Dissent over cut in gas supply from D-6 block: Government's final order

After discussing out the stakeholders, the government made the following observations:

• It would be necessary to identify sectors where lower price of gas is a pass through and benefits are passed on to the public at large. Such sectors are fertilizers, power, LPG and city gas distribution projects. This is the reason why they are termed as core sectors. The EGoM recognized these sectors required the highest priority. 
• Sectors like refinery, petrochemical and steel are decontrolled with units operating in a competitive market, where prices are not determined through a cost plus approach but via market forces. Accordingly, these sectors, along with captive power plants, and city gas distribution (for industrial and commercial purposes) have lower priority than fertilizer and power plants. If gas is required for the relatively less important sectors, the demand can be met through imported LNG for which sufficient capacities exist in the country. While it is a fact that the price of imported LNG is higher than domestically produced natural gas, such sectors should not be dependent on low cost gas for their survival in a market that is decontrolled. Further, availability of a low cost input like gas distorts the level playing field vis-a-vis competitors not having access to such low cost inputs. 
• Legally, the government is within its right to issue directions to the contractor for imposing cuts on non-core sectors rather than on core sectors. The Supreme Court vide its order dated May 7, 2010, in the RIL and RNRL cases, has also held that the government owns the gas till it reaches its ultimate consumer and that PSC provisions would override any other contractual obligation between the contractor and any other party. Under the provisions of the PSC, commercial utilization of natural gas would be determined in accordance with the government policy in this regard. In this context, the Supreme Court has deliberated in detail on the subject and has concluded that government decisions would be binding on the contractor. 
• Firm allocations definitely have a priority over fallback allocation. With regard to the issue raised by the Counsel for both Welspun and Ispat that the allotments to the steel sector were on firm basis and GSPAs were signed accordingly, and hence, reduction in supplies cannot be made now, the government pointed to some fallback allocations that were made to power plants to operate beyond 70% to 75% PLF. However, in view of the reduction in gas availability, such fallback supplies have been cut first and, when gas supplies increase, even though power is a higher priority sector, the fallback allocations will operate only after firm demand has been met. Using the same logic, firm allocations will have to be trimmed in non-priority sectors in order to ensure adequate gas supply to fertilizer and power plants.
• It is not correct to say that steel sector was allocated gas within the first 40 mmscmd. In fact, the unutilized quantity allocated to CGD (transport & domestic) was transferred to steel sector. Subsequently, when gas production was projected to increase to 60 mmscmd some units were not in a position to offtake the gas immediately, it was decided to extend the gas allocation to sectors, like refinery and petrochemicals, as also to supply gas to existing power plants to increase their PLF and to new power plants. Any allocation in a particular sequence would not change the priority amongst sectors and, even if steel was allocated some gas within 40 mmscmd, the priority of steel sector would remain the same. 
• The EGoM has not accorded a higher priority to steel vis-a-vis refinery, petrochemical or CGD (industrial & commercial) sectors. In case pro rata cuts are to be made on all customers, such directions would apply to all non-core sectors and not just steel, as the steel sector will not have a higher priority over these sectors.
• The priority of allocation when the production of gas was going up has to be maintained  when the production of gas is going down, in line with the Gas Utilization Policy. The ministry had written to RIL to make pro-rata cuts in July 2010, when the reductions were small and there was uncertainty about the period for which cuts were to be imposed; there was still an expectation that gas production may increase. Thus, those directives cannot be referred to now when cuts have reached substantial levels.