Supply of 28 mmscmd of KG D-6 gas by Reliance Industries to Reliance Natural Resources (RNRL) will impact the current and future gas allocations to existing power and fertiliser units, thus questioning the relative standing of government?s gas allocation policy under the profit sharing contract (PSC).
Citigroup in its comprehensive analysis on Bombay High Court?s June 15 order asking RIL to supply 28 mmscmd of gas at $2.34 per mmbtu for 17 years to RNRL, also observed that new gas allocation, ex-RNRL and NTPC could take a backseat if the issue goes to the higher court and uncertainty lingers on. This could impact gas demand and ramp up beyond 80 mmscmd.
RIL, based on the empowered group of ministers? (EGoM) decision, has already inked gas sale purchase agreement for the supply 18 mmscmd of gas to power sector and 14 mmscmd to fertiliser sector of the total 40 mmscmd.
Citigroup, which released its report on June 30, said the gas supply contracts with the existing customers includes a clause which will necessitate reducing supplies to them in order for RIL to supply 28 mmscmd (plus 12 mmscmd if NTPC does not happen) to RNRL. That could result in the existing gas deficient units once again relying on liquid fuels for their energy needs. Interestingly, RIL?s contract for 12 mmscmd to NTPC is not yet consummated. As a result, the pricing is yet to be approved under the PSC though the EGoM price decision of $.4.20 per mmbtu did take note of its subjudice status.
?If the issue lingers on especially if RIL chooses to appeal in Supreme Court, it could discourage emergence of demand from new power and fertliser plants. It is important to note that the existing units are amenable to signing to 3-5 year contracts, as they are replacing costlier liquid fuels whereas new power unit would require a long term (20 years) supply contract. So while 80 mmscmd could get absorbed by the demand from existing units (power, fertilisers, process industries), the next leg up which is100-120 mmscmd might be delayed till either Reliance Power or NTPC unit comes on. If Reliance Power?s units come up in phases, it could also hold up new demand from emerging,? Citigroup said.
According to Citigroup, gas supply from contractor?s share may not be bankable as the High Court has specified that RIL supplies RNRL from its quota of gas, as a means to supply at the lower price at $2.34 per mmbtu.
However, as per KG D6 model, RIL?s share starts at 90% but declines to only 15% (from 80-90 mmscmd to 10-20 mmscmd ) after 10-11 years . Given that units of Reliance Power and NTPC might take 3-4 years to start, it would be left with only 7 years of assured volumes. However, it is unclear whether the PSC allows the contractor to claim its profit share in kind. There is a lack of clarity on RNRL?s right on future gas discoveries as per the MoU and the High Court order is also silent on the issue.