Reliance moots ‘supply or pay’ model for new gas fields

With gas output from its fields not matching commitments in the past, Reliance Industries is offering ‘supply or pay’ contracts for natural gas it plans to produce from newer fields beginning mid-2020, with an obligation to pay if it is unable to supply.

Reliance and its partner BP of UK, in a notice inviting offer (NIO) for sale of gas from R-Series fields in the KG-D6 block in the Bay of Bengal have, for the first time, offered to pay the buyer for the purchase of alternative fuel for the default quantity.

This clause is in addition to the take-or-pay clause requiring the buyer to offtake the committed quantity or pay for it.

“If a shortfall quantity arises in a quarter, then, sellers shall reimburse buyer as liquidated damages for the purchase by buyer of a quantity of gas equal to such shortfall quantity,” according to the gas sales purchase agreement (GSPA) accompanying the NIO. It provides for the buyer procuring the replacement quantity on a competitive price and provides the sellers detailed documentary evidence of all costs.

Reliance had in the past committed to supplying as much as 60 million metric standard cubic metres per day (mmscmd) of gas from Dhirubhai-1 and 3 (D1&D3) and MA fields in the KG-D6 block and signed committed GSPAs with fertiliser, power and other consumers.

But output lagged commitment with gas production beginning to dip within two years of the start of production in April 2009. The production now is 1.3 mmscmd, leaving several committed customers having to buy gas from other sources or shut plants.

MA field ceased to produce last year.

Reliance-BP are developing three sets of discoveries in KG-D6 block — R-Cluster, Satellites and MJ by 2022 that can produce a peak of 30 mmscmd of gas. The quantity offered for bidding in the NIO is 5 mmscmd from R-Series fields which will start production in mid-2020.

Officials said peak output from R-Series is 12 mmscmd, while Satellites will produce another 7 mmscmd beginning mid-2021. MJ field, which will start production in the second half of 2022, also has a planned peak output of 12 mmscmd.

While Reliance-BP is confident of meeting supply commitments from these fields, they are offering additional comfort to buyers through the supply-or-pay clause, they said.

Termination due to fraud

The GSPA has also introduced anti-bribery and anti-money laundering clauses that provide for “immediate termination” of the agreement and recovery of any losses in case of violation.

Reliance and BP sought an undertaking that the buyer or its affiliates had not bribed anyone in the past five years and none of their directors, officers, or key employees has been convicted or investigated of any offence involving money laundering in the past 10 years.

It sought indemnity for the sellers (Reliance and BP) from any loss or damage due to failure of contractors or third parties associated with buyers to comply with bribery and anti-money laundering laws.

The company asked the seller to inform it in writing of any breach of these laws by any of the contractors or third parties to the gas sale agreements.

Reliance, which is the operator of KG-D6 with 60 per cent stake, has so far made 19 gas discoveries in the Bay of Bengal block.

Of these, Dhirubhai-1 and 3 (D1 & D3) — the largest among the lot — were brought into production from April 2009 and MA, the only oilfield in the block, was put to production in September 2008.

BP holds 30 per cent stake in the block while the remaining 10 per cent is with Niko Resources of Canada.

COMMENT NOW