`Sale price proposed by RIL would lead to loss to Govt'

Our Bureau

Pricing problems

Govt fears

drop in royalty, profit petroleum.

Proposed sale

price between RIL, RNRL not competitive.

Reference gas

price quoted by RIL to NTPC not finalised.

New Delhi, July 11

Reliance Natural Resources Ltd (RNRL) may end up shelling out more for buying gas from Reliance Industries Ltd (RIL).

The Petroleum Ministry is understood to be of the view that the gas sale price proposed by RIL would lead to financial loss to the Government in the form of lower royalty and lower profit petroleum.

Under the production-sharing contract (PSC) with the Government, RIL has sought approval for the price formula for gas from D6 Block of K G Basin.

RIL has proposed the gas price for RNRL's Dadri power project in Uttar Pradesh at $2.34 per million British thermal unit (mmBtu).

According to sources, the Ministry is of the opinion that RIL's sale price was significantly lower than $4.75 per mmBtu price charged by the joint venture partners, including RIL, for Panna, Mukta and Tapti (PMT) field gas.

The Petroleum Ministry had sought the comments of the Directorate-General of Hydrocarbons (DGH).

The DGH has said that the gas sale price proposed by RIL for its entitlement gas cannot be considered for the purpose of calculation of Government share of profit petroleum, as the reference gas price quoted by RIL to NTPC has not yet been finalised between the two entities and is before the courts.

The DGH also said that the proposed sale price between RIL and RNRL was not based on competitive bidding and does not reflect the trends in the current market.

International and domestic prices of gas have changed substantially since the tendering by NTPC. According to the sources, the Ministry held the view that the agreement between RIL and RNRL for sale of gas was a part of their demerger agreement and the gas supply master agreement was signed between them when RNRL was a subsidiary of RIL.

Hence, the master agreement does not appear to meet the PSC criteria of arms-length competitive pricing for sale of gas.

The DGH has stated that the price formula proposed by RIL would adversely affect Government's interest by reducing royalty and profit petroleum.

It also held that it is estimated that gas price of above $4 per mmBtu would enable Government to reach 85 per cent share in profit petroleum from the block.

As per production-sharing contract entered into by oil and gas field operators, the Government as the owner of the fields is entitled to a share in production, called profit petroleum and royalty.

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(This article was published in the Business Line print edition dated July 12, 2006)
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