Govt mulls new price discovery for D6 gas

Written by Anupama Airy | Sanjay Jog | New Delhi, Mumbai, May 14 | Updated: May 15 2008, 06:34am hrs
The government is mulling fresh pricing of gas from India's largest reserve in the Krishna-Godavari basin. At stake is whether the gas from the D6 block of Reliance Industries Ltd be supplied at the same price to sectors other than power and fetriliser, the top consumers of the fuel.

An empowered group of ministers will take a call on the issue shortly. This comes after the government took more than a year to decide the pricing of gas from the D6 basin at $ 4.21 per mmBtu.

Now the petroleum ministry says the present valuation of gas was approved on the basis of a price discovery process obtained from only 10 buyers in the power & fertiliser sectors (for a maximum quantity of 34 mmscmd), which need not be the basis of pricing for other sectors.

In a letter to the Director General of Hydrocarbons, the ministry notes, "If the contractor (Reliance) proposes to sell gas to other sectors, then should the price discovery include other sectors The DGH is requested to provide inputs on the issue clearly by May 19."

The letter says this is necessary to decide whether as per the production sharing contract, the commitment of the gas in the market to other buyers would require a fresh price discovery and approval of the government before Reliance opens the gas tap.

Sources said the reason why the petroleum ministry is pushing for a fresh price discovery for other sectors is because the government will benefit if Reliance sells gas at a higher price than $4.21 to other sectors. The government share of profit petroleum will be worked out at that higher price.

As the price order has also provided for higher prices for valuation in case gas is sold at higher prices. Therefore, there is implicit acceptance of higher prices/ valuation, the ministrys note said.

This has implications for the forthcoming Nelp-VII blocks, too. The note says the modification made in the price Article of the production sharing contracts for these blocks reflects that the price discovered through the open market process shall apply to all consuming sectors for valuation purposes.Just as a price discovered only through those sectors which have a higher capacity to pay (high end consumers) would be inappropriate to enforce commonly to all sectors, even the vice versa would not be appropriate. The petroleum ministry has also noted that since the matter between RIL and RNRL is sub-judice, the gas sales and purchase agreement may not be finalised between these 10 buyers in view of the Mumbai High Courts stay.

Considering that the production from the field is to start in the immediate future, even if the above sale is permitted, there is a possibility that RNRL/NTPCs facilities may not be able to lift the gas, thereby making this additional gas available for sale through price discovery, the ministry has noted. Reliance is planning to start production from the D6 blocks in the next few months. To start with the company will produce 40 mmscmd-- which too will be reached in 2-3 months after starting with a production of around 15-20 mmscmd. By 2009, Reliance expects to scale up the production of gas from D6 block to 80 mmscmd.