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Reliance Industries, fertiliser companies fail to agree on gas supply terms

Mar 31 2014, 22:24 IST
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Reliance Industries wanted the 16 fertiliser companies to financially secure payments for about 13 mn standard cubic meters per day. Reuters Reliance Industries wanted the 16 fertiliser companies to financially secure payments for about 13 mn standard cubic meters per day. Reuters
SummaryReliance Industries and its only customers today failed to agree on the key terms of sale of natural gas from tomorrow.

Reliance Industries and its only customers today failed to agree on the key terms of sale of natural gas from tomorrow but the government asked the Mukesh Ambani-run firm to continue supplies on existing terms in the interim.

After an almost five-hour marathon meeting between Reliance Industries and urea companies, the two sides failed to settle on the rate at which gas supplies should be securitised.

The options were the rate of USD 4.2 per million British thermal units, which expires today, or USD 8.34, the price that would have been applicable had the Election Commission not postponed implementation of the Rangarajan Committee formula till the completion of the general elections.

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Reliance Industries wanted the 16 fertiliser companies to financially secure payments for about 13 million standard cubic meters per day of gas they buy from its eastern offshore KG-D6 field at USD 8.34.

But the fertiliser units said that since the new rate is not applicable and the oil ministry had ordered the supply of gas at the existing rate while the model code of conduct is in place, they would provide letters of credit at USD 4.2.

Fertiliser Secretary Shaktikanta Das, who chaired the meeting, said Reliance Industries will supply gas on the existing terms in the interim and a new Gas Sale and Purchase Agreement (GSPA) will be negotiated.

"We had discussions today with Fertilizer Association of India (FAI) and Reliance Industries on GSPA. Reliance has agreed to supply gas at USD 4.2 mmBtu. In the meantime, Reliance and FAI will sit together to come up with new agreement," he said.

"The GSPA is under discussion. Both Reliance and FAI have agreed they will sit together and finalise it soon. Both of them agreed to do it earliest," he added.

The government had fixed USD 4.205 per mmBtu as the sale price for KG-D6 gas for the first five years. KG-D6 started output in April 2009 and the existing price expires today.

A new price formulation was approved by the Cabinet in December last year and notified on January 10 but the specific rate based on the formula was not notified before the elections were declared.

The oil ministry approached the Election Commission for approval to announce the price but the poll watchdog asked the government to hold the rate till mid-May.

The delay in implementing the Rangarajan price formula will not have a material bearing on 85 per cent of the gas produced in the country as firms such as ONGC can continue sales at USD 4.2 per mmBtu on existing contracts.

However, new contracts needed to be signed for KG-D6 as RIL's current sales pacts expire today.

"The gas price will be payable which is notified by the government from time to time. Similarly in the case of marketing margin also. And this is what supplier should charge," FAI Director General Satish Chnader said.

He added that the agreement is yet to be finalised and in the meantime gas will be supplied at USD 4.2 per mmBtu.

Sources said RIL and buyers of its KG-D6 gas had settled most issues on the new sales pacts at a meeting last week but the issue of securitisation remained unresolved.

Urea plants had flagged about 10 issues, including duration of the contract and supplier liabilities, in the new GSPA that RIL had proposed for the period starting April 1.

RIL agreed to a five-year validity for the new GSPA, like the current one.

It previously offered three-month contracts in line with the new gas pricing policy, where rates would have changed quarterly, based on average international hub prices and the cost of imported LNG in the preceding 12 months with a lag of one quarter. This had been opposed by the fertiliser units.

To continue supplies from April 1, RIL had forwarded a simplified GSPA term sheet to buyers that would be valid till it is replaced by the GSPA. The key features include a clause allowing buyers to pay only for the quantity supplied.

While the seller will be responsible for quality specs of gas, in times of constraint, gas will be supplied on a pro-rata basis to all fertiliser buyers. Key terms like invoicing, payments and letters of credit are similar to the GSPA signed in 2009.

The official said the issue that remains to be resolved is the marketing margin to be charged by RIL.

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