RIL, partners may pay $147 m per quarter as bank surety for KG-D6

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SummaryThe lower bank guarantee comes as a big relief since, at one point, the finance ministry had estimated it could be as high as $9 billion.

With the bank guarantee that the Reliance Industries-BP-Niko Resources consortium will have to furnish likely to be only $147 million per quarter, and the path cleared for it to invest around $6 billion (see graphic) over the next three to four years, Reliance's stock price jumped 4.6% on Friday against the broader market's 1.79% hike.

The lower bank guarantee comes as a big relief since, at one point, the finance ministry had estimated it could be as high as $9 billion. This, however, was over a longer period and on the shortfall in RIL’s output vis-a-vis what it was alleged to have promised.

On Thursday, after the Cabinet cleared the proposal to allow RIL to charge the Rangarajan formula-based price subject to bank guarantee, petroleum secretary Vivek Rae clarified the formula would be prospective. That means if RIL and partners produce 100 units of gas and get a price of $840 against the $420 it gets currently, they will have to give a bank guarantee of $420.

Edit: Stepping on the gas, P6

Based on the likely 11mmscmd output, that works out to a bank guarantee of $147 million per quarter. Of this, Reliance's share will be $88 million. For a period of two years, by when the arbitration over gas hoarding is likely end, the overall bank guarantee will amount to $1.2 billion.

The oil ministry and RIL are currently engaged in arbitration over the government's move to disallow $1.005 billion expenditure made by the company in developing the gas fields because of a sharp fall in output. Oil ministry officials say that the outcome of the arbitration would prove whether the contractor deliberately suppressed gas output or it was a genuine geological surprise.

The bank guarantee will be equivalent to the incremental revenue RIL will get from the new gas price. It will cover the difference between the current gas price of $4.2 per million British thermal units (mmBtu) and the new rate which will come into effect from April 1 as per the Rangarajan committee formula. It will be revised on a quarterly basis depending on variation in gas price which is indexed to the international hub rates.

The D1 and D3 fields have about 1.2 trillion cubic feet (tcf) of reserves still to be tapped and the company is currently producing at around 0.05 tcf per year. The company plans to invest a further $500 million on these fields.

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