RIL gets gas pricing breather, subject to bank guarantee

Govt decides to allow firm to raise price to $8.4 an mBtu from April 2014

In a major relief for Reliance Industries Ltd (RIL), the government on Thursday decided to allow the Mukesh Ambani-controlled company to double the price of gas produced from its KG-D6 block to $8.4 a million British thermal unit (mBtu) from April 1, 2014. However, the breather is subject to certain riders — the company has to give a bank guarantee for shortfall in production from the block and sign a supplementary agreement with the government for the new dispensation.

The Cabinet Committee on Economic Affairs (CCEA) had decided to raise domestic gas price in June but was forced to reconsider the move after facing political pressure over doubling the price despite charges of gas hoarding on RIL.

BRIDGING THE GAP

•  BANK GUARANTEE: Meant to make up for the gas supply shortfall from RIL’s D1 and D3 discoveries in the KG-D6 block
• MODALITIES: To be worked out later, in consultation with the law ministry
• PRODUCTION: RIL is currently producing only 10 mscmd of gas from KG-D6 field
• PRODUCTION SHORTFALL: At 154 mscmd in four years — output fell from 61 mscmd in 2010-11 to 33 mscmd in 2011-12 and 14 mscmd in 2012-13

The bank guarantee, meant to make up for the shortfall in production of gas from the D1 and D3 discoveries in RIL’s KG-D6 block, will be encashed if it is found the company had hoarded gas. After a CCEA meeting, Petroleum Minister M Veerappa Moily said the modality of the guarantee would be worked out later, in consultation with the law ministry. An RIL spokesperson refused to comment on the development.

Though the finance ministry was apprehensive the guarantee would have to be as high as $9 billion, if the arbitration process — initiated by RIL after being slapped with a $1-billion penalty for production shortfall — did not start anytime soon, Moily confirmed the figure was not going to be higher.

In another relief for the company, CCEA decided against capping the new price. “There will be no change on the decision to include spot prices in computation of gas prices... The Cabinet has decided a cap on the new gas pricing will not be required,” Moily added.

RELIEF WITH RIDERS

Timeline of gas pricing issue

• Jun 2005: Tariff Commission (TC) set up to look into pricing issues
• May 2007: TC revises pricing; suggests normative producer price of Rs 3,600/MCM, escalation of Rs 50/MCM for each 10-point increase in WPI
• Jun 2007: CCEA decides to revise producer pricing in line with TC recommendation
• Sep 2007: RIL’s KG-D6 gas price fixed at $4.2/mBtu
• May 2010: The price of ‘administered’ gas more than doubled from previously subsidised level — from $1.8 an mBtu to $4.2 an mBtu
• Dec 2012: The Rangarajan committee files its report on gas pricing
• June 27, 2013: Cabinet Committee on Economic Affairs clears gas pricing, doubles it to $8.4 an mBtu
• Dec 19, 2013: CCEA clears the decks for RIL to raise gas price, provided it gives bank guarantee for shortfall in KG-D6 output, till it is proved there was no intentional hoarding

The bank guarantee would be a quarterly arrangement, said Petroleum Secretary Vivek Rae said. The government is likely to sign a supplementary agreement with RIL by January 2014. Rae indicated the guarantee might be equal to the incremental revenue RIL would get from the gas price increase. It would also depend on the quantum of shortfall and the eventual price emerging from the Rangarajan formula.

Former ONGC chairman & managing director, R S Sharma, lauded the move, saying the bank-guarantee mechanism was logical, as it meant the government could encash the guarantee if the arbitration proceedings between the government and RIL went against the company. “If RIL gets a favourable arbitration award, it will not need to seek higher price retrospectively from its customers,” he added.

The company’s KG-D6 output, currently at 10 million standard cubic metres a day (mscmd), is expected to rise by two mscmd from the MA field in the same block. Its total production from the block over the past four years has been 154 mscmd short of target.