Customers willing to pay more for D6 gas: RIL

New Delhi: Reliance Industries (RIL) is ostensibly seeking a 25% increase in the price of natural gas it produces from the eastern offshore Krishna-Godavari (KG) basin after it wrote to the oil ministry saying it has customers willing to pay more than the government-approved price, reports PTI.

RIL senior vice-president (commercial) B Ganguly on 6th September wrote to oil secretary S Sundareshan saying that it has received proposals from GMR Energy and Welspun Maxsteel for purchase of additional KG-D6 gas at prices between $4.75 and $5.25 per million British thermal units (mmBtu), a senior government official said.

The price the two customers Andhra Pradesh-based are willing to pay is more than the $4.205 per mmBtu price approved by the government for a five-year period ending 31 March, 2014.

Though the letter did not explicitly seek a revision in prices, Mr Ganguly cited provisions in the Production Sharing Contract (PSC) that RIL has signed with the government to say that a higher price would be beneficial to the government and the company.

The company did not make any suggestion for a revision in rates, but referred the proposals received to the ministry for advice and action.

RIL's spokesperson could not be reached for comments.

Industry analysts said the RIL proposal may not go down well with the government, as the company can, hypothetically speaking, get a letter from some other customer in dire need of fuel tomorrow to seek an even higher price.

Furthermore, the company has all along in the legal battle with the Anil Ambani Group — which was seeking gas as per a family agreement at rates lower than the government-approved price — stated that RIL was a mere contractor and the government alone had the powers to approve a price and fix users of the gas.

The position taken by RIL and also by the government was upheld by the Supreme Court recently and so for the company to now say it wants to sell gas to customers willing to pay a higher price was in violation of the Gas Utilisation Policy, which gives the government sole authority to identify customers and allocate volumes to them.

The analysts said RIL has been saying that it cannot sustain output beyond the current level of 60 million standard cubic metres a day (mmscmd) and has been resisting signing new contracts at the government-approved price. But it is now seeking to sell gas to GMR/Welspun that are offering to pay a higher rate.

Mr Ganguly, in the letter, stated that RIL had "received an offer dated 21st August from GMR Energy Ltd requesting additional gas supply of 11,000 mmBtu per day for their barge-mounted power plant at Kakinada. The company has requested for this additional supply for a period of one year commencing September, 2010."

GMR offered a $5.25 per mmBtu price for KG-D6 gas.

"We have also received a letter from Welspun Maxsteel for purchase of additional KG-D6 gas for their sponge iron plant at Salav at price of $4.75 per mmBtu," he wrote.

Mr Ganguly then went on to cite Article 21.6.1 of the PSC that states, "The contractor shall endeavour to sell all natural gas produced and saved from the contract area at arms-length price to the benefits to parties to the contract (i.e. the company and the government)."

"The contractor (RIL) is currently selling all gas produced from KG-D6 at the government-approved price formula.

The offer of GMR Energy Ltd/Welspun is to purchase the additional gas for their plants at higher than the government-approved price."

"Under the terms of the price approval letter dated 10th October, 2008, issued to us by minister of petroleum and natural gas, if the contractor sells gas at a price higher than the approved price, such higher price shall be used for valuation" for the purpose of paying royalty and profit petroleum to the government.

"Under the PSC between us and government, any higher realisable gas price leads to quicker cost recovery, increasing profit gas for all the parties, including the government, and a higher royalty accrual to the government," he wrote.

"Having received this offer, in view of the provisions of Article 21.6.1 of the PSC, we bring to your notice these offers of purchase for your views as a party to the PSC on how to proceed in terms of the provisions of the PSC," he added.


The US economy’s current dip may only be a blip

That much-feared double-dip might not take place; the flexible labour and capital markets in America will help provide opportunities for those with the courage to take them up

Throughout August, the markets have been terrified of the dreaded double-dip. This spectre has been haunting markets all over the world as investors flee risk for the safety of US Treasuries and German Bunds with ultra-low interest rates and the shiny appeal of gold. But the reality is that the fears are overstated. A double-dip does not seem to be on the cards.
To understand the reason why, we first have to understand the nature of the great recession. This recession had two causes. The first cause was the housing bubble. The second cause was the collapse of credit. The housing bubble like other episodes of financial euphoria had the effect of drawing enormous amounts of both capital and labour to what seems to be a very efficient and profitable sector of the economy. As a frenzy in the business cycle reached its peak, a particular sector becomes less productive and less profitable until it collapses.
As part of the creative destruction of capitalism, both capital and labour are eventually drawn to other sectors often as a result of new technologies. Sometimes this process can take what seems to be a very long time, but this is only in retrospect. What is happening is not that the economy is going into a double-dip. What is occurring is simply the reallocation of resources.
The problem with credit has already begun to heal. Profits of major banks have returned to pre-crisis levels. Certainly there are areas of weakness specifically among American regional banks, which have exposure to commercial property, and European banks, which have exposure to sovereign debt. In contrast the US consumer finance company CIT went bankrupt during the crises and cut off many small employment-generating companies from credit. It has since emerged from bankruptcy. Its shares are up 35% and it raised a $3bn 5-year loan last month. Credit for businesses is finally loosening up generally. According to the Financial Times, "During this year's third quarter, global financial companies - including deposit-taking banks as well as finance companies - will issue as much as $80 billion-$100 billion in debt, more than in either of the first two quarters."

