The empowered group of ministers (EGoM) headed by external affairs minister Pranab Mukherjee will meet on September 3 to deliberate on the vexed issue of pricing of gas from Reliance Industries Ltd?s (RIL?s) mega gas field in the Krishna Godavari basin. This comes close on the heels of the Prime Minister?s economic advisory council (EAC) submitting its report on gas pricing to the PMO last week.
Sources said the EGoM, in its first meeting on September 3, will discuss the two reports submitted by the committee of secretaries (COS) and the EAC, respectively, on the issue pricing of gas from the fields being developed under the new exploration and licensing policy (NELP) regime.
This, the sources said, may also be followed by some high-level presentations from RIL chairman Mukesh Ambani and other stakeholders from the user industries.
An expert view from an international legal consultant on the issue may also be sought by the EGoM.
The controversy generated by RIL?s market price for the gas discoveries in its D6 KG basin deepwater block, scheduled to commence commercial production from July 2008, is regarding the formula and bidding process adopted for discovering the ?competitive arms length price? envisaged under the production-sharing contract. RIL?s formula yields a basic gas price of $4.33 per million British thermal unit (mBtu).
While the contracts signed between the government and the contractor govern gas production and pricing as well as its marketing in the country, it is pertinent to note here that the three major policies governing utilisation, pricing and bidding for natural gas produced under these contracts are still not in place. This has also been pointed out by both the high-powered committees. Moreover, there is no upstream regulator at present to whom the pricing issue can be delegated.
On RIL?s discovered gas price of $4.33 per mBtu, the EAC has observed that there are two ways of looking at the rationality of the discovered price.
The first is to compare it with other benchmarks and the second is to consider its impact on fertiliser and power sectors.
The EAC has also observed that while the price discovered through the RIL bidding process is higher than several existing long-term administered price mechanism (APM) contracts, it is nevertheless comparable with the current market pricing for short-term non-APM gas contracts which though are for relatively smaller volumes.
Regarding the issue of increase in capital expenditures, the EAC has noted that while capital cost for deep water activities involving cutting edge technologies are bound to be high, capex and production profiles needs to be scrutinised very carefully by an independent panel comprising top international experts and cleared at a senior level.
In case of RIL, the initial capex of $2.1 billion was later revised to $5.2 billion along with an increase in peak gas production from 40 mmscmd to 80 mmscmd.
Another significant recommendation of the council is that the petroleum ministry could also consider whether the profit petroleum could be done away altogether by making production sharing the biddable parameter.