HC asks Ambanis to frame new gas pact

Written by Corporate Bureau | Mumbai | Updated: Jun 16 2009, 09:23am hrs
Reliance group
The Bombay High Court on Monday ordered Mukesh Ambani-owned Reliance Industries Ltd, Indias largest company, to sell natural gas to brother Anil Ambanis Reliance Natural Resources Ltd at a price that is 44% lower than the price proposed by the government earlier.

The order could significantly impact the contours of the natural gas economy in the country. RIL has been asked to supply natural gas to RNRL for 17 years at $2.34 per million British thermal units. RNRL, however, cannot trade the gas but can use it as raw material in its power projects. Natural gas accounts for about 18% of the total energy-mix of the Indian economy.

An RIL spokesperson said: The full text of the judgment of the honourable High Court has been received by us and is being reviewed by us. We will decide the future course of action based on legal advice.

Analysts said RIL can approach the Supreme Court to challenge the order.

RNRL, in a release, stated: Todays court verdict is the victory for the RNRL shareholders, who were promised the business of gas supply from RILs gas fields as per the demerger scheme of RIL approved by the Bombay High Court in 2005. The company looks forward to signing the gas supply agreement with RIL, based on commercial aspects settled by the courts verdict.

After the orders, the RNRL stock gained 24.11% on the Bombay Stock Exchange to close at Rs 108.35, while RILs scrip plunged over 7.48% to close at Rs 2180.45.

The courts final order posted on its Website states that RIL and RNRL will have to firm up an agreement within a month, based on the terms of the memorandum of understanding signed between them in June 2005. The new agreement must include the new price, quantity and tenure as the three parameters of the deal.

A division bench of the high court comprising Justices JN Patel and KK Tated said if the agreement does not happen within 30 days, then the parties should approach mother (Kokilaben Ambani) as provided for in the MoU. If after mothers intervention matter is not resolved, then company court may be approached for modification of the demerger scheme. Alternatively, RNRL can also file a suit for damages against RIL.

Getting an assured gas supply from the Krishna-Godavari D6 field of RIL will make RNRLs job of procuring fuel for the Anil Dhirubhai Ambani Groups power projects easier. Bloomberg data shows group firm Reliance Infrastructure operates six power plants and plans to build seven more, while Reliance Power is building three power stations, most of which will be gas-based.

RIL is expected to have gas production of 80 million standard cubic metres per day by December. It has agreed to sell 11 mmscmd gas to power companies in late April and 15 mmscmd to fertiliser firms in late March, but the pricing of the gas was contested.

The Prime Ministers Economic Advisory Council in 2007 set the price of the gas at $4.20 per mmBtu, which was below the $4.5 RIL had asked for.

Petroleum secretary RS Pandey said he will await a copy of the order before making any comments on the Bombay High Court verdict.

RNRL had claimed a right to over 70% of K-G D6s initial output of 40 mmscmd by virtue of the MoU between the two companies and had taken RIL to court in November 2006 over it.

But RIL had argued that the price of $2.34 per unit as stated in the gas sales agreement signed by both the parties after the demerger of the Reliance group in January 2006 was not maintainable. RIL said it cannot sell gas at that price because if it did so it would not recover even the production cost for the gas. But RNRL was adamant to get gas at the agreed price and duration. The high court had earlier asked both the groups to rework the gas supply master agreement. But they returned to the court saying they could not arrive at an amicable agreement.