Reddy red-flagged RIL gas price hike to EGoM

Written by fe Bureau | New Delhi | Updated: Nov 1 2012, 08:27am hrs
S Jaipal ReddyS Jaipal Reddy, Ex-oil minister & now minister for science & technology
In his last days at the Union petroleum ministry, S Jaipal Reddy had reiterated his opposition to a hike in the price of natural gas from the current $4.2 per unit at Reliance Industries KG-D6 block. If the companys demand for price revision is accepted now, the exchequer could lose around $6 billion, Reddy said in a note prepared for the empowered group of ministers (EGoM) and a copy of which was sent to the attorney general (AG).

After India Against Corruptions Arvind Kejriwal revealed this and posted purported copies of Reddys note dated October 10 on its website on Wednesday, RIL came out with a statement denying the allegations.

RIL said: The statements made by IAC in the press conference today are devoid of any truth or substance whatsoever and are denied. The deep water exploration project in the KG-D6 basin has deployed the best technical resources and has been recognized by the oil and gas industry as one of the very best in its class. This project has added great economic value to the country and by all accounts is a project of which India can be justly proud. The company added: Irresponsible allegations made by IAC at the behest of vested interests without basic understanding of the complexities of a project of this nature do not merit a response.

In 2007, an empowered group of ministers fixed KG gas price on the basis of crude oil price at that time. Even though the price is due for revision only in 2014, RIL wants it revised now in tune with international prices, which is more than two times higher.

That Reddy who was shifted to the science and technology ministry in the recent Cabinet reshuffle had resisted RILs demand even in his latest note could add fuel to the notion that the tiff with the countrys largest private entity did cost him his job. Reddy also sought to disallow $1 billion capital expenditure recovered by the company which, if accepted, would have inflated its profits from the block by $2.2 billion as per an investment multiple ratio agreed to by the government earlier. The matter is now under arbitration.

Reddys letter could make it difficult for new oil minister Veerappa Moily to take a different position on gas price as expected by the market and the company.

Sources said the ministry, under a new leadership, is unlikely to propose a revision in gas price before 2014, as such a move would expose a government already bruised by a series of corruption scandals to renewed criticism.

Besides, even Reddys predecessor Murli Deora had rejected RILs demand, which would make it difficult to justify a change of position now.

As oil minister, Moily has not promised any gas price revision, merely assuring that he would take quick decisions in all cases to boost production in the energy sector.

According to sources, RILs latest stand is that a decision to raise gas price to global levels could be taken right now, although implementation could wait until 2014 in line with the production sharing contract.

Revising the price now might protect RILs gas production business from a possible fall in price by 2014 if crude oil falls below $60, the value used to arrive at the current price. But that is a double-edged sword; government sources say it could turn out to be a self-goal for RIL, if crude oil turns more expensive by then. (In the absence of a benchmark for gas price, it is usually linked to crude price globally as both fuels are substitutable for many applications).

The price set by the EGoM was implemented in 2009, when production started from the block. The price was fixed for a period of five years but RIL wants a price revision before it is due in 2014 to make the gas business more remunerative considering the fact that imported gas is three to four times the administered price in India. Even if the price is doubled, it would still be cheaper than the delivered price of imported liquified natural gas. Government sources, however, said domestic gas cannot be equated to long-term contracts to import LNG as the latter includes the cost of liquefaction and regassification.

The current international gas price is $12-13. Sources said RIL is keen to see that domestic gas price is fixed close to its current international price. In case gas price moves up immediately, as sought by RIL, this would provide a cushion for RILs margins even if price falls in 2014.

Earlier this year, RIL wrote to the Prime Ministers office demanding an early revision of gas prices at a time when output from its most prolific KG D6 field is constantly declining. The current output stands at around 30 mmscmd. Reddy did not buy RILs explanation of geological difficulties for falling gas output and alleged that the company was trying to force the government to revise gas price.