Petroleum and gas industry players are confused over the Bombay High Court order asking Reliance Industries Ltd (RIL) to supply KG gas at $2.34 per mmbtu to RNRL for 17 years. Even though multiple gas pricing currently exists in India, industry players claim this is a unique case where gas is supplied at dual prices from the same gas field as all GSPAs (gas sales and purchase agreements) that RIL entered into with fertiliser and gas producers for sale of gas from KG-D6 is at $4.20. This dual pricing discriminates among customers without any basis whatsoever.
The empowered group of ministers (EGoM) on September 12, 2007, finalised a pricing formula which priced the KG gas at $4.20 per mmbtu at landfall which translates into a price of Rs 172.20 per mmbtu at the prevailing rupee-dollar exchange rate. The approved price was 8.32% lower than the price proposed by the contractors.
However, industry players observe that with the court directing RIL to supply 28 mmscmd to RNRL for 17 years, RIL and the government in particular will be at loss as the payback time will be longer than currently estimated. Besides, the judgement seems to enforce the bid price of 2002, without an escalation clause, on gas going to be supplied in 2014 when the 7,480mw plus Dadri project being developed by the Anil Dhirubhai Ambani Group is expected to be commissioned.
As per a Mumbai-based analyst, should the government decide that all gas sales to be priced at $4.20 per mmbtu, then effectively RIL will end up subsidising RNRL, incurring tremendous losses and impacting the fortunes of the company and compromising the interests of shareholders. This could result in a loss of up to $1 billion to RIL during the term.
Deepak Pareek from Angel Broking said, “We view the court’s verdict as favourable to RNRL, Reliance Power and NTPC. We expect RNRL to earn marketing margins of around $0.12 per mmbtu on the gas sold. Reliance Power is likely to get favourably impacted as its Dadri project visibility improves. Since RIL-RNRL agreement draws the reference gas price from the RIL-NTPC agreements, NTPC’s case against RIL also gets strengthened because of the verdict favouring RNRL. RIL, on the other hand, is likely to get adversely impacted as the blended natural gas realisation for the company will come down significantly in the backdrop of this latest development.”