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DGH rejects RIL's CBM gas price

On June 22, oil regulator told the govt that CBM pricing did not conform to utilisation policy

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In a sudden U-turn, upstream oil regulator has rejected the price Reliance Industries had proposed for gas saying the process followed was not in conformity with oil ministry guidelines.

DGH had on April 12 written to the oil ministry saying the bidding process followed by to discover CBM was in "compliance with Article 18.6 of the Production Sharing Contract and subsequent guidelines issued by Ministry of Petroleum and Natural Gas dated June 15, 2011 on 'Pricing & Commercial Utilisation of Coal Bed Methane (CBM)."

But DGH again wrote to the ministry on June 22 saying the pricing for CBM RIL plans to produce from its Sohagpur blocks in Madhya Pradesh was not in conformance with last year's CBM pricing and utilisation policy as bids were called only from selective users, sources privy to the development said.

Directorate General of Hydrocarbons (DGH) Director General Rajiv Nayan Choubey did not take calls made for comments.

RIL had in February proposed to price CBM at import parity just like crude oil and had submitted for a rate equivalent to the price at which the country imports liquefied natural gas (LNG).

CBM from RIL's blocks would cost $12.93 per million British thermal unit at $100 per barrel oil price.

Sources said the DGH reply was in response to the clarification sought by the ministry on June 13, a day after senior bureaucrat Choubey took over as the head of upstream advisory body (DGH).

Sources said RIL's CBM price as well as the $4.20 per mmBtu price proposed by Essar Oil for its Raniganj CBM block would now go to the Cabinet Committee on Economic Affairs.

The Ministry in its June 13 letter wanted DGH to review its previous decision saying the Supreme Court had in the May 7, 2010 ruling stated that, "Supplies of natural gas can only be made in accordance with the policies of the government and subsequent guidelines issued by Ministry of Petroleum and Natural Gas on Pricing and Commercial Utilisation of CBM."

The ministry on June 13 wrote to Director General DGH saying the Supreme Court had in its May 7, 2010, judgement stated that "Allocation of natural gas made by the EGoM (Empowered Group of Ministers) cannot be overridden by a contractor through a private arrangement.

Sources said the Supreme Court ruling in the gas dispute between RIL and RNRL pertained to natural gas pricing and allocation and not for gas produced from coal seams (CBM). The court had not made any comments on CBM contracts, which are different than those of oil and gas blocks.

Also, the ministry's guidelines on CBM pricing and commercial utilisation of CBM were non-existent at the time of Supreme Court ruling and were issued more than a year later.

Sources said DGH had on April 12 written to the Ministry
saying the bidding process followed by RIL to discover price of CBM to be produced from its Sohagpur block was in "compliance with Article 18.6 of the CBM contract and subsequent guidelines issued by MoPNG dated June 15, 2011 on 'Pricing & Commercial Utilization of Coal Bed Methane (CBM)".

"Out of 73 bids received by contractor, 70 seem to be from unrelated and non affiliate parties and, therefore, appear to be at arms length," the DGH had written.

The Ministry however in the letter dated June 13 stated that "the operator (RIL) should call for bids from identified priority sectors/customers for CBM gas price."

RIL had invited companies to quote a variable 'v' that can be added or subtracted from its CBM pricing formula of 12.67% of JCC, or Japan Customs-Cleared Crude, plus $0.26 per mmBtu.

This formula generated a demand six times the 3.5 mmcmd gas it will produce from Sohagpur blocks.

The Ministry stated that firms submitting a bid of zero or more for 'v' were from sectors like ceramic, city gas distribution, textile and chemical plants.

"...And most of them are small consumers, which shows the companies, submitted the bids for 'v' more than zero is from non-corre sectors or for non-core use. However, Gas Utilisation Policy accords the top priority to fertiliser (urea manufacturing) and power sector," the Ministry wrote.

The pricing formula RIL has proposed for CBM is different from the one natural gas from the company's eastern offshore KG-D6 block is priced at. KG-D6 gas at cap crude oil price of $60 per barrel translates into a sale price of $4.205 per mmBtu. Sohagpur CBM at $60 per barrel oil price would be $7.862 per mmBtu.

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