The Hindu Business Line : Govt clears Reliance gas formula with some changes

Final word
Ceiling of price band lowered to $60 a barrel
Formula sets benchmark for gas pricing in region
Decision will avert delays in start of production

Our Bureau

New Delhi, Sept. 12 Putting an end to months of debate on the issue of gas pricing, the Government today approved Reliance Industries Ltd’s (RIL) price formula for the natural gas to be produced by it from the Krishna-Godavari Basin, with minor changes.

This formula sets the benchmark for gas pricing in the region.

The Empowered Group of Ministers headed by the External Affairs Minister, Mr Pranab Mukherjee, modified the price formula, which would lead to a price of $4.20 (roughly Rs 170 at current exchange rates) per million British thermal units (mBtu) at delivery point, against $4.33 proposed by RIL.

The Group removed the exchange rate component and lowered the ceiling of the price band from $65 to $60 a barrel.

This would in turn translate into lower consumer price by reduction in the ceiling of the crude price. The decision would also avert delays in starting production from RIL’s D6 block scheduled for June-July next year.

The Group was constituted on August 13 to examine and decide the issue of gas pricing and commercial utilisation of gas under the New Exploration & Licensing Policy (NELP).

According to an official statement, the Group observed that it would not be in the country’s interest to renege from the contractual provisions under the production sharing contracts (PSCs) entered into in good faith under the NELP.

The Group decided that the price basis/formula submitted by RIL and its partner in the block, Niko Resources Ltd, may be accepted with modifications as per the recommendations of the Prime Minister’s Economic Advisory Council.

This price basis/formula will be valid for five years from the date of commencement of first commercial production and supply.

The statement said that the decisions taken in the Group meeting will be without prejudice to NTPC vs RIL and Reliance Natural Resources Ltd (RNRL) vs RIL court cases.

For all NELP I-VI contracts, for natural gas, price calculation will be pegged at a constant ‘C’ $2.50 per mBtu.

Bidders are asked to quote on a parameter ‘C’ in the formula.

The Group observed that since ‘C’ was the only biddable component in the submitted formula, assigning a value of zero to this component would also address the transparency aspect of the bidding process.

RIL had proposed the value of ‘C’ at Rs 4 per mBtu whereas the fertiliser units had bid a low of Re 1.

The statement also said that the price discovery process on arm’s-length basis will be adopted in the future NELP contracts only after the approval of the price basis/formula by the Government.

The price discovered through this process would be applicable to all the sectors uniformly, it added.

The PSC between the Government and RIL and Niko Resources with respect to contract area identified as block KG-DWN-98/3 was signed on the April 12, 2000.

The application for approval of gas price basis/formula was submitted by RIL on May 18 this year.

Gas production from the block is likely to commence from July 2008.

Initial estimated production is 40 MMSCMD, with projected plateau rate of production at 80 MMSCMD, which will almost double the domestic gas production in the country.