Moily pulls Reddy note against KG price hike

Written by fe Bureau | New Delhi | Updated: Nov 21 2012, 07:12am hrs
In a rare administrative move, petroleum and natural gas minister Veerappa Moily has withdrawn a note circulated by his predecessor Jaipal Reddy to the members of a ministerial panel, which had opposed an immediate price hike sought by Reliance Industries (RIL) for the gas from its KG-D6 block.

Ministry sources attributed the decision to the matter being considered by the six-member Rangarajan committee, but is widely perceived as a sign of moderation in the way the government views RILs demand. Moilys move also reflects the governments anxiety to ramp up domestic gas output, crucial for the energy-starved economy.

Reddy had said that Reliances demand for a price revision before the expiry of the period of the current price of $4.2/mmBtu (fixed in 2007 and implemented in 2009 for a five-year period) would result in a additional subsidy burden of $6.3 billion on the exchequer.

The company itself later withdrew the demand for price revision before April 1, 2014, but has insisted on linking domestic gas price to global prices under any subsequent production sharing contract. The company wants gas price post-March 2014 to be about 10% below the price of LNG imported from Qatar which means a three-fold increase in the price at current rates.

Sources said the ministry was likely to move a fresh note on the revision of KG-D6 gas price for the newly-constituted empowered group of ministers headed by defence minister AK Antony only after assessing the report of the Rangarajan panel. Reddys note was circulated for inter-minister-ministerial opinion but was not placed before the ministerial panel, the sources added.

If the latest RIL proposal is accepted, the price of domestic gas at current LNG spot rates will be close to $12 per mmBtu. Such a hike in price could jack up the cost of gas-based power and fertilisers considerably, although the new price is meant to be effective post 2014.

The Rangarajan panel set up to decide on future gas pricing and production sharing contracts is expected to submit its report next month. Gas production from the KG-D6 block is shrinking continuously and we need to see how allocation in this constrained environment could be worked out, said an oil ministry source.

In a recent letter to C Rangarajan, RIL executive director PMS Prasad sought market-linked pricing for natural gas and said this was critical for increasing domestic production.

The output from the KG D6 field is constantly declining. At present, the output stands at around 30 mmscmd and could fall further to 20 mmscmd by 2014.

Reddy had also sought to disallow $1-billion capital expenditure recovered by the company which, if accepted, would have inflated its profits from the KG D6 block by $2.2 billion as per an investment multiple ratio agreed to by the government earlier. The matter is now under arbitration.