The Hindu Business Line : Transparent pricing mechanism proposed for RIL gas finds

Fair procedure
The mechanism would include open and competitive bidding process that allows fair and equal opportunity to all gas consumers to participate in the price discovery.
As per estimates, the Government fears it would take a phenomenal hit in terms of profit petroleum if the gas price was kept at low cost.

New Delhi , July 27

The Government has thrown the ball into the court of Mukesh Ambani-led Reliance Industries Ltd (RIL). It has asked the company to come out with a transparent pricing mechanism for its gas finds in the KG Basin. The transparent pricing mechanism would include open and competitive bidding process that allows fair and equal opportunity to all gas consumers to participate in the price discovery, a Petroleum Ministry official said.

Speaking to Business Line the official said, "The reason for not endorsing the gas price at $2.34 per million British thermal unit (mbtu) for sale of gas to Anil Ambani controlled Reliance Natural Resources was not linked to price, but the manner in which it was reached."

He said that ideally RIL should invite bids for its gas finds in the KG Basin to reach market related price discovery. The basis for concluding the $2.34 per mbtu price is not correct, the official added.

"There is no hurry on the part of the Government to approve the gas price. However, an early resolution of the price would help RIL to tie-up with downstream companies," he said.

Gas price approval

Under the production sharing contract terms, the Government has to approve the price of gas before June 2008, when RIL is expected to commence commercial production from its KG Basin finds.

As per estimates, the Government fears it would take a phenomenal hit in terms of profit petroleum if the gas price was kept at low cost. "We are ready to approve $2.34 per mbtu price or even lower if the open bidding is followed," the official stated.

NTPC case

NTPC's case is different as the price of $2.34 per mbtu was reached through open reverse bidding process, he explained. "The deal with RNRL would amount to utilising public funds for settlement of a family dispute," he added.

The Government will be a major beneficiary after the critical level of an operator getting 2.5 times his capital investment is attained. Nearly 85 per cent of the profit gas would flow to the Government.

"If the price is kept low, the critical level would be reached at the time when the gas field would be facing a declining production," official stated.

On Wednesday, the Government had said that it did not agree with RIL's proposed valuation formula for gas sales to RNRL. The Petroleum Ministry held that, ideally, any price discovery should be the result of an open and transparent competitive bidding process that allows fair and equal opportunity to all gas consumers to participate in the price discovery.

The same procedure has already been followed by companies, including RIL in the Panna-Mukta and Tapti product sharing contracts, it said.