The Finance Ministry wants its petroleum and natural gas counterpart to adopt a cautious approach while extending the higher gas price benefit to Reliance Industries in lieu of a bank guarantee. While giving an in-principle nod, it asked the Petroleum Ministry to examine issues such as what happens if the arbitration case with RIL lingers on and the likely course of action if the company fails to fulfil its bank guarantee obligations.
The Petroleum Ministry is of the view that if RIL wants to benefit from the revised gas price that becomes effective April 2014, it should submit a bank guarantee for the unmet supply commitment from its KG-D6 block.
Since some of the investments made by RIL are in dispute, the Finance Ministry also expressed concern over the consequential impact the enhanced gas price, if any, will have on the Government’s share of profit from the produce, and benefits of royalty and taxes so collected.
The production from the D6 block based on the approved field development plan was to go up to 86.73 million standard cubic metres a day (mmscmd) in 2012-13 from 33.83 mmscmd in 2009-10. But the production started declining after hitting a peak of 60 mmscmd in early 2010.
The actual production was 55.89 mmscmd in 2010-11 and 26.18 mmscmd in 2012-13. The current output is below 10 mmscmd.
According to sources, the Finance Ministry has observed that the bank guarantee mechanism will dilute the Government’s stated position before the different ongoing arbitration proceedings. The official stand is that the shortfall in gas production is because of RIL’s fault and not of geological surprises. This was in violation of the terms and conditions of the production-sharing contract between the Government and RIL.
The Finance Ministry has also expressed concern that in case arbitration lingers on indefinitely, the bank guarantee may run to about $9 billion, which will need to be monitored closely by the Petroleum Ministry so that it remains valid till arbitration is completed.