BP, Niko join arbitration, eye higher price for gas

Written by fe Bureau | New Delhi | Updated: Mar 29 2014, 10:49am hrs
Reliance Industries' (RIL) foreign partners, UK-based BP and Canadas Niko Resources, have issued supplementary notices of arbitration (NoAs) to the government against the $1.8-billion penalty for the fall in the KG-D6 gas output.

This brings them on the same platform with RIL, which served a similar notice nearly two years back.

BP and Niko filed separate notices earlier this week, said a news agency. RIL, the lead partner in the consortium that explores the KG-D6 block, had issued an NoA to the government two years ago and is therefore in a position to raise the gas price as per the Rangarajan formula (currently deferred by Election Commission), provided the company gives bank sureties equivalent to the resultant incremental revenue.

The contentious issue is that the companies claim that the production-sharing contract (PSC) do not have any provision for levying a penalty if production drops and do not match the projects made as per the field development programme.

The output from KG-D6 is hovering around 13 mmscmd after it touched peak of 67-68 mmscmd in 2010. BP and Niko, which are also partners in the consortium that operates the once-prolific gas block, have been left high and dry as the government had refused to recognise them as parties to the ongoing arbitration. And therefore they were not eligible for higher gas price.

This marks a departure from earlier stand of BP and Niko where they said that the arbitration initiated by RIL was as the contractor for KG-D6 block and as partners to the Indian company in the production-sharing contract, they were ipso facto represented by RIL.

On March 24, the Election Commission asked the ministry of petroleum and natural gas to defer the new gas pricing regime that was to be effective from April 1.

The new Rangarajan formula-based pricing would nearly double gas prices from $4.2/mBtu now.

The explorers are in continuous dialogue with the ministry to ensure that the benefit of higher gas price effective April 1 is made available to all three partners. Moreover, there is ambiguity as the existing gas sale purchase agreements between these companies and the buyers expire on March 31.

The government has been consistent in its view that the NoA it received was from the contractor and not parties to the PSC. Meanwhile, the Supreme Court is likely to deliver a verdict on whether to appoint a third-party arbitrator (as demanded by RIL) in addition to the arbitrators of the government and RIL.

On December 19, 2013, the Cabinet Committee on Economic Affairs approved the hike in domestic gas price but said for KG-D6 gas, the revised price would be allowed, subject to the condition that RIL submit a bank guarantee.

The bank guarantee would be encashed by the government in case if it is proven that RIL suppressed production. If it is found that the decline in gas output was due to geological reasons as claimed by the company, the surety would be returned to it.