Gas price hike not end of woes for RIL

Directorate General of Hydrocarbons still considers old rate for clearance of discoveries

Though the Cabinet Committee on Economic Affairs (CCEA) has decided to double the price of domestic gas to $8.4 a million British thermal unit (mBtu), the Directorate General of Hydrocarbons (DGH) is still considering the older rate - $4.2 an mBtu - for clearance of discoveries.

On December 10, 2013, DGH had rejected two discoveries of the Mukesh Ambani-led Reliance Industries Ltd (RIL) - D39 and D41 in the KG-DWN-2003/1 block - that had made declarations of commerciality (DoCs) on the basis of the older gas price, calling those unviable.

This was even as the government had on June 27 decided to double the domestic gas price. Besides, on December 19, it also cleared the decks for a higher rate for RIL, despite a shortfall in production from the company's KG-D6 fields, provided a bank guarantee to cover the shortfall was furnished (unless it was proved there was an intentional hoarding of gas). A three-member committee is to monitor the quantum of production shortfall from the D1 and D3 fields and decide the amount of bank guarantee to be given by the company. A notification on this is likely to be made shortly.

PRICING DILEMMA

• Jan 2013: DGH says D-39 and D-41 generated negative net present value of $520 million, given a sunk cost of $305 million
• Jun 27: CCEA cleared the proposal to double the domestic gas price to $8.4 an mBtu from April 2014
• Dec 10: DGH maintains its January stand that the discoveries are unviable on the older price, despite the government going ahead with a new pricing
• Dec 19: CCEA clears the higher gas price for RIL, provided it gives a bank guarantee for shortfall in production from KG-D6

According to a source close to the development, DGH had stuck to its stand of January - that the D39 and D41 discoveries were unviable - and had not considered a review even after the CCEA decision to go for the Rangarajan pricing formula and double the gas price from April 2014. Based on a DoC filed by RIL in January 2013, DGH had said: "D39 and D41 generated negative net present value (NPV) of $520 million, considering the incurred cost of $305 million."

Also, it turns out, DGH decided not to review its stand even as the Planning Commission, in its half-yearly review of on the energy sector in September, batted for the new gas price as the basis for New Exploration Licensing Policy (Nelp) fields' pricing. According to a source close to the development, the Planning Commission Member (energy) had said: "Some of the Nelp fields that were not viable at the price of $4.2 an mBtu might be viable under the price recently announced by the government."

R S Sharma, former ONGC chairman & chairman of Ficci's hydrocarbons committee, said: "As of today, no official channel can say the price is going to be $8.4 an mBtu. There is no notification in this regard to say the price will be exactly $8.4 an mBtu. They have gone on the basis of the current situation. No one wants to take a futuristic decision that might land one in trouble."