RIL defends marketing margin levy on KG-D6 gas

Reliance Industries (RIL) has strongly defended its decision to impose a marketing margin over-and-above the government-approved sale price for KG-D6 gas, saying the levy was to cover for the risk and cost associated with marketing of gas.

Responding to upstream oil and gas production regulator DGH reopening the issue, RIL Executive Director PMS Prasad on August 24 wrote to Oil Secretary GC Chaturvedi saying the $0.135 per million British thermal units marketing margin is a cost levied beyond the gas delivery flange and as such, is not regulated by the Production Sharing Contract (PSC).

The PSC governs fixation of price of gas at the 'delivery point', the point at which an upstream operator transfers custody of gas to a marketing and transportation agency. That point for eastern offshore KG-D6 gas is Kakinada, in Andhra Pradesh, and the government had in 2007 approved a gas price of $4.205 per mmBtu at the delivery point.

But the DGH wants the $0.135 per mmBtu levy added to the gas sale price and profits for RIL and the government to be calculated thereafter. Currently, profits are calculated by deducting capital and the operating cost from the gas sales price only.

Prasad, however, said the PSC does not provide for such a move, as the marketing and transportation cost cannot be recovered from revenues earned from sale of oil or gas.

Section 3.2 (iii) of the PSC states that "costs of marketing or transportation of petroleum beyond the delivery point are not cost-recoverable. Both marketing and transport costs are clearly recognised as being distinct from the sale price at the delivery point and kept outside the PSC for purposes of cost recovery," he wrote.

He said any attempt to include the margin as part of the price of gas approved under the PSC "will have the effect of making all marketing costs as well as ensuing risks and liabilities cost-recoverable under the PSC."

Moreover, such inclusion can be done only after amendment of the present PSC.

The marketing margin is to cover for cost of employees involved in marketing and sales, related infrastructure and all legal and operational expenses that occur beyond the delivery point, as defined in the PSC.

It also covers the credit risk of buyers, litigation costs and penalties such as ship-or-pay reimbursement to transporters and levies for supplying off-spec gas.