With arbitration withdrawn, RIL, BP may get higher gas price from KG-D6

Development comes days after RIL, BP announced they would invest Rs 40,000 cr in 3 projects

Almost a week after the big-bang announcement by Reliance Industries (RIL) and BP Plc to invest Rs 40,000 crore in the Krishna Godavari Basin field, a senior BP official said that the company has withdrawn its arbitration with the government related to gas prices.

This has triggered expectations that the government could now allow the oil majors to charge a higher price for gas from KG-D6. While the price for domestic natural gas for the period of April 1 to September 30 has been kept at $2.50 per million metric British thermal unit (mmbtu), for deepwater blocks, a higher price of $5.56 per mmbtu is allowed. However, RIL and its partners were denied this price due to arbitration.

"Yes, we have already withdrawn the arbitration," confirmed a BP official, while refusing to divulge further details. There are three more ongoing arbitration cases between both the parties and the companies are tight-lipped about the matter. These cases include one on cost recovery, another on gas migration penalty, and the case on penalty for unfinished minimum work programme. When contacted, a government official declined to comment on the issue.   

In a cost-recovery model, a company starts sharing income with the government only once its exploration and development costs have been covered. In 2011, the Mukesh Ambani-led RIL had initiated an arbitration process anticipating that the government would impose a penalty on the explorer for not meeting output targets. Following this, the government started disallowing cost recovery. Till March 31, 2015, the total cost recovery disallowed comes to $2.756 billion. 

The basis of the gas migration case was a penalty of $1.55 billion slapped on RIL and its partners, BP and Niko, for commercially producing state-owned Oil and Natural Gas Corporation's (ONGC’s) share of natural gas in the Krishna-Godavari basin. According to a D&M report, over 11.2 billion cubic meters of gas had migrated from ONGC’s idling KG fields.

On the other hand, an arbitration related to tax demand by the government was ruled in favour of the government last year. Similarly, RIL had also dropped another arbitration against a government order to relinquish about 80 per cent of the KG-D6 area.

"RIL might have got some assurance regarding pricing from the government. That might be the reason for fresh investments and also the withdrawal of arbitration," an industry official said.

Last week, after meeting Prime Minister Narendra Modi and Petroleum Minister Dharmendra Pradhan, RIL chairman Mukesh Ambani and BP CEO Bob Dudley had announced Rs 40,000 crore worth of fresh investments into KG-D6. Speaking on the arbitration with ONGC over gas migration, Ambani had said, "We are pretty sure that we will get a fair outcome and don't think that this will come in way of our future investments. We were working with ONGC before the arbitration and are working with them after that also."

“We see this as a positive, as withdrawal of arbitration was a key requirement for RIL to get the higher prices under the new formula for new deep water gas. While there is no near-term earnings impact (actual production is still a few years away), it is a positive sentiment," said a J P Morgan Markets research report.