The Hindu Business Line : Debate over Reliance’s gas pricing from KG basin rages on

What is the issue before the Empowered Group of Ministers (EGoM) and what exactly is it supposed to be discussing? The EGoM is the latest stop for the file pertaining to pricing of KG Basin gas by Reliance Industries; it has already done the rounds of the Petroleum Ministry, a panel of secretaries and finally the Economic Advisory Council to the Prime Minister.

The basic issue is how Reliance should price the gas from the KG Basin. The company has sought government approval of its pricing policy as per the terms of the Production Sharing Contract (PSC) that it signed with the latter. The PSC requires that the gas price be discovered on a “competitive arm’s length” basis.

Through a process of bidding, Reliance discovered a price of $4.33 per million British thermal unit (mBtu) which, inclusive of transportation charge and marketing margin would translate into a delivered cost of between $4.76 and $5.98 per mBtu.

Ordinarily, this price would have been approved but the Chief Minister of Andhra Pradesh, Dr Y.S. Rajasekhara Reddy, in a letter to the Prime Minister, objected to the method adopted by Reliance for price discovery. There were also objections from Mr Anil Ambani who faulted the price bidding process for not being transparent.

This prompted an examination of the issue by a secretaries’ panel that reported to the Cabinet Secretary who in turn submitted a report to the Prime Minister’s Office. The latter then decided to ask the Economic Advisory Council to examine the issue; it is this report that is now being discussed by the EGoM.

‘No transparency’

The report has said that the bidding process adopted by Reliance was not transparent implying that the price discovered may not be a fair one. Reliance had set three criteria for bidders — they should be power or fertiliser companies, they should have demand in excess of 1 million standard cubic metres per day of gas and they should be linked to Reliance’s proposed pipeline grid or to the HBJ pipeline.

There were bids from 13 prospective buyers but the Economic Advisory Council report says that it is not sure if all the prospective buyers fulfilling the above criteria were invited to bid. The report also says that Reliance did not indicate the total volume of gas on offer nor did it specify the price reset mechanism for long-term contracts.

The EGoM will now have to take a call on whether Reliance should be asked to go through the bidding process again in a modified, transparent manner. It also will have to discuss a possible modification of the price formula by doing the calculations in US dollars and converting the final gas price so arrived into rupees based on the prevailing exchange rate.

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