Reliance believes that the new price will be effective for supplies between 1st April and 30th June. 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'

All the 16 urea producers have been obtaining their gas supplies from Reliance Industries Ltd’s KG-D6, based on a price level of $4.2 per mBtu for the last five years, and this contract expired as on 31 March 2014. The gas supplies from these wells have been going down and, presently, only 13 million standard cubic metres per day are available for distribution among the sixteen fertiliser units.

The Rangarajan Committee had, after great detailed study, recommended a price of $8.34 per unit, based on the gross calorific value (GCV) as against net calorific value (NCV) in the past.

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.

In other words, the price (or rate) announcement would not "influence" the voter either way, because the voting would have taken place, and the process of counting and announcement of results would be starting from various places.

In an apparent move to safeguard its own interest, Reliance had sought to obtain additional letters of credit (LoCs) for $4.1 per mBtu more for every unit to be supplied, claiming that the old rate is "invalid", but supplies will be maintained, and that the rate will be as per the new rate applicable, with effect from1st April, as notified in the gazette dated 17th January!

In fact, this was as a sequel to the meeting convened by the Ministry of Petroleum and Natural Gas (MPNG) and Ministry of Chemicals and Fertilizers (MCF) with all stakeholders, who were asked to work the agreement details, while advising Reliance to continue supplies at the prevailing rates till the new rate (price) is announced by the government.

Apart from basic price per unit, Reliance 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.

It may be recalled that the MPNG had on 21st November ordered that the margin to be charged over and above gas sale price should be fixed between the seller and buyer in all sectors, other than urea and LPG. It asked the Regulatory Board to determine the margin for supply of domestic gas to urea and LPG producers through its independent process. Now they are in the process of hiring a "consultant" to assist them in the task!

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. Now the proposal base is the margin on gross calorific value (GCV) rather than net calorific value (NCV). If this is done, effectively, the marketing margin will increase by 11% which is opposed by the fertilizer units, who are the only consumers of gas from KG-D6. These urea units want to pay only 12.2 cents to RIL if base is changed from NCV to GCV.

All domestically produced natural gas will be priced at an average of international hub rates and the cost of importing LNG.

So far, fortunately, the urea units have not complained about non-receipt of gas from KG-D6. It is now a question of five-six weeks before this matter can be settled to mutual satisfaction. It is very clear that those involved in gas production have stated, time and again, that the price of gas fixed is not commercially viable and, if the price is increased to realistic level, in line with international prices, chances are both domestic and foreign investors would take a lot more interest in investing in exploration and development of this much needed industry, for national development.

As far as the fertilizer units are concerned, any increase that they have bear in terms of gas costs would be one way or other subsidised by the government. They must also realise that the cost of obtaining local supplies would reduce their dependence upon imports.

Both industries need each other’s support in the long run for their survival.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)