Gas pricing: Reliance Industries not to withdraw arbitration notice

Written by Siddhartha P Saikia | New Delhi | Updated: Aug 25 2014, 14:48pm hrs
Reliance IndustriesReliance Industries chose not to withdraw an arbitration notice sent to the Centre in May
While a secretaries panel set up last week is about to go into the vexed issue of gas pricing, Reliance Industries chose not to withdraw an arbitration notice sent to the Centre in May for the latters failure to keep the promise of a new gas price from April. RIL has written to the petroleum ministry contending that the government is not within its right to compel it to sell gas at below market price.

The company said it was wrong to assert that the government has an unfettered right to fix the price of KG-D6 gas under a production sharing contract (PSC). On the contrary, it said, the contract provided for the opposite. In particular, it argued, Article 21.6.1 of the PSC commands the contractor to sell gas at competitively-determined, arms length price.

Although Article 21.6.3 of the PSC obliges the Centre to approve the price proposed by the contractor, it was only meant to ensure that the contractor do not sell the gas below the market price, it said in the latest communication to the ministry.

RILs stand signals that it would not mind being in a collision course with the government on the issue.

Separately, another arbitration is taking place between RIL and the government over the alleged suppression of production at the KG-D6 block. The government had slapped penalty notices of $2.3 billion on RIL for the production being below what was promised in the field development plan.

The government had in July told RIL and its partners BP and Niko Resources in the development of the once-prolific block, to withdraw the arbitration notice they had sent in May. The companies had said their investment plans were thwarted by the delay in implementing a new gas price.

It may be recalled that the UPA government had approved pricing norms on the line of the Rangarajan formula that would have doubled the domestic gas price from the current $4.2/mmBtu, but could not implement the new price due to an Election Commission diktat.

While the Modi government said it needed to comprehensively review the issue before taking a decision, petroleum minister Dharmendra Pradhan told Rajya Sabha recently that a formula that factors in every stake-holders interest would be announced by September 30.

The Ambani firm is of the opinion that government is misreading the Supreme Court judgment in the case between RIL and Anil Ambani-controlled RNRL which said natural resources belonged to the people of India and so the government as their custodian had the rights to allocate these resources and decide on their pricing.

According to RIL, the governments contention that it is stopped from challenging the policies/directions of the government on the pricing of natural gas in an arbitration proceedings lacks any merit or substance whatsoever.

The continuing delay on the part of the government of India in notifying the price in accordance with the approved formula for the gas to be sold has left the parties with no other option but to pursue this course of action, a joint statement by RIL, BP and Niko had said, adding, without this clarity, the parties are unable to sanction planned investments of close to $4 billion this year.

The government cites Article 21.6 of the PSC that empowers it to fix gas price. While formulating bid documents prior to the launch of oil and gas blocks auctioning under New Exploration Licensing Policy (NELP), the government kept a provision for approval of the gas price formula prior to any sale of gas. The idea was to protect the governments entitlements, as revenues in the form of profit petroleum and royalty is directly dependent on the price of gas, which has been elaborated in the PSC provisions, in particular Article 21.6.

In the pricing issue, the government has nominated former Supreme Court judge G S Singhvi as its arbitrator, while RIL-BP-Niko, named London-based David Steel as their arbitrator.

In July, gas output from KG-D6 averaged barely 12.46 million standard cubic metres per day (mmscmd), whereas the originally envisaged level of peak production from the field should have touched at least 60 mmscmd.

Price fixing

* May 9, 2014: RIL and its partners BP & Niko Resources slap an arbitration notice on the govt for not revising the gas price

* July 7, 2014: Oil ministry asks RIL and its partners to withdraw their notice of arbitration

* Petroleum ministry cites Article 21.6 of PSC to argue government has the right to approve gas price

* Government nominates former Supreme Court judge GS Singhvi as its arbitrator

* RIL and its partners BP & Niko Resources name London-based David Steel as arbitrator

* KG-D6 output averaged at around 12.46 mmscmd in July against the target of 60 mmscmd