How Modi government's bait disallowing higher gas prices is working

Move to disallow higher price to firms in litigation with Centre may make Reliance consider dropping arbitration case

The Modi’s government’s March decision to disallow higher gas prices for output from fields involved in litigation with the oil ministry may have been meant as a healthy administrative measure to avoid complexities during the pendency of the cases but seems to be working to rid the country’s petroleum sector of the vast swathe of court cases that had been hurting growth for years.

A little over two months since the Union Cabinet took that decision, and at least one company, billionaire Mukesh Ambani-owned Reliance Industries (RIL), seems to have relented. The firm, India’s largest private company, is understood to be considering dropping an ongoing arbitration with the Centre over an order that forced the company to surrender a large part of the flagship KG-D6 block.

This comes on the backdrop of similar reports on how the company may be looking at not pursuing its age-old arbitration over gas prices allowed to be charged from the block. Business Standard had reported earlier this month that the company was perusing whether to withdraw the pending arbitration on the gas price issue.

The company’s top management is looking at two divergent views – on the merits of dropping the arbitration – which have been presented to the top management and the board will take a final call soon, a senior executive close to the development had told Business Standard. The addition of the case over surrender of KG-D6 area to the list of arbitrations that may not be pursued seems to indicate the government’s bait of disallowing higher prices to litigants may be working.

The oil ministry had, in 2013, passed an order that asked RIL to relinquish as much as 80% of the contract area of the KG-D6 block off the Andhra coast. The company initiated arbitration on the matter in 2014 – last in a series of arbitrations by RIL against the government and the first one to be initiated after the Modi government came to power.

The company has told the government it no longer wished to pursue arbitration in this case in a move that would help effectively end the dispute, said a media report quoting a senior official. The report also said, quoting an industry executive, the area RIL relinquished contains low volume of gas and, with oil and gas prices having crashed now, its commercial exploitation would not have made sense.

The government had in March this year launched crucial reforms for the oil and gas sector based on which the ministry had announced a ceiling price of $6.61 per unit for gas from Deep Water, Ultra-Deep Water and High Pressure-High Temperature areas. This was more than double of the current domestic gas price of $3.06 per unit. The government had said the new liberal policy would apply to blocks involved in arbitration only after the arbitration is ended or withdrawn by the company.