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Monday, Jun 29, 2009
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Business Daily from THE HINDU group of publications Monday, Jun 29, 2009 ePaper | Mobile/PDA Version | Audio | Blogs |
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Petroleum Corporate - Corporate Disputes Web Extras - Courts/Legal Issues
Richa Mishra New Delhi, June 28 The recent judgment by the Bombay High Court in the Reliance Industries Ltd-Reliance Natural Resources Ltd (RIL-RNRL) case has generated some debate. This is over its revenue implications for stakeholders in case the gas from Krishna-Godavari Basin is sold at a price lower than the one fixed by Government ($4.2/mBtu landfall point). As things stand, industry trackers see two scenarios emerging. One, the possibility of a price distortion in case the gas is sold at a price lower than the one approved by the Government to anyone; two, if everybody pays $2.34/mBtu, along with RIL, the Government would stand to lose billions of dollars in terms of lower royalty and a lower share of profits. Consumer gainsConsumers, however, would clearly gain if all of them get gas at a lower price. Fertiliser industry sources told Business Line, “If the feedstock price is lower, then the price will get closer to the rates at which feedstock is available in West Asia and Russia. If the actual price is lower, then the competitiveness of the industry will also be better.” A lower price would also result in bringing down the subsidy outgo on the supply of fertiliser, the sources said. For the power sector, the end consumer would get a lower power bill. However, if any single customer is allowed to buy gas at a lower price, it would lead to market distortions. “Since the sector is now opening up for competition, it would put the plant paying $4.2/mBtu for the same gas at a disadvantage,” sources said. Verdict impactThe court has ordered RIL to supply 28 million standard cubic metres of gas from its D6 Block to RNRL at $2.34/mBtu for 17 years. The verdict will have an impact on RIL’s future earnings. Less clear is the impact on the Government’s earnings from the field. According to the production sharing contract signed between RIL (which is to operate the field) and the Government, RIL will have access to 90 per cent of the total output during the initial phase of the production from the field. This is to compensate it for its investment in developing the field. The Government’s share, however, will increase to 16 per cent once RIL’s return from the field exceeds 1.5 times its initial expenditure.
Subsequently, the share will keep increasing as follows: 28 per cent when RIL’s return surpasses 2 times its initial expenditure and 85 per cent when beyond 2.5 times initial expenditure. The total recoverable reserves of the field have been pegged at 11.03 trillion cubic ft. If the price of total gas supplied from the fields remains at $4.2/mBtu, the total revenue generated from the sale is estimated to be $47.17 billion. Considering the total investment made by RIL would be $10 billion over an initial 15 years of the field life, it will earn $27.30 billion. The Government’s earning during this period would be $19.68 billion. According to industry sources, if 28 mscmd of gas is supplied to RNRL and 12 mscmd to NTPC (assuming NTPC wins the case against RIL) both at $2.34/mBtu, the average gas price will come down considerably. The average price for the total production will dip to $3.27/mBtu — half of the production is supplied at $2.34/mBtu and remaining half at $4.2/mBtu. At $3.27/mBtu total revenue from the field will decline to $36.73 billion. In this scenario, RIL will earn $26 billion whereas $10.72 billion will go to Government, sources said. The Government revenue will decline because RIL will take longer to recover its costs. HC order on gas: Reliance still weighing options RNRL seeks meeting with RIL on gas sharing issue RIL-RNRL dispute: Await more twists in the tale Court directs Reliance to sell gas to RNRL at $2.34 More Stories on : Petroleum | Corporate Disputes | Courts/Legal Issues | Reliance Industries Ltd
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