RIL gas price: Petroleum ministry considers prior bank guarantee

Ministry might ask for $9 bn as condition for allowing an increase

Reliance Industries Ltd (RIL) might have to shell out $9 billion in bank guarantees if the Union government approves a proposal aimed at breaking the deadlock on an increase in the price of natural gas.

The ministry of finance, however, avers such a proposal could dilute the government stand in arbitration with the biggest private sector company in the oil sector. The ministry of petroleum is in the process of taking the proposal to the cabinet, said an official who did not want to be named.

“The bank guarantee proposal was mooted by the company itself as a way out to deal with the government allegation of artificial fall in gas production,” he said, though there was no official confirmation available on the $9-bn amount.

Petroleum Secretary Vivek Rae told reporters on the sidelines of the 12th Petro India conference here: “We have received comments from the finance ministry (on the draft cabinet note floated on the KG-D6 gas pricing issue).” He did not give details.

Background
The government plans to take a bank guarantee from RIL to make up for the shortfall in gas supply from its D1 and D3 discoveries in the KG-D6 block (the Krishna-Godavari basin). Beside dilution of stand, the ministry of finance also feared if the arbitration proceedings prolong, the guarantee would have to be monitored constantly. The views were communicated in a meeting earlier this week, said an official.

The ministry of finance also wanted the cabinet note to detail the safeguards against possible default by the company in fulfilling the obligations against the guarantee.

The government had in June approved the Rangarajan formula for pricing all natural gas from April 2014. The formula is expected to double the base price to $8.4 from $4.2 a million British thermal unit. The ministry of petroleum then decided to amend the natural gas pricing guidelines, following criticism from several quarters.

Goldman Sachs, the investment banking company, had in a November 19 report quoted a figure of $135 million of bank guarantee every quarter, which it said could lead “to the end of  political debate around the D6 gas price increase and will likely allow the market to look beyond the intense near-term noise around RIL stock and focus on the strong medium-term earnings in the company”.

However, with the figure now expected to be much higher, RIL could be in a tight spot. A company spokesperson did not respond to phone calls.

Option
The ministry of petroleum is likely to put forth an option. One, deny RIL a price rise for the shortfall from the two producing discoveries till March 31, 2014, unless the pending arbitration and legal proceedings are in favour of RIL, establishing that the production fall was not deliberate but due to geological reasons.

The other would be to allow the contractor to sell at the revised price only after a bank guarantee. This would be equivalent to the incremental revenue the company would get from the new gas price and would be encashed if it was proved RIL hoarded gas or deliberately suppressed production. B Ganguly, chief operating officer of RIL’s exploration and production business said last week: “It (production) is about 10 mscmd (million standard cubic metres a day).” The production is made of output from the Dhirubhai-1 and 3 gas fields, as well as the MA oil and gas field, he said. In November, it was about 12 mscmd.

The company blames geological complexities such as high water and sand ingress in wells and a larger than anticipated drop in reservoir pressure for the fall in output from close to 70 mscmd achieved in March 2010.