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Monday, April 23, 2012

Oil ministry against RIL gas price hike

The ministry of petroleum and natural gas has opposed a proposal of Reliance Industries Ltd (RIL) for an increase in the price of gas, saying that would lead to an additional burden of $8 billion on the exchequer.

The petroleum ministry recently communicated its view to the law ministry, from which it is seeking legal opinion on the revision proposal.

RIL had in January asked for a price revision in line with the present international crude oil and gas prices, though the current price of $4.20 is valid till April 2014. In February, an Empowered Group of Ministers headed by Finance Minister Pranab Mukherjee had directed the petroleum ministry to seek law ministry’s advice and suggest an appropriate regulatory authority to aid the group.

In its communication to the law ministry, the petroleum ministry has strongly recommended there are neither legal nor financial justification for a revision in gas prices at this juncture. It has argued that huge financial implications of such an upward revision would hit the country’s fiscal balance.

RIL had asked for a steep increase in the price of gas produced from its KG-D6 field — from $4.20 per million British thermal unit (mBtu) to $14.20 an mBtu. According to the ministry’s calculations, the increase of $10 per unit would translate into a $8.5-billion increase in revenue for RIL in next two years, while the increase in government’s revenue in the form of profit petroleum would be to the tune of just $0.438 billion.

The oil ministry said if the price of gas were to be raised by $10 per mBtu, the burden on state and Central governments would go up by around $8 billion, as most of the gas produced was being used by fertiliser units and power plants supplying to state discoms. Confirming the communication to the law ministry, a petroleum ministry official said: “We have maintained that no interim price increase in gas should be allowed. Any increase will have an adverse impact on the government’s subsidy bill.”

The current price of $4.20 was fixed by the EGoM in 2007, to be applicable for a five-year period from the date of commencement of gas supply. This was through a formula where the crude oil price was capped at $60 a barrel. This price, as well as the duration of five years, was accepted by RIL.

The ministry has sought law ministry’s advice on “whether the price can be revised before the end of the five-year period for which the price set by EGoM is valid and consented to by the contractor”. It has also asked that in case of a possible revision, whether the existing formula shall be used or a fresh price discovery should be allowed on a new formula, subject to government approval. It has also asked the law ministry that in case a price revision is done after the end of the five-year period, should the existing formula be adopted with a higher crude cap or a new formula be brought in.

This is not the first time that RIL is pushing for a revision in gas price. An earlier request made in 2010 was turned down as international prices were lower.

RIL’s plan to survey KG-D6 gas potential gets approval

Sidestepping objections of the upstream regulator, the Directorate General of Hydrocarbons, the oil ministry has agreed to Reliance Industries’ plans to survey potential of all the gas discoveries made in the KG-D6, instead of a piecemeal approach. RIL and its partner UK-based BP Plc had proposed to undertake concept validation and front-end engineering design for all their 16 finds.

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