Govt plans to stop RIL from selling crude oil to Jamnagar refinery

Written by PTI | New Delhi | Updated: Aug 21 2014, 07:55am hrs
The oil ministry is considering ordering Reliance Industries to stop selling KG-D6 crude oil to its Jamnagar refinery and instead sell it to Chennai Petroleum Corporation (CPCL) at lower rates.

The Production Sharing Contract (PSC) mandates producers to sell crude at the best available market rate so as to ensure highest profit petroleum and royalty to the government.

RIL, which sold crude oil from the MA oil field in the predominantly gas-rich KG-D6 block to CPCL during first five years of production on negotiated terms, floated a tender for sale of 2.5 million barrels of oil in 2014-15.

Jamnagar refinery of RIL won the tender as CPCL offered a pricing formula that was about $4-5 per barrel less than the formula quoted by the private sector refiner.

The Oil ministry is now of the view that sale of crude oil is to be done on arms length basis and therefore cannot be done to an affiliate, a senior ministry official said.

It believes RIL's Jamnagar refinery would not qualify for this bidding as per PSC provision and the company would have to go for the next option which in this case is CPCL. Also, RIL may go for a fresh tender for getting an arms length price.

The official said that in the interim period, the ministry is considering directing RIL to stop sale to its affiliate Jamnagar refinery and sell it to CPCL at the price quoted by it.

RIL, refuted this view saying that there is no restriction in the PSC that the oil and gas cannot be sold to related party as long as an arms-length process is followed.

While higher price would give government more profit petroleum and royalty, CPCL being a subsidiary of IOC, does not pay any dividend to government on its profit.

PSC obliges contractor to sell at the market determined price to the benefit of all parties. The sell at higher price to RIL Jamnagar refinery would entail additional profit

petroleum and royalty. Petroleum Ministry has never questioned

that the process followed is in violation of PSC," a company

spokesperson said.

RIL said it earlier sold the crude oil and is now selling

condensate to PSUs under similar process followed wherein RIL

Jamnagar was not the highest bidder. "No question was raised

as to the same bidding process," he said.

The ministry official said CPCL wanted the pricing

mechanism to be reopened as it felt a premium of 2 per cent

over widely traded Bonny Light crude oil, reflecting quality

differential, was not justified.

The crude, CPCL felt, produced more naphtha and less of

high value diesel, and so offered a price formula which was

about USD 4-5 a barrel lower than the one offered by RIL.

The official said: "It appears that terms and conditions

of the tender has been framed in such a manner that none other

than RIL Jamnagar refinery could participate."

RIL spokesperson however refuted this saying that "having

followed a robust transparent bidding process, the allegation

that RIL has tailor-made the formula is only an after-

thought."

RIL said KG-D6 crude oil was being sold to CPCL and HPCL

on spot contract basis since November 2008 and CPCL has been

the sole buyer since April 2012.

"Fresh tenders, with payment security as a condition to

avoid any forced withholding outside any judicial process,

were invited on April 10 from all oil refining companies in

India -- IOC, CPCL, HPCL, BPCL, MRPL, Essar Oil and RIL -- for

sale of spot cargoes of KGD6 crude oil during the period April

2014 March 2015," the spokesperson said.

Copies of the tender invitation letters were sent to the

ministry on June 11, 2014.

"On the request of CPCL, the last date of submission of

bids was extended from April 25 to May 7," it said, adding

that the copies of the bids received were sent to oil ministry

on June 11.

The bidders were asked to quote the crude oil price as

per the formula given in the Tender Invitation document. This

formula, inter-alia, provided 'D' as a biddable element.

"While both CPCL and RIL Jamnagar refinery quoted a 'D'

of Zero USD per barrel, CPCL's bid was conditional.

"CPCL accepted the condition of providing Letter of

Credit (LC), provided LC charges are borne by the Seller. CPCL

also stated in their bid that the Pricing Mechanism must be

reopened and that the sellers have to justify the component

'C', which is a composite premium of 2 per cent over Bonny

Light, reflecting quality differential, based on the present

quality of KG-D6 crude oil," the spokersperson said.

RIL said even though the tender document clearly stated

no conditional bids will be accepted, in view of long business

relations with CPCL, the suggestion to bear the LC charges was

accepted and it was given opportunity to submit a revised bid.

"CPCL submitted a revised bid on May 26. In its revised

bid, CPCL reiterated its earlier position that the pricing

mechanism," the spokesperson said.

During discussions with CPCL on June 6, "CPCL stated that

it will not be possible for them to continue to link the price

of KGD6 crude to Bonny Light and sought to link it to DF

Condensate through a GPW Differential plus a Discount, for

under recoveries due to high naphtha content," RIL said.

"CPCL quoted this discount at USD 4 per barrel," the

spokesperson said, adding that the pricing formula proposed by

CPCL works out to about USD 45 per barrel less than the

pricing formula quoted by RIL Jamnagar.

"Since even after giving CPCL an opportunity to revise

their price bid, RIL Jamnagar Refinery's offer is highest,

accordingly we have no option but to accept RIL Jamnagar's bid

for lifting of KGD6 crude oil," the spokesperson said.