Stuck with $4.2 a million British thermal units (mBtu) price for its natural gas till 2014, Reliance Industries Ltd (RIL) has sought from the government an import-parity price for sale of gas from its D6 field in the Krishna-Godavari basin (KG-D6).
Doing so would allow KG gas to be sold at the import price for liquefied natural gas (LNG). If approved, this would mean KG gas could be sold at over three times its current price. “We are asking for what we are entitled to. The pricing needs to be economical. It should give us sufficient return on costs and all the risks,” said a senior RIL executive. The market price could be lower if LNG prices fall, he added.
If the government agrees, it will be a first where any country’s domestically produced gas is priced equivalent to LNG rates, analysts said. Due to the costs involved in converting gas into liquid form at minus-zero temperatures and shipping it before regasifying, LNG is priced higher than domestic gas.
The current $4.2 price had been arrived through a formula linked to the Brent crude oil price. While setting it, the government had capped the crude price at $60 and fixed it for five years from the start of production. This period ends on March 31, 2014. Though the company has been seeking a revision in the price, the government has not agreed.
Besides pricing, RIL and the government have differences over the minimum work programme for the field, that has seen its gas production falling. Gas volumes have fallen to 27million standard cubic metres per day (mscmd), against the 62 mscmd committed by RIL. The RIL executive said decline in output had primarily happened due to water ingress and approvals had been sought to carry out procedures like workovers and side-tracking to overcome the hurdles.
Blaming the petroleum ministry for artificially suppressing gas prices, he said, “We are not suppressing gas production; it is the government which is suppressing the price.” They are paying $16-18 per mBtu for import of LNG but do not want domestic companies to be paid remunerative prices, he said.
He cited the production sharing contract (PSC) governed the government and operator relationship, guaranteeing the market price and marketing freedom. The government currently decides the price, as well as the customers for RIL. “The need of the hour is to restore contractual sanctity,” said another RIL executive.
The company has taken the government to court, seeking arbitration, even as the ministry of petroleum has retaliated by disallowing over $1 billion in cost recovery for the field. RIL has maintained there was no provision in the PSC to link cost-recovery to production, The ministry had served a notice on the company, on the grounds that it had failed to drill nine of the committed 31 wells. “That we have recovered all the KG-D6 capex is not true. We invested close to $10 billion and are yet to recover a significant part,” said the company executive.
RIL said the company had sought regulatory approvals to implement its plans to increase output from the D1 and D3 wells in the same field. The executive said if approvals were received in the next six months, it expected output to increase in about two years. “The second phase of D1 and D3 has not been done. Whatever requirement will come, will be all integrated with the development of other fields in the block,” said the executive.