Govt mulls cover from RIL for higher price

Reliance Industries will have to provide a bank guarantee of $135 million every quarter to get a higher price for natural gas from April 1 next year.

The bank guarantee will be encashed if it is proved that RIL hoarded gas or deliberately suppressed production at the Dhirubhai-1 and 3 (D1&D3) main gas fields in its eastern offshore KG-D6 block, a top Oil Ministry official said here.

The bank guarantee will cover the difference between the current gas price of $4.2 per million British thermal units and the rate of $8.4 per million BTU, which will come into effect from April 1.

The Oil Ministry previously proposed that RIL be forced to sell gas from the D1&D3 fields at the current rate until it is proved that the 80% fall in output at the fields was due to natural reasons or it makes up for the shortfall in production since 2010-11.

"This, if implemented, would have been nothing short of pronouncing RIL guilty without trial," the official said. "Suppose we forced them (RIL) to sell gas at $4.2 and at a later date it was established that output had actually fallen due to geological reasons and there was no hoarding, then who would make good the difference between $4.2 and the price they are actually eligible from April 1, 2014?"

The official said the veracity of allegations that RIL was hoarding gas in anticipation of a higher price can be established either by arbitration or by appointing a third-party expert, a process that can take over a year.

The government, he said, could have charged customers the higher price applicable from April 1 and paid RIL the lower rate while keeping the difference in an escrow account until the issue was sorted out. However, the production sharing contract does not provide for escrow accounts.

Alternatively, the government can allow RIL the increased price, provided the company furnishes a bank guarantee for the incremental amount, which can be encashed if the hoarding charges are proved true later.

"The second option is a win-win for both sides - the bank guarantees secure the government's interests and higher gas price protects the operator's interests," the official said. He added that if the hoarding allegations are true, the bank guarantees would be encashed, with interest, for the period from April 1 to the date the charges are proved.

From April 1, all domestic gas will be priced at an average of international hub prices and the cost of LNG imported into India. Prices will change quarterly, based on the previous one-year average.

RIL will have to provide a bank guarantee for $135 million, presuming a gas price of $8.4 per million BTU in April.

The penalty in the form of the lower gas price would have been the second imposed by the Oil Ministry on RIL for falling short of stated production targets. It had already levied a $1.8 billion penalty for the output drop and the issue is before arbitration.

Gas production from the D1&D3 fields has fallen to less than 10 million standard cubic metres per day from the peak of 54 mmscmd in March 2010.

Production has been lower than target since the latter half of fiscal 2010-11 and it should currently have been 80 mmscmd, as per the 2006 investment plan.

Output from the MA oil and gas field in the KG-D6 block, too, has fallen over 62%.

However, the ministry and the oil regulator DGH have agreed with RIL's reasoning of geological complexity being responsible for the drop and approved the higher price for the MA field's output.