KG-D6 shortfall begins to bite: Government directive violative of GSPA, claims Essar

Essar Steel has requested the petroleum ministry to allocate D-6 gas to firm customers on pro-rata basis as per the laid down ratio and not in order of priority as outlined in the directive issued in April, 2011. Alternatively, the company wants that the matter be placed before the EGoM for an expeditious decision in order to mitigate further losses to the customers. In April, the government had directed RIL to first meet the gas requirements of the four priority sectors, namely fertilizers, power, CGD and LPG, and only after that gas should be supplied to other priority sectors such as sponge iron and steel. 

• Describing the government`s decision to supply D-6 gas to core sectors in order of priority as "arbitrary" and "discriminatory" in nature, Essar has claimed that this directive is in direct conflict with the commercial arrangement executed by RIL with the customers. The clause 5(h) of the Gas Sale and Purchase Agreement (GSPA) between RIL and Essar clearly provides for cuts in supplies of gas on pro rata basis on the laid down ratio, if gas is insufficient to meet the firm allocation of all customers significantly without making any distinction of which so ever nature between consumers of various sectors. 
• Essar has argued that if the government`s decision is implemented by RIL, it would not only be in breach of the provisions of the GSPA, but also, induce breach of contracts made by Essar with various customers on supply-or-pay basis causing substantial financial losses. 
• Essar has further stated that the petroleum ministry should not direct the sellers to supply gas up to firm allocations to customers of only few of the prioritised sectors by totally ignoring the firm allocations of customers of remaining prioritised sectors. According to the company, the EGoM has not defined "core" or "non-core" for the purpose of allocation and supply of gas to the customers and therefore, it cannot be a valid ground for the petroleum ministry to issue directives of the nature stated in its letter dated March 30, 2011.
• Essar Steel has the country`s largest gas-based facility to manufacture sponge iron at Hazira in Gujarat, with an installed capacity of 7.28 MMTPA. The facility requires 5.50 MMSCMD of gas as feedstock to manufacture sponge iron. Around 65%, up to 3.20 MMSCMD, of this requirement is met by supplies by RIL. The company claims that this quantity was allocated by EGoM after recognising steel sector as a priority sector.