RIL likely to give $1.2-bn bank guarantee for higher gas price

The guarantee is to to cover RIL's liability if gas-hoarding charges are proved.

Reliance Industries (RIL) and its partners, UK’s BP and Canada’s Niko Resources,  might have to provide a maximum of $1.2 billion in bank guarantees over three years to get nearly double the rate for natural gas being produced from the main fields in KG-D6 block.

The Cabinet Committee on Economic Affairs  had  decided on December 20 to allow RIL to almost double the price of natural gas from April, provided the firm gave a bank guarantee to cover its liability if gas-hoarding charges are proved. The guarantee, equivalent to the incremental revenue RIL will get from the new gas price, will be encashed if it is proved the company hoarded gas or deliberately suppressed production at the Dhirubhai-1 and 3 (D1&D3) fields in the eastern offshore KG-D6 block since 2010-11, sources said.

RELIEF WITH RIDERS

• Jun 2005: Tariff Commission (TC) set up to look into pricing issues
• May 2007: TC revises pricing; suggests normative producer price of Rs 3,600/MCM, escalation of Rs 50/MCM for each 10-point increase in WPI
• Jun 2007: CCEA decides to revise producer pricing in line with TC recommendation
• Sep 2007: RIL’s KG-D6 gas price fixed at $4.2/mBtu
• May 2010: The price of administered gas more than doubled from previously subsidised level — from $1.8 an mBtu to $4.2 an mBtu
• Dec 2012: Rangarajan committee files its report on gas pricing
• June 27, 2013: Cabinet Committee on Economic Affairs clears gas pricing, doubles it to $8.4 an mBtu
• Dec 19, 2013: CCEA clears the decks for RIL to raise gas price, provided it gives bank guarantee for shortfall in KG-D6 output, till it is proved there was no intentional hoarding

Considering that gas prices will rise from $4.2 a million British thermal unit to $8.2-8.4 after the Rangarajan pricing formula comes into effect from April, the bank guarantee — being the difference of current and new price — for every trillion cubic feet (tcf) of gas production will come to $4 billion. Sources said the guarantee for the entire remaining recoverable gas reserves of about 0.75 tcf in the D1&D3 fields comes to $3 billion. At current rate of production of about eight million standard cubic metres a day, D1&D3 will produce about 0.3 tcf in the next three years — the time that may be needed to settle the issue of gas hoarding charges. The guarantee for 0.3 tcf comes to $1.2 billion, they said. Of this, the share of RIL, which holds 60 per cent stake in KG-D6, will come to $60 million a quarter. BP has 30 per cent interest and the remaining 10 per cent is with Niko.

D1&D3, the first of the 19 discoveries in eastern offshore KG-D6 block that was put on production in April 2009, originally was estimated to hold 10.03 tcf of reserves. But these were slashed last year to 2.9 tcf based on production data for the first three years when wells were shut one after another following water and sand sweeping inside along with sharp drop in reservoir pressure. Of the re-stated reserves of 2.9 tcf, about 2.2 tcf have already been produced in first four-and-half-years and balance of about 0.75 tcf remains to be produced. Sources said the new rate will apply to all other fields in KG-D6 without any preconditions. The currently producing MA oil and gas as well as fields like R-Series and satellite discoveries that will come into production in 2016-17 will also get the new rates without any preconditions.

While RIL blames unseen geological complexities for production not matching the pre-stated targets for D1&D3, the petroleum ministry and its technical arm the Directorate General of Hydrocarbons hold the company responsible for not drilling the committed number of wells, resulting in output fall. With both sides not budging, the issue has been referred to arbitration, which could take two to three years for a verdict.

Prodded by the finance ministry, the petroleum ministry had initially proposed to deny the new gas prices  unless RIL either made up for the shortfall in output in the past three financial years, or it was proved the company was not responsible for production below target. The issue had held up notification of the new pricing formula that will be applicable to all producers — public and private — and all forms of gas —conventional and unconventional forms like coal-bed methane and shale gas. As a way out, it was proposed that RIL and its partners be asked to give bank guarantees for the incremental revenue they will get till the hoarding issue is resolved through arbitration by independent international experts.

The government in June approved the Rangarajan formula for pricing of all domestically produced natural gas at an average of global gas hub rates and price at which India imports LNG (gas in liquid form). The rate in April 2014, when the new pricing is to be implemented, will be about USD 8.2 to 8.4 as against the current USD 4.2. Prices of natural gas, which is an input for manufacturing fertiliser and electricity generation, will be revised every quarter based on the average of the past four quarters, with a gap of one quarter.