Reliance can charge higher price for gas with bank guarantee

Dec 20 2013, 01:10 IST
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CCEA resolved to allow RIL to price gas as per the Rangarajan formula from April 1 next year. Reuters CCEA resolved to allow RIL to price gas as per the Rangarajan formula from April 1 next year. Reuters
SummaryCCEA resolved to allow RIL to price gas as per the Rangarajan formula from April 1 next year.

IN what could help revive sagging investor interest in Indiaís 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 ó covering the difference between the current gas price of $ 4.2/per million British thermal units (mmBtu) and the new formula rate ó which can be encashed in case it is proved later that hoarding ó and not any geological surprise, as claimed by the company ó 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 ministryís views. According to the government, the short-supply of gas at KG-D6 so far has been around 1 trillion cubic feet.

The unbiased armís 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 ó 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

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