In what could potentially reduce Reliance Industries? gain from the recent gas price revision by billions of dollars, the finance ministry, one of the strongest proponents of the price hike, seems to be having second thoughts on producers getting ?unlimited gains? from the move. In a note to the petroleum ministry, North Block has listed out a few options that ?may be considered for appropriate action?, in view of this objective and in the interest of major industrial users of the fuel.
Significantly, one issue flagged by the finance ministry is that once RIL overcomes ?the technical difficulty of producing gas at the KG -D6 field, the government must ensure the company delivers the shortfall it still owes (to the government) at the old price of $4.2/mmBtu, rather than getting the benefit of the new price?. Assuming the gas price post-April 2014 could be $7.2/mmBtu as per the formula approved by the Cabinet Committee of Economic Affairs ? what the Cabinet approved was a formula, not an actual price ? the firm?s gain would be lower by a whopping $4.7 billion (see graphic).
RIL, which had hit a peak output of 69.43 million standard cubic metres per day (mmscmd) from the KG-D6 block in March 2010, is currently producing just over 14 mmscmd. This output is way short of the 80 mmscmd target for the year. The overall shortage of gas produced since 2009-10 vis-a-vis annual targets stands at 122.77 mmscmd. A back-of-the-envelope calculation shows that if RIL gets $3/mmBtu less than the government approved rate of $7.2 mmBtu, say, it will get a potential $4.7 billion less. The RIL scrip on Wednesday closed 1.95% down at R856.35.
The finance ministry correspondence also called for an examination into whether there is a case for an upper limit for gas prices. ?There must be a ceiling price under the formula. It cannot be that gas producers will reap unlimited gains in the case of an upswing in global prices; any upside has to be capped,? the office memorandum notes.
The finance ministry also requested the oil ministry to provide it with the copy of production sharing contracts (PSCs) in respect of gas producing blocks held by private contractors.
In respect of the KG D-6 basin, it has sought year-wise information on the production targets set out in the annual plans approved by the management committee, while allowing investment approvals.
It also sought the latest status regarding recommendation of the Rangarajan Committee towards moving to a revenue sharing arrangement with gas producers. Information has also been sought on steps taken by the managing committee to supervise issues related to technical parameters of various fields and cost recovery.
Among the options the finance ministry has suggested is a sharing of gas price hike impact by all power producers given the need for them to pass on the resultant tariff hike of 7-8 paise per unit.
The CCEA on June 27 approved pricing of all domestically produced natural gas from April 1, 2014 at an average of the prices of imported liquefied natural gas (LNG) into India and the weighted average of gas prices in North America, Europe and Japan.
The price effective for April 1, 2014 is estimated at around $8.40 per mmBtu, double the price of $4.20 for current gas sales from RIL?s KG-D6 block, but it could be less, even $7.2, since the Cabinet cleared a formula, not a price. This rate is to change every quarter based on international prices and there are concerns that leaving the formula open-ended may result in prices rising to $10-12 in the near future.
The price for each quarter will be calculated on the basis of the 12-month trailing average price with a lag of one quarter (i.e. price for April to June 2014 will be calculated based on the averages for the 12 months ended December 31, 2013).
