Note Opposing KG-D6 Gas Price Hike By RIL Withdrawn
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ENERGY AND POWER

20 Nov,2012 11:57 IST

Note Opposing KG-D6 Gas Price Hike By RIL Withdrawn

PM appointed Rangarajan Committee is examining pricing of the fuel
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The oil ministry has withdrawn a note it had circulated to the members of a ministerial panel opposing hike in price of gas produced by Reliance Industries, as the Rangarajan Committee is examining pricing of the fuel.
 
In a surprise move, the ministry had on October 10 moved a note to the Empowered Group of Ministers (EGoM) opposing a hike in price of RIL’s KG-D6 gas before April 2014 even though the company itself was not seeking a revision before that date.

“Yes, the note to EGoM has been withdrawn,” a top ministry official said. This was done in view of panel haded by Prime Minister’s Economic Advisory Council Chairman C. Rangarajan being asked to suggest “structure and elements of the guidelines for determining the basis or formula for the price of domestically produced gas, and for monitoring actual price fixation.”

Prime Minister had appointed the six-member panel to essentially look at the design of future contracts for exploration of of oil and gas. It had also been tasked to suggest pricing of natural gas.

Meanwhile, on 8 November, CAG had asked oil ministry not to approve any of Reliance Industries' investment plans for the flagging KG-D6 gas field unless the company gives it unfettered access to audit its spendings.
 
In a strongly worded letter, Comptroller and Auditor General of India (CAG) referred to media reports about the ministry giving nod to RIL's annual capex for KG-D6 that have been pending for past three years, to advise the ministry not to approve any investment except those of "emergent nature".

"It is well within the knowledge of the Ministry that any increase in capital expenditure is likely to have significant adverse impact on government's financial interests," CAG wrote to Oil Secretary on November 9.
 
Rise In Subsidy Burden Feared
Sources said the ministry had in the October 10 note to EGoM members argued that a higher price of KG-D6 gas would result in $6.3 billion rise in subsidy burden.

RIL, it said, would get an additional $4.1 billion revenue if the rates are hiked from current $4.2 per million British thermal unit to import parity rates of $14.2-14.51 per mmBtu. The government on the other hand would get only $0.5 billion at current year production level of around 25 million standard cubic metres per day.

Sources said the ministry stated that a $10 rise in gas price would result in increase in subsidy paid on fertiliser and power by $6.3 billion.

The ministry, however, in the note did not state that RIL had modified its January request for a price revision to clearly state it is seeking rate revision only from April 1, 2014 when the current price is due to expire.

RIL first in June and then again on September 6 reiterated its demand for a price at par with the rate India is paying for import of liquefied natural gas (LNG) from April 1, 2014 when the current five-year period of $4.2 price expires.

It wants to price KG-D6 gas at 12.67 per cent of JCC, or Japan Customs-Cleared crude, plus $0.26 per mmBtu. At $110 per barrel oil price, gas will cost $14.23 per mmBtu.

Sources said the company has also proposed to price gas it plans to produce from coal seams, called coal-bed methane (CBM), from Sohagpur blocks in Madhya Pradesh according to the same formula.
 
Its CBM pricing formula as well as Essar Oil’s demand for $4.2 per mmBtu price of CBM from its Raniganj block in West Bengal had been referred Rangarajan for review.
 
The EGoM had in 2007 fixed $4.2 per mmBtu price of KG-D6 gas for first five years of production. RIL began KG—D6 gas production in April 2009.

The formula proposed by RIL for sale of gas from April 1, 2014 is the same at which Petronet LNG Ltd,  the nation’s largest liquefied natural gas importer, buys 7.5 million tonnes per annum (30 million standard cubic metres per day) of LNG from RasGas of Qatar.
 
RIL Pitches For Market-driven Price For Natural Gas
Pitching for market-driven prices for natural gas, Reliance Industries has said it has found very large gas reserves that need a price of more than $10 per million British thermal unit to be developed and produced.
 
In a 18-page submission to the C Rangarajan Committee, which is examining terms of future contracts for  exploration of oil and gas as well as basis for gas pricing, RIL said only market related prices can provide an incentive to help produce the vast domestic resources that either concentrated in small pools or are located in technologically challenging ultra deep sea.
 
"RIL (and partner) BP have around 5.5 Trillion cubic feet of discovered gas resources which would require large amount of risk capital to be invested. Most of these discoveries would require price of more than $10 per million British thermal unit to be developed and produced," it said.

It currently gets paid $4.2 per mmBtu for the gas produced from its KG-D6 fields in Bay of Bengal. This rate is lower than what Cairn India gets in the neighbouring Ravva Satellite field in the same basin and UK's BG Group-operated Panna/Mukta and Tapti fields in western offshore.
 
KG-D6 output has slipped drastically due to a host of problems and the company is arguing that restoring production would need higher investments.

RIL, which has been seeking a rate equivalent to import parity price for KG-D6 gas from April 2014, said the signed contracts for its and other fields gives government powers to approve but does "not entitle the government to fix the price of gas."
 
"There is no finding or observation in the Judgement of the Supreme Court which entitles the government to arbitrarily or unilaterally fix the price of gas and require the contractor to sell gas at a price which is not the market price of natural gas in the country," it said.
 
The Apex Court, the May 2010 judgement in RIL's gas dispute with Reliance Natural Resources Ltd, "requires the Government to revise the price if the price at which the contractor sells the gas under a formula is not the market price of gas in the country."

"We trust that the committee will make recommendations...which stipulates that all gas produced by the contractor will be sold at an arm's length market price," RIL wrote.

The company wanted the existing arrangement of profit sharing between explorers and the government to continue.

The six-member panel headed by the Prime Minister's Economic Advisory Council chairman may be veering around to the idea of changing the present system where firms like RIL are allowed to recover all their  investment first before sharing profit with the government, thereby giving incentive to keep raising spending to delay government profit.

(Agencies)

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