While globally, the credit picture has brightened, the American employment picture has not. The reason is quite simple. It is far easier and faster to reallocate capital than labour. The construction of new homes during the housing bubble created enormous number of new jobs in the construction industry. As it collapsed, these jobs were lost and the situation has not improved.

Some 61,000 construction jobs were lost between May and July of this year. In addition, during that time, another 56,000 posts were shed in ancillary areas - such as makers of wood products and furniture, building products and furniture retailers, and providers of financial services related to property. The losses in construction jobs account for 3 million or about half of the 6.6 million jobs lost since the peak of the housing bubble in 2006.

Manufacturing has lost 2 million jobs, but thanks to global demand often from emerging markets, this sector is beginning to hire.
The real depth of the problem will perhaps never be revealed for the simple reason that many of the construction jobs in the US were held by illegal immigrants. With the collapse of the industry, many of these people have simply gone home. It is estimated that the total number of illegal immigrants declined by 8% of 12 million in March 2007 to 11.1 million in 2009. It has probably declined even further.

The loss of construction jobs is the reason for the length and depth of the recession. The US economy was supported by a housing boom for much of the past decade. The over concentration of labour in one area of the economy cannot be changed overnight. Reallocation of labour takes retraining, often relocation and most important, time. The lag does not mean a double dip. It is just a measure of the height that the economy has fallen.

What the US economy has going for it, which is different from most other economies, are flexible labour and capital markets. The large numbers of foreclosures is not evidence of a problem but evidence of a solution. Foreclosures are evidence of a flexible capital market. It means that the debts are not going to sit on the books of the banks as they did in Japan. It also means that the price of housing will rapidly reach a sustainable level. The flexible labour markets in the United States unlike those in Europe mean that the US economy will rapidly readjust.

In fact we all are already seeing this occur. Over one-third of the new construction incorporates green technologies. Like the Internet boom, the US economy is perhaps already adjusting to a post-fossil fuel world. So in the future the present dip, will only been seen as a dramatic opportunity for those with the courage to take it.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).


Wednesday’s Market Preview: Flat-to-positive opening on the cards

The market is likely to witness a flat-to-positive opening on tepid cues from the global markets. Wall Street closed with marginal losses overnight. While retail sales numbers were in line with market expectations, selling in financial stocks erased earlier gains. Markets in Asia were mostly in the green on the US retail sales numbers. The SGX Nifty was up 1 point at 5,817.50 over its previous close of 5,816.50.

The Indian market which, witnessed splendid gains on Monday, added some more today, albeit to a lesser extent. The market, after scaling a fresh 32-month high in morning trade, gave up part of the early gains and ended range-bound in the green. However, the market ended in the positive zone for sixth day running. The Sensex settled at 19,347, up 138.63 points or (0.72%). The Nifty was at 5,795, up 35.55 points (0.62%).

India’s inflation for the month of August stood at 8.51%, according to the new Wholesale Price Inflation (WPI) series released by the government on Tuesday. As per the old series with a base year of 1993-94, WPI inflation stood at 9.5% for the month, according to the commerce ministry.

Overall inflation in August witnessed a fall of 1.27 percentage points from 9.78% in the month of July, as per the new series, which considers 2004-05 as the base year.

US markets closed with marginal losses on Tuesday. While the retail sales numbers were in line with market expectations, selling in financial stocks erased earlier gains. Purchases increased 0.4% following a 0.3% gain in July, Commerce Department figures showed. This apart, inventories at US businesses rose in July at the fastest pace in two years as companies stocked up ahead of the back-to-school sales season that proved to be better than projected, other figures from the Commerce Department revealed.

The Dow slid 17.64 points (0.17% to 10,526. The S&P 500 fell 0.80 points (0.07%) to 1,121. The Nasdaq added 4.06 points (0.18%) to 2,289.

The rise in US retail numbers gave hopes to exporters in Asia. The regional markets were trading mostly in the green. Stocks in Japan rose after the government intervened to weaken its currency for the first time since 2004.

The Hang Seng was up 0.21%, Nikkei 225 surged 0.21%, Straits Times gained 0.25%, Seoul Composite was up 0.19% and Taiwan Weighted rose 0.15%. On the other hand, Shanghai Composite was down 0.51% and KLSE shed 0.21%. The SGX Nifty was up 1 point at 5,817.50 over its previous close of 5,816.50.

India's indirect tax collections for the April- August period rose more than 45% from a year ago, mirroring optimism by policymakers of the economy achieving 8.5% growth in the current fiscal that ends in March 2011.

Customs collections rose more than 66% to Rs51,870 crore, while excise collections were up more than 41% at Rs 49,672 crore, the finance ministry said in a statement on Tuesday. Total indirect tax collection for the period stood at Rs1.24 lakh crore.




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