CCEA: RIL can hike gas price with bank guarantee

Sum of the bank guarantee would swing with the level of production achieved by RIL-BP.

Written by Express News Service | New Delhi | Published:December 20, 2013 2:41 am

The Cabinet on Thursday gave a major relief to Reliance Industries Ltd allowing it to charge a higher gas price of a likely $8.4 per million British thermal unit from next April,in return for a bank guarantee.

The bank guarantee,equivalent to the incremental revenue that RIL will get from the new gas price,would be encashed if it is proved that the company hoarded gas or deliberately suppressed production at D1 and D3 fields in the KG-D6 block since 2010-11.

The new prices,based on the C Rangarajan formula,can spur investment in the sector that has been crippled by the stand-off.

The government plans to bid out fresh blocks under the tenth round of its ‘new exploration licensing policy’ was held up as companies wanted to know how this dispute would pan out.

While RIL is yet to reply formally,a company source said the proposal for the bank guarantee is workable. RIL chief Mukesh Ambani and his joint venture partner BP had held several rounds of meetings with the government this year to break the deadlock.

Also,while the arbitration case between the two against the penalties sought to be levied by the government would continue,by resolving the gas price issue the differences has now got narrowed.

Prodded by the finance ministry,the petroleum ministry had initially proposed to deny the new gas price to RIL till such time it either made up for the shortfall in output or it is proved that the company was not responsible for production falling below targets.

The total shortfall in KG-D6 production in the last four years was 154 million standard cubic metres per day.

The Cabinet,in June,approved the formula which averages global gas hub rates and the price at which India imports LNG. But its implementation got delayed as the Comptroller and Auditor General in its audit of the KG-D6 block had earlier asked the government to ensure that RIL delivers upon the committed shortfall at the lower price agreed upon,before it was allowed to migrate to the new price for fresh output.

The CAG had written to the petroleum ministry in November as to how it “is ensuring that the contractor delivers the gas shortfall at $4.2 rather than getting the benefit of the new revised price from April 2014”.

In the event RIL was allowed the new price,the auditor asked for the additional subsidy burden figure to be borne by the government in the fertiliser and power sectors. It also questioned the RIL bank guarantee saying that its acceptance would lead to extending the high-price benefit on the previous shortfall.

As a way out,it was proposed that RIL be asked to give bank guarantees for the incremental revenue they will get till the hoarding issue is resolved through arbitration and validation by independent international experts. RIL claims geological complexities and lower-than-anticipated reserves led to fall in gas output.

The sum of the bank guarantee would swing with the level of production achieved by RIL-BP and would be net of the government’s share of profit petroleum.

THE CONDITIONS

* RIL is likely to charge $8.4 per mmBtu from April

* The bank guarantee would be equivalent to the incremental revenue RIL would get from the new gas price

* The guarantee would be encashed if it is proved that the company hoarded gas or deliberately suppressed production at the KG-D6 block

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