Reliance looks to cap K-G gas output

The recent order of the Bombay High Court restricting gas sales from Reliance Industries' Krishna-Godavari basin to Reliance Natural Resources (RNRL) and NTPC has forced the Mukesh Ambani-promoted company to cut production from the block.

RIL was planning to expedite the peak production from the block following a request by the petroleum ministry.

The ministry had asked the company to hit peak production of 80 million standard cubic metres per day (mscmd) within six months of the first gas production from the block "" slated in July 2008 "" to meet the demand of gas-starved industries.

"In view of the shortage of gas supply in the country, we intend to ramp up to 80 mmscmd within 6 months," the company had said in a communication to the ministry on June 18.

The gas availability in the country is currently only around half of the demand of 170 mscmd.

RIL's original plan was to start producing 26 mscmd of gas from the block in July 2008 and to reach the peak rate of 80 mscmd in July 2011.

However, everything has changed with the high court ordering that RIL cannot sell the 80 mscmd of gas to any other company for eight years.

According to the court order, RNRL is entitled to 28 mscmd of the gas, while NTPC gets 12 mscmd. RIL has 24 mscmd for its captive use. According to the contract between RIL and RNRL signed in January 2006, RNRL also has the right to 40 per cent of all additional gas to be produced from the block.

When the contract was signed between the two companies, RIL's production was envisaged at 40 mscmd, which was later doubled.

"If the high court upholds its interim order in its final hearing on July 7, RIL will be forced to cap production to meet only its own requirement of 24 mscmd. This would essentially mean that the peak production will not be reached any time soon," an official in the petroleum ministry said.

Meanwhile, the pricing of the gas from the K-G basin is being debated within the oil ministry. RIL's price discovery exercise for the K-G basin gas, where it has "discovered" a price $4.50 per million British thermal unit (mBtu) (which means a selling price of $5.2 - $6.2 per mbtu) has been opposed by the power and fertiliser ministries as being too high.

Moreover, calculations showed that if the gas was sold at $2.34 per mBtu "" as per the original agreement with RNRL "" then the government would lose around $8.5 billion in terms of profit, petroleum, royalty and corporation tax.

However, if the gas was sold at $4.5 per mBtu, the price determined by RIL, the government would have to shell out an additional $22 billion towards power and fertiliser subsidy.

Industry experts, however, said both the power and fertiliser sectors can absorb gas prices of up to $6 per mBtu.

"Bids for ultra mega power project based on imported coal were between Rs 2.26 and Rs 2.96 per unit of electricity. This is taking into account the zero customs duty on the coal. At the bid price, these plants can absorb $6 per mBtu cost of gas," an expert pointed out.