The joint statement from RIL and its partners BP Plc and Niko Resources Plc also indicated that pending resolution of the issue, it was halting any further exploration and development work at KG-D6. 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, the joint statement said. Without this clarity, the parties are unable to sanction planned investments of close to $4 billion this year.
Along with the fresh Vodafone arbitration notice last month, this is the governments third arbitration notice in as many weeks (see Delay, delay, delay ), taking government-industry relations to a new low it has taken RIL 29 months to just get the arbitrators appointed in its first arbitration.
At stake is a potential $8-10 billion investment by RIL and its partners BP and Niko over the next few years of this, $4 billion was to be invested in the current fiscal, but each day of delay means the consortium cannot go ahead with its plans.
Although the gas price hike, based on the Rangarajan formula, can be notified once the Election Commissions code of conduct comes to an end and the new government is sworn in, RIL is taking no chances. As the firms lawyer Harish Salve said on Saturday, the company is in litigation mode. The government had notified the price hike well before the ECs model code of conduct came into play but the oil ministry presented the matter to the EC as a new decision the EC, not surprisingly, put the gas hike on hold.
Last week, the government returned the bank guarantee of R509.55 crore that RIL had submitted to be eligible to get a higher price for natural gas. The petroleum and natural gas ministry returned it, saying the new rate hasnt been announced. The surety, given on April 10, covers the incremental revenue RIL would have got in the April-June quarter had the price been doubled to $8.4 mm British thermal units.
Relations between the government and RIL have soured over the last couple of years, with the bone of contention being the declining gas output from KG-D6, which, the company claims, is due to unforeseen technical challenges. In the quarter ended March, gas output from KG-D6 averaged
barely13-14 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.
RIL has contested allegations it deliberately supressed production from the KG basin and has claimed it was looking to invest additional amounts in exploration, provided the returns were remunerative. The government, however, is of the opinion that RIL has simply not done enough to ramp up production and arbitration proceedings are pending in a case where the former disallowed RIL from recovering costs incurred in developing the gas reservoir, proportionate to the decline in output.
The joint statement said that issuance of the arbitration notice to the government (dated May 9) was essential since their plans to invest around $8-10 billion in the next few years to significantly increase production from the KG-D6 block was in jeopardy failing notification of the new gas price.
RILs concern isnt the governments inability to notify new gas prices alone. They are also worried about an indication from the ministry of petroleum and natural gas that revised gas prices may only be applicable from the second quarter of fiscal 2014-15, and not from April 1, 2014, as was originally envisaged.
This contradictory move has resulted in a loss to the contractor group and the government of R300 crore per month, the statement said. Amid rising concerns of not enough investment flowing into exploration and production of hydrocarbons in India due to lack of remunerative prices, the Union cabinet approved in 2013 a new formula for gas pricing in the country suggested by a committee headed by C Rangarajan, chairman of the Prime Ministers Economic Advisory Council.
The formula sought to arrive at a price for domestic gas taking into account prevailing international gas prices. It was to be valid for the first five years, after which gas prices were to transition to being purely market-linked. The current price of gas in the country is $4.2 per million British thermal unit (mBtu), though contracts using this gas price expired on 31 March 2014.
Domestic gas price under the new formula (which would have worked out to around $8 per mBtu) was to come into effect from 1 April 2014, but didnt. Initially, the government delayed the decision in the wake of allegations from other political parties like the Communist Party of India and the Aam Aadmi Party that alleged that gas prices were being hiked at the risk of fanning inflation in the country for the benefit of only certain private entities like RIL. The matter is also pending in the Supreme Court.
According to an RIL executive, who didnt wish to be identified, the company is concerned about the uncertainty regarding gas prices even after the elections are over and the Model Code of Conduct is lifted. We dont know if and how soon the new government will be able to take a decision on gas price, if the kind of unwarranted opposition to the move by certain fringe elements continues, this person said.
In 2013, RIL and its partners made a major discovery of new gas in the KG-D6 basin and according to the company it sought to bring this gas on-stream by 2017. The contractor group which was getting ready to sanction the first major project with an investment of $4 billion in June/ July 2014 is now forced to halt activities, the statement said. One quarters delay this year will delay this project by one year due to the construction weather window in the Bay of Bengal being lost.