GAIL tells govt to accept profit petroleum in kind

Even as major exploration and production companies like Reliance Industries want the government to continue accepting its share of profit petroleum in cash, domestic gas major GAIL (India) has told the Ministry of Petroleum and Natural Gas that it favours the government getting its share of profit petroleum in "kind."

Profit petroleum is the share of crude oil or gas that the government gets from operators such as Reliance Industries or British Gas on account of being the owner of oil/gas fields.

GAIL's argument is two-fold: It will help the government tide over the current shortage of gas in the country if it receives profit petroleum in the form of gas/petroleum, and its own under-utilised pipeline network could be put to use for carrying gas.

In a letter to the ministry, GAIL said: "Given the existing shortage of gas in the country...there is a necessity to take profit petroleum in kind, particularly in the Krishna Godavari Basin, where GAIL's pipeline network is under-utilised."

The letter was sent in response to a ministry directive seeking the views of all players in the gas sector on a gas tariff formula acceptable to all parties. The move came in the wake of the RIL-RNRL controversy.

Both RIL and British Gas are reported to be in favour of cash settlements as it translates into a bigger share of profits from sale of gas at prevailing market prices.

The price at which the government will get its share of gas is fixed in advance at the time of contracts, and, therefore, an upward price movement will affect the government's earnings adversely, while allowing operators to pick up greater margins on gas sales.

Gas spots have been ruling in the range of $5-6 per million british thermal units (mmbtu) in the international markets, while the price of profit petroleum was fixed in the range of $3-3.68 per mmbtu for the previous New Exploration Licensing Policy rounds.

Industry analysts point out that under the RIL-RNRL deal, the government would have lost about $7.5 billion in revenues if it had let Reliance Industries sell gas to the Anil Ambani group company at $ 2.34 per mmbtu, the price arrived at as part of the agreement between the two brothers.

In that case, the government would have got $1.105 billion in profit petroleum and royalties over the 17-year life of the gas field in the Krishna Godavari basin. But at $4.75 per mmbtu