Reliance consortium serves arbitration notice on gas pricing

The consortium led by Reliance Industries has served a notice of arbitration on the Indian government, seeking the implementation of the natural gas pricing guidelines notified in January this year.

"The continuing delay on part of the Government of India in notifying the price in accordance with the approved formula for the gas to be sold has left the parties with no other option but to pursue this course of action," the consortium said Saturday.

"Without this clarity, the parties are unable to sanction planned investments of close to $4 billion this year. In addition, this will also delay the ability of the parties to appraise and develop other significant discoveries made last year."

The consortium, the contractors for the KG DR Block in the Krishna-Godavari Basin, an area in the east coast of Andhra Pradesh where the two rivers discharge waters into the Bay of Bengal, includes Canada-based Niko and BP, formerly British Petroleum.

In the statement, the consortium said it was planning to invest some $8-10 billion in the next few years to significantly increase production from the KG D6 Block to meet India's energy needs in a significant way.

"This domestic production is essential for meeting India's energy needs and will also help conserve foreign exchange which is required for imports of natural gas into India at the present time. All of this requires clarity on pricing."

The formulae, which Mukesh Ambani-led Reliance Industries and its two major consortium partners want immediately implemented, is based on the recommendations of the committee headed by C. Rangarajan, chairman, Prime Minister's Economic Advisory Council.

This was endorsed by a meeting of the Cabinet Committee on Economic Affairs presided over by Prime Minister Manmohan Singh in June last year. The oil ministry thereafter issued the norms in January which were to be implemented from April 1 this year.

In March, when the time came to notify the new price for the quarter beginning April, the Election Commission advised its deferment till such time the national elections conclude, as also because the issue by then was sub judice in the Supreme Court.

The consortium says it is now forced to continue selling the gas at the current price of $4.2 per unit even though the contract for it expired end-March. Both the parties and the government, thus, suffer a loss of Rs.300 crore ($50 million) per month, it said.

According to oil ministry sources, the consortium in April had also furnished a bank guarantee that was mandatory for implementing the the new gas price. But the ministry returned it saying it was not permitted to implement the revised price as yet.

The guarantee was to be encashed if it is proved that the consortium hoarded gas, or was deliberately suppressing its production at the fields. The decision to ask for a bank guarantee also has a background to it.

The ministry, in 2012, had imposed a penalty on the company for failing to produce gas in line with the pre-stated targets. But the consortium denied it, approached for arbitration, and said the fall was due to geological complexities and lower reserves.

Thus, it it now the second major arbitration notice served on the Indian government. For the first, a three-judge panel was finalised April 29 this year after Supreme Court's intervention. It is chaired by Australia's Justice (retd.) Michael Hudson McHugh.