Put simply, this means that if RILs proposal is accepted, the price of domestic gas at current LNG spot rates will be close to $12 per mmBtu. This is about three times the $4.20 per mmBtu that RIL gets for its KG-D6 gas at present. Such a hike in price could jack up the cost of gas -based power and fertiliser considerably, although the new price is meant to be effective post 2014.
Of course, the actual price impact will hinge on the LNG market. Analysts, however, dont see LNG prices coming down significantly in the near future.
RILs executive director PMS Prasad wrote to the Rangarajan panel on October 30: Since domestic gas substitutes imports, the price of LNG imported reflects the price of gas consumers are willing to pay in the open market.
Besides, he said, import-parity principles are used for all other oil products in the country and under the production-sharing contracts, oil and gas cannot be treated differently.
RILs production from its KG-D6 fields has slipped drastically to 26 mmscmd from its peak of 62 mmscmd in June last year.
FE had reported earlier that the Rangarajan panel was likely to recommend a production-linked payment system for sharing profits between the government and oil explorers, replacing the existing system of linking returns to investments.
Currently, producers can decide whether and how to recover their investments before starting to share profits with the state. The Comptroller and Auditor General had criticised this system as it allows an incentive to frontload capital expenditure and delay the governments share of profits. The Rangarajan committee is expected to submit its report to the oil ministry by next month.
In its letter to the panel, RIL has also noted that if commodity prices are not market-related, no investor will be able to manage the capital-investment risks. The RIL-BP combine has around 5.5 trillion cubic feet of discovered gas reserves, which would require a large amount of risk capital to be invested, the company said. Most of these discoveries would require a price of more than $10 per mmBtu to be developed and produced. Only market-related prices would provide the right incentive to convert domestic resources to production. RIL said.
RIL, however, said it has no problem with the production-linked payment mechanism for revenue-sharing with the government for future production-sharing contracts. For existing contracts, the current system of investment-multiple-based profit sharing should continue, it said.