Reliance Industries has asked the C Rangarajan panel to allow for a new market-based price setting mechanism for natural gas, but without disturbing the pattern of profit sharing between itself and the government.
The fresh comments by RIL are a reaction to a purported draft report from the panel that asks for changing the cost recovery mechanisms to be written in the production sharing contracts for future bids. A six-member committee headed by the Prime Minister’s Economic Advisory Council chairman currently reviewing the contracts has apparently suggested that gas production should be shared between the government and the contractor on a new format.
RIL’s executive director PMS Prasad has written a letter to Rangarajan on October 30 arguing that to continue the flow of investments in the sector it is necessary to ensure that the terms of the existing exploration and licensing policy and the production sharing contracts signed should not be deviated from “in letter and spirit”. He has noted that RIL, as the contractor, was willing to try for an open-market price discovery, but under the gas utilisation policy approved by an empowered group of ministers in 2010 this was not possible.
“We trust that the committee will make recommendations ... which stipulates that all gas produced by the contractor will be sold at an arm’s length market price.”
RIL currently gets paid $4.2 per mmscmd for the gas it extracts from the offshore KG-D6 fields. But its production has slipped drastically due to a host of problems. The company has argued that restoring production to higher levels would need higher investments, which has been contested by the oil ministry.
Based on the fiscal model suggested by the Rangarajan committee, the share of profit petroleum to the government will commence from the first day of production instead of the current one where profits commence when all contract costs have been recovered. It has also recommended that the revenue which the contractor will earn even after this will be shared with the government. Finally, it has also asked the government to levy income tax on the full extent of the profit after a seven-year tax holiday. Prasad has also asked for an import price parity regime on the lines of the oil sector for gas saying the landed cost of the fuel must be the base of the calculations. The committee is expected to submit its final report before the