PMO wants to know if RIL can raise gas price

Written by Priyadarshi Siddhanta | priyadarshi siddhanta | New Delhi | Updated: Feb 28 2012, 10:00am hrs
The Prime Ministers Office (PMO) has asked the petroleum ministry to legally examine whether the government can allow the Mukesh Ambani-controlled Reliance Industries (RIL) to increase the prices of gas produced from the KG D6 basin as against the current sale price of $4.2 a unit as decided by a group of ministers in October 2007.

In response to a letter written by RIL, the PMO in a letter on January 23 told petroleum secretary GC Chaturvedi that it should have the contentions put forth by the gas producer legally examined before placing it in the empowered group of ministers (EGoM) on gas pricing and commercial utilisation at its mid-March meeting.

The undersigned is directed to request you to consider obtaining legal opinion on the matter and placing it before the EGoM on gas, PMO director Sanjay Lohia said in the letter to Chaturvedi. RIL in its letter on January 6 to the PMO had stated that it wanted to exercise its contractual right to market natural gas on the basis of arms length competitive sales to benefit all the parties under the production sharing contract (PSC) including the government.

Describing the current price of KG D6 gas as a sub-market price, RIL had sought renegotiating a revised formula with the petroleum ministry under the PSC and the New Exploration Licensing Policy within 90 days (by April 6). Pointing out that it has invested about $8 billion in the KG D6 fields, RIL president and chief operating officer B Ganguly had said his company has the legitimate expectation of a free market with the ability to obtain competitive arm's length prices as suggested by the PSC. According to him, gas prices in India and globally have significantly increased while the government recognises that the current formula fails to provide for a market price and distorts the level playing field.

Ganguly had cited that while RIL is paying up to $17 per mmBtu for gas for its own use, it has been mandated to sell the fuel at $4.2 per mmBtu, which implies that the government is effectively asking the company to subsidise users of gas including those in the private sector. This below-market price for natural gas unfairly discriminates against RIL, particularly as the government is contracting with foreign gas suppliers, either directly or through its agencies like the Gas Authority of India Limited (GAIL) for gas supply within India at prices which are significantly higher than $4.2 per mmBtu, he had argued.

Moreover, the consequences of these sub-market prices are damaging to both the contractors and the government. It is no exaggeration that the nation's energy security is threatened by this price anomaly as the domestic gas production potential is being depressed by sending wrong signals to potential producers, the RIL COO had contended.

Ganguly had argued that the refusal to entertain discussions regarding a revised formula only exacerbates these consequences and further constrains the development of indigenous gas resources. He said it is RIL's firm view that in the current gas market, the present price formula is no longer viable given the changed circumstances. In addition, we believe the current formula is contrary to public interest as it jeopardises the potential energy security of the country. The widely varying prices of natural gas and the government's refusal to address such differential pricing creates a situation wherein we submit, there exists a controversy, difference between us and the government over pricing of natural gas and our rights to determine those in accordance with the PSC, Ganguly told the PMO.