Honour the contract

The controversy surrounding Reliance Industries’ offshore KG-D6 gas block has thrown up multiple legal and policy issues. It is important that they be resolved quickly and with a view to ensuring fairness, efficiency and impartiality, because the solution could set the blueprint for the evolution of the Indian exploration and production industry. On Wednesday, Reliance Industries Ltd (RIL) urged the Supreme Court to appoint an arbitrator to resolve a dispute over cost recoveries in KG-D6. RIL also has a pending request with the government for revision of the price of KG-D6 gas.

The company claims its production-sharing contract (PSC) with the government allows it to fully recover the costs of development, regardless of output. This is relevant because the block’s output is significantly lower than projected — 34 mmscmd (million metric standard cubic metres per day) instead of 70. The government, thus, can reasonably argue that RIL is failing to fulfil the terms of the PSC; it drilled only 18 wells instead of the agreed-upon 31. The Director General of Hydrocarbons recommended that cost recovery of only $3.99 billion (approximately Rs 20,550 crore) should be allowed; RIL has already recovered $5.26 billion (about Rs 27,100 crore). Future PSCs must not allow for any of the ambiguities that RIL claims this one has.

Even as its output has dipped, RIL has sought to renegotiate prices. Since January this year, it has sought to wriggle out of the legally contracted price contract, of gas at $4.2 per million British thermal units (mBtu) for five years ending April 2014. It wishes this to be hiked massively to $14.20/mBtu — which would imply windfall revenue of an extra $8.5 billion or so over the next two years. That gas is committed to the fertiliser and power industries. Hence, a price hike leads to a double, or even triple, whammy for taxpayers. State or central units would pay for that gas, and it would cause fertiliser and power subsidy burdens to jump as well. In spite of such obvious financial consequences and its potential to create another controversy over undue revenue gains for a private company at the cost of the central exchequer, the government has gone ahead and referred the question of revising the gas price to an empowered group of ministers. And this when the petroleum and natural gas ministry has reportedly opposed any revision in the gas price at present. Furthermore, this demand comes when gas is selling at historic lows in much of the world. In future, given that gas pricing is liable to huge shifts over such long periods, an extended lock-in at a fixed price may be inadvisable. It may be more viable to seek a formula tying price to, say, a basket of market prices across several global exchanges, and to gas under the administered price mechanism (APM) from Bombay High. But as far as the current price contract for KG-D6 gas is concerned, this should be honoured and the government has little reason to review it until at least 2014.