BP signals willingness to take back arbitration

After the oil ministry’s tough talk, BP of the UK has signalled its desire to end arbitration seeking higher prices for natural gas from eastern offshore KG-D6 block that it co-owns with Reliance Industries.

The Cabinet on Thursday allowed market prices for undeveloped gas discoveries in difficult areas subject to a cap. But this higher rate will not apply to areas where their operators have either filed legal suits or arbitration over gas pricing.

Asked for comments, BP India spokesperson said, “The recent decision by the government on marketing including pricing freedom for new production from deep, ultra-deep water and high-pressure, high-temperature areas provides clarity to end the pending gas pricing dispute.”

RIL, BP and their partner Canada’s Niko Resources had in May 2014 filed an arbitration seeking implementation of higher gas prices for the flagging KG-D6 block.

The Thursday’s Cabinet decision that allows operators to charge up to USD 7.08 per million British thermal unit (mmBtu) as against the current USD 3.82 per mmBtu will be applicable to new gas production and not existing output from fields like Dhirubhai-1 and 3 and MA in KG-D6 block.

The new rate will apply to four satellite gas discoveries of D-2, 6, 19 and 22 as well as R-Series gas find in the same block. It will also be applicable for 1.4 trillion cubic feet MJ-1 discovery in KG-D6 block.

But that can happen only when arbitration and litigation directly on gas price are concluded or withdrawn.

“BP and its partners will now focus on working closely with the government to develop resources and bring additional natural gas to market,” the spokesperson said.

The three partners plan to invest USD 1.53 billion in producing 10.36 million standard cubic metres (mmscmd) of gas per day from the four satellite fields.

They are also lining up another USD 3.18 billion in R-Series or D-34 gas discovery holding 2.2 tcf of reserves to produce a peak of 12.9 mmscmd of gas. Field development plan for MJ-1 discovery is yet to be finalised.

An oil ministry official said the government wants operators to withdraw only those arbitration that directly challenge the government’s right to decide gas price.

RIL has also gone for an arbitration over disallowance of USD 2.3 billion as KG-D6 output lagged targets. Another one challenges the ministry’s decision to take away 814 square kilometre of KG-D6 area that contained five gas discoveries.

RIL-BP-Niko had in May 2014 initiated an arbitration over delay in implementing the revision of natural gas prices.

Interestingly, BP is not part of the arbitration over taking away of the area after end of contractual deadline.

In the gas price arbitration, they contended that they were entitled to get a new rate from April 1, 2014, after expiry of the 5-year term of USD 4.2 per mmBtu rate.

The previous UPA government, in June 2013, had approved a formula linked to global benchmarks, potentially doubling rates to USD 8.4 per mmBtu from April 1, 2014.

The Election Commission, however, in March 2014 asked government to defer an increase until the completion of the Lok Sabha elections.

The new NDA government then put the previous decision of the UPA government on hold and in October 2014 announced a new gas pricing formula that led to a rise in rates to USD 5.61 per mmBtu in November 2014, which subsequently dropped to USD 3.82.

The marketing freedom announced on Thursday will be subject to a cap which will be lower than the one-year average cost of imported cost of fuel oil, or landed price of liquefied natural gas (LNG) or weighted average of imported price of coal, fuel oil and naphtha. Based on 2015 prices, the lowest of these averages comes to USD 7.08.

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