically indexes its prices to crude oil, for example, while Europe has several different pricing centers and the U.S. revolves around Henry Hub. But as Cambridge Energy Research Associates recently reported, even Henry Hub is an increasingly unreliable benchmark for the world market as North American gas is increasingly developed in the western parts of the continent, far from the New York Mercantile Exchange. To be sure, Mukesh's Reliance Industries is a low-cost developer. A recent Goldman Sachs report saluted RIL and claimed its development costs were lower than all of its Indian peers. But the development costs in such a demanding region are nonetheless sizable, and if a robust market is to develop with serious investment, a serious price will need to prevail. Anil's stated price is insulting to the energy firms that might be interested in doing business in India. And it's already spooking development - E&P magazine reports that production rates from the area in dispute are well below expectations. The Indian Supreme Court is set to weigh in soon. This will be critical. If it upholds the depressed price demanded by Anil, the investment climate for Indian fossil fuel E&P will be chilled to the bone. The Court must uphold the government-mandated price - or possibly even a higher one - to ensure adequate interest in plowing capital into an area that is so demanding from an engineering and technology standpoint. The persistent regulatory and legal uncertainty is only driving the development price higher. As gas becomes more difficult to come by in areas such as the North Sea, India could be an increasingly attractive possibility for the energy world's heavy hitters. But conversations with participants in the Indian road show in Houston last month reveal deep uncertainty and concern over the fighting between the Ambani brothers, in particular the impossibly low prices demanded by Anil. If this price prevails and wildly distorts the Indian market, it will scare off major investment for a generation. The results for Indian welfare and for the world's natural gas markets will be lamentable. Dr. Michael Economides is editor-in-chief of Energy Tribune and a professor at Cullen College of Engineering at the University of Houston.