Centre in a bind over RIL's KG gas

Higher price will lead to hike in fertiliser subsidy while a lower price will hit returns.

The fight between the Mukesh Ambani and Anil Ambani groups over pricing of gas from the D6 block in the Krishna-Godavari (K-G) basin has put the government in a dilemma.

As owner of the gas, which Mukesh Ambani's Reliance Industries will produce under a production-sharing contract, the government is keen to maximise its returns. However, it would lose up to Rs 34,000 crore ($8.5 billion) over the next 25 years if the gas was sold at the price demanded by Anil Ambani's Reliance Natural Resources Ltd (RNRL), which signed a contract to buy 28 mscmd when the field would start producing gas in June 2008.

However, if the price was higher, the government's subsidy to power and fertiliser units, the other major prospective consumers of gas from the K-G basin, would increase by almost Rs 88,000 crore ($22 billion), said a senior official in the petroleum ministry.

Earlier this month, RNRL had said that the price of $4.79 per mBtu (million British thermal unit) that RIL was demanding was far higher than $2.34 per mBtu, the originally agreed price. This price was rejected by the government as RNRL was then a part of the RIL group and therefore did not meet the "arm's-length" criterion for pricing.

NTPC, the country's largest power producer, has entered into a contract to buy another 12 mscmd. Cases regarding both the contracts are in the Bombay High Court.

"At $2.34 per mBtu, the government will get only $4.5 billion from royalty and profit share whereas it will get around $13 billion if the gas is sold for $ 4.79 per mBtu," the official said. RIL, however, was not likely to make any profit if the gas was sold at lower rates, the official added.

Under the production-sharing contract with RIL, once commercial sale of oil or gas starts, the operator will keep a majority share of the profits until it recovers its investment, with the government getting a lower share. Later, the contractor's share will come down and that of the government rise.

RIL is expected to spend around Rs 32,000 crore ($8 billion) in producing gas from the block. In May this year, RIL, in an exercise, "discovered" the price of the gas from the Andhra Pradesh coast at $4.79 per mBtu.

Based on this, users in Maharashtra, for example, would have to pay above $6 per mBtu for the gas as taxes and transport cost would be added to the base price.

"As soon as the price of gas goes above $4 per mBtu, coal starts replacing gas as a fuel in power and fertiliser plants," said an industry expert, who did not want to be named.