'Price revision is a policy issue'

EGoM fixed the price for 5 years and it needs to decide on RIL’s revision demand, says Vahanvati

The government’s top law officer has said deciding on revising the price of gas from the D6 field of the Krishna-Godavari (KG-D6) basin before April 2014 is a matter of policy, not law.

In his advice to Finance Minister Pranab Mukherjee, who chairs the empowered group of ministers (EGoM) on the subject, Attorney General G E Vahanvati has said one cannot ignore the fact that the price has been fixed and the fixation is effective up to April 2014.

The production sharing contract (PSC) that governs the agreement between the government and an oil or gas block operator did not mandate any fixed period during which the approved prices would remain valid, but this was agreed upon by the EGoM, he has said.

 

On the issue of delegating the EGoM's powers on gas pricing to the Petroleum and Natural Gas Regulatory Board (PNGRB), the A-G said this may not be advisable.

After repeated demands by Reliance Industries (RIL), the operator of KG-D6 (now in partnership with global multinational BP), for a revision, the EGoM had asked the law ministry and the A-G to advise on whether the price could be revised before the end of the five-year period for which the price set by EGoM was valid.

The EGoM was constituted to consider issues related to pricing and utilisation of gas under the New Exploration Licensing Regime (Nelp) and had fixed $4.20 per unit of the gas in 2007 for a five-year period after production began. RIL started production in April 2009.

RIL has been pushing for a price increase. In January, it had asked for a price revision in line with international crude oil and gas prices, though the current price of $4.20 per million British thermal units (mBtu) was supposed to be valid till April 2014. It wanted a steep increase from $4.20 mBtu to $14.20 an mBtu.

A top petroleum ministry official said the A-G’s opinion would go to the EGoM. “We have all along opposed the gas price revision before 2014 and will do so when the issue comes up before the EGoM.

Since it was EGoM that had fixed a price for a five-year period and RIL had agreed to it, any review before 2014 would imply going back on the agreement. Moreover, why should a higher price be paid for a falling output?”

The ministry has said any price revision at this juncture will have huge financial implications for the government and its subsidy bill.

Against a projected output of 80 million standard cubic metres of gas per day (mscmd) by this time, KG-D6 is currently producing 32 mscmd.

The output this financial year would average only 28 mscmd, petroleum minister Jaipal Reddy told Parliament earlier this month. And, production in 2013-14 was projected to drop to 24 mscmd.

The Mukesh Ambani-run firm had started production from KG-D6 in April 2009 with an output of 30 mscmd. This hit a peak of 61.5 mscmd a year later but has since been declining.

RIL, which has so far drilled and completed 18 of the 22 planned wells by April 2011 and 31 by April 2012, blames the fall in output to the reservoir not behaving in the previously predicted fashion, fall in pressure in the wells and water and sand ingress.