Reliance can charge higher price for gas with bank guarantee

Written by fe Bureau | New Delhi | Updated: Dec 20 2013, 06:40am hrs
RILCCEA resolved to allow RIL to price gas as per the Rangarajan formula from April 1 next year. Reuters
IN what could help revive sagging investor interest in Indias hydrocarbon sector, the Cabinet Committee on Economic Affairs on Thursday resolved to allow Reliance Industries (RIL) to price gas from the KG-D6 field as per the Rangarajan formula from April 1 next year.

This is subject to the company giving a bank guarantee covering the difference between the current gas price of $ 4.2/per million British thermal units (mmBtu) and the new formula rate which can be encashed in case it is proved later that hoarding and not any geological surprise, as claimed by the company has resulted in the slippage in KG-D6 output.

The Rangarajan formula would be notified in a week.

The formula is for gas pricing for five years starting FY15. At current rates of the reference prices, the gas price based on this formula would be around $7/mmBtu. It is hoped that the new formula could eventually pave the way for market-determined pricing of gas.

The formula was approved by the Cabinet in June but uncertainty prevailed over its implementation due to the wrangle over alleged short-supply of gas by the company after the finance ministry put its foot down, saying the company ought to be penalised for producing gas less than mandated in the approved plan. The oil ministry subsequently proposed to secure bank guarantees from the company.

The government said that details of the bank guarantee including its periodicity would be worked out by January 2014, taking into account the law ministrys views. According to the government, the short-supply of gas at KG-D6 so far has been around 1 trillion cubic feet.

The unbiased arms length price proposed by the Rangarajan panel is the average of two weighted averages. One is that of the prices defined by taking the cost of LNG imports into India under long-term contracts

and excluding charges such as transportation which would denote the price at the point of production in exporting countries.

The other is that of prices at three major gas trading points the price at Henry Hub in the US, the price at the National Balancing Point of the UK and the net-back price at sources of supply for Japan. Even as the notification of the formula got delayed due to the wrangle over alleged short-supply of gas by RIL, a parliamentary standing committee recently sought revision of the formula to factor in domestic cost of production. The panel pointed out that the benefit of lower gas prices at Henry Hub has been largely diluted by the inclusion of Japans LNG prices which includes 60% royalty component linkage to Japanese Crude Cocktail and a host of other factors.

Separately, the oil ministry and RIL are engaged in arbitration over the governments move to disallow $1.005 billion expenditure made by the company in developing the KG-D6 fields because of the sharp fall in output. The arbitration, where RIL is opposing the government stand that non-drilling of committed wells led to 80% fall in output, might get extended for an indefinite period. Oil ministry officials say that the outcome of the arbitration would prove whether the contractor deliberately suppressed gas output or it whether the fall in output was a genuine geological surprise, as claimed by RIL.

The Directorate General of Hydrocarbons in July raised the penalty on RIL to $1.8 billion to reflect the fall in natural gas supply from Dhirubhai 1 and 3 gas fields in KG-D6 block. "Directorate General of Hydrocarbons vide letter July 22, 2013, has proposed for disallowance of cumulative cost recovery amounting to $1,797 million up to financial year 2012-13 towards creation of excess capacity," said a note from the regulator.

RIL states that the fall in production is a result of geological complexities. Gas production from the D1 & D3 fields fell to 8.7 million metric standard cubic metres per day (mmscmd) this month from a peak of 55.9 mmscmd in 2010-11. The output from the MA oil and gas field in the KG-D6 block, too, has fallen over 62%. The estimated shortfall in production vis-a-vis targets between 2009-10 to 2013-14 stands at 122.77 mmscmd of gas.

Oil ministry officials say that they want to settle the pricing issue before the Nelp 10 round of auctions. The Planning Commission and the law ministry have also both backed the bank guarantee as the possible resolution to the issue.