Is Reliance putting pressure to implement 10th January gas pricing guidelines?
Reliance Industries Ltd (RIL) and its partners BP plc of UK and Niko Resources has issued a notice of arbitration to the Indian government seeking implementation of domestic natural gas pricing guideline 2014 that were notified on 10 January 2014.
"We requested the government to announce the gas prices as soon as the Model Code of Conduct was over, with effect from 1 April 2014 given that fact that our contracts had expired in March 2014. The ministry of petroleum and natural gas (MoPNG) indicated gas prices would only be announced for the 2nd quarter 2014, completely ignoring the Cabinet decision to change prices from 1 April 2014. This contradictory move has resulted in a loss to the contractor group and the government of Rs300 crore per month," RIL said in a note.
According to sources, the stock market anticipates the Manmohan Singh government to take a decision on this issue between13th to 16th May, as the model code of conduct would come to an end on 12th May. On Friday, RIL share price rose about 4% to Rs997.35 on the BSE, while the 30-share benchmark ended the day around 3% higher at 22,994.
According to the joint statement issued by the three companies, the non-implementation of the guidelines, is delaying their ability to appraise and develop other significant discoveries made last year.
"The continuing delay on part of the Government of India in notifying the price in accordance with the approved formula for the Gas to be sold has left the Parties with no other option but to pursue this course of action. Without this clarity, the Parties are unable to sanction planned investments of close to $4 billion this year," the companies said in a joint release.
It said, "Overall, the Parties were planning to invest $8-10 billion in the next few years to significantly increase production from the KGD6 block. This domestic production is essential for meeting India’s energy needs and will also help conserve foreign exchange which is required for imports of natural gas into India at the present time. All of this requires clarity on pricing."
According to the note, gas pricing has been debated for over two years with a Cabinet decision, which approved a Rangarajan Committee price formula in 2013. This price formula was not an arms-length price as per the Production Sharing Contracts (PSC), yet it showed intent to move towards and transition to arms-length pricing. However, implementation of the Cabinet decision has been deferred leading to no clarity on gas price from 1 April 2014 for the contractor group to plan their future investments.
The government notification, dated 10 January 2014, giving effect to this price, was actually gazetted on 17th January, for the price to be effective from 1 April 2014.
Although the contract and revision of price structure has been going on for months now, the Oil Ministry decided to approach Election Commission for clearance to announce the price because of the election schedule. The poll watchdog committee advised the government to hold the rate till mid May, by which time actual voting process would be completed.
Last year in June, the Cabinet Committee on Economic Affairs (CCEA) headed by prime minister Manmohan Singh approved near doubling of natural gas prices to $8.4 per million metric British thermal unit (mmBtu) from 1 April 2014, a move that may result in rise in power tariff, urea cost and CNG prices.
While RIL’s KG-D6 gas price was fixed in 2007 at $4.205 per mmBtu for first five years of production, APM gas rates were last revised in June 2010 when prices were raised to $4.2 from $1.79. RIL began production from its eastern offshore KG-D6 field in April 2009.
Apart from basic price per unit, RIL believes that the new price will be effective for supplies between 1st April and 30th June and it is only the dollar value to calculate the price, which has to be announced (or reconfirmed).
Fertilizer companies, on the other hand, have taken a stand that whatever the new price is fixed by the government, it cannot be applicable "retroactively". The new price, in any case, excludes local levies, marketing margins and transmission tariff.
In the past, Reliance charged 13.5 cents per mmBtu as marketing margin over and above government set price of $4.205 per unit from KG-D6 gas, for the first five years' production, which ended on 31st March.
The Rangarajan formula would be applicable for five years.
The Rangarajan formula uses long-term and spot liquid gas (LNG) import contracts as well as international trading benchmarks to arrive at a competitive price for India.
While the Rangarajan panel had recommended revising domestic gas prices every month based, the oil ministry changed it to a quarterly revision.
Though the average of the two currently comes to $6.775, the price of gas from April 2014 if these guidelines come into effect would be around $8.42 and over $10 in the following year. This is because Petronet’s deal with Qatar’s RasGas (India’s only functional long-term LNG contract) had a price-cap, which was lifted in January 2014, linking gas prices fully with crude.
