Oil regulator asks RIL to club gas margin with sale price

In a surprise move, oil regulator Directorate General of Hydrocarbons (DGH) has asked Reliance Industries (RIL) to include the marketing margin the company charges on sale of natural gas from its field to the approved gas price for calculating the government's share from the project.

DGH wants the $0.135 per million British thermal unit margin that RIL charges to cover marketing risks of gas from Krishna Godavari basin-D6 fields to be added to the sale price of $4.20 per mmBtu for calculating royalty and profit share to the government, sources in the know said.

This runs contrary to the the Production Sharing Contract (PSC) under which a contractor (RIL in case of D-6) can recover the capital and operating expenditure incurred on producing oil or gas from sale of the produce.

However, costs involved in marketing of oil or gas are excluded and a contractor is not allowed to recover the same from the sale proceeds.

Sources said DGH wants 5 per cent royalty payable to the government to be calculated at $4.33 per mmBtu price (sale price plus marketing margin), making this by implicit action the sale price from which RIL will recover the cost.

The price at which royalty is calculated is considered the sale price under PSC and the operator will recover all cost from this before sharing profits with the government.

While RIL spokesperson could not be immediately reached for comments, S K Srivastava, Director General, Directorate General of Hydrocarbons (DGH) was not available for comments. The issue has been referred to Petroleum Ministry now.

Sources say if implemented, some operators may claim actual marketing cost that may include a large sales team, cost of offices at multiple places and other overheads to be deducted along the capital and operating expenditure from the sale proceeds before the government gets its share of profit.

RIL is investing $8.8 billion capex besides associated operating expenses in KG-D6.

Under PSC, while the revenues from the gas sales are shared between the government and contractor, the costs and risks associated in marketing efforts undertaken by the contractor in generating these revenues are to be borne by the contractor and are not shared by the government.

Sources said the Empowered Group of Ministers (EGoM) had fixed $4.20 per mmBtu as the landfall point price of gas and levies beyond that like the marketing margin were settled between the buyers and sellers of gas.

Under normal circumstances, the price of the commodity is supposed to include all risks and costs associated with the sale of a commodity. However, under the PSC mechanism, the marketing costs and risks are not covered.

RIL charges marketing margin costs, incurred in customer identification, execution and sales of a Gas Sales Agreement, customer registration and activation, gas sales planning, daily gas sales operations, gas accounting, invoicing and collection and establishment of regional offices, and risks like penalties and liquidated damages, volume risks, credit risks and claims and settlement of disputes.