Bank guarantee terms surprise Reliance

The Petroleum and Natural Gas Ministry’s terms of supplement agreement for the bank guarantee, to be paid by Reliance Industries and its partners in the KG-D6 block, has taken the private sector explorer by surprise.

“The draft only deals with RIL and does not mention the consortium partners – BP and Niko. This needs to be sorted out,” said an official aware of the development.

It will take time before the differences are sorted out, the official said, adding the draft does not set any amount for the bank guarantee. RIL and its partners have to pay a bank guarantee if they want to benefit from the higher domestic gas prices effective April 1. “Thursday’s was the first meeting on the issue. We expect more meetings before clarity on the agreement emerges,” the official said.

According to RIL, the guarantee has to be paid by all three consortium partners jointly depending on their stake. Only after the principles of bank guarantee calculations and the process of furnishing it is finalised, the amount will be decided.

Indications are that the new gas price may be over $8/unit (gas is measured in million British thermal units). If the price is over $8.4/unit, bank guarantee on a quarterly basis could be in the range $100-$120 million; this could go up to $130 million depending on the price.

According to RIL, the bank guarantee will be based on the actual daily output of the D-1 and D-3 fields (the producing fields in the D6 block off the Andhra Pradesh coast) multiplied by the difference between the new and the existing gas prices and the number of days of production. The Petroleum Ministry said this will be based on the indications made in the field development plan, and the shortfall in output.

The Government when notifying the new gas pricing policy had said RIL could benefit from high gas price if it submits a bank guarantee. The new price is likely to be almost double the current price of $4.2 a unit at the landfall point, which RIL gets for D6 block. This price is excluding the transportation charges, marketing margin, state taxes and levies.

RIL and its partner have recently reversed the continued drop in output from the block. The current production from the fields (D-1, D-3 and MA) is 14 million standard cubic metres a day (mscmd) and is likely to be maintained at this level or a little higher 14-15 mscmd during the fiscal.

It is being estimated that shortfall in supplies was about one trillion cubic feet. According to the initial estimates, the KG-D6 output was to reach 80 mscmd in 9-12 months of start of production. Production from the D-1, D-3 fields in the block started in April 2009. After hitting a peak of 60-61 mscmd in early 2010, the output started to drop.

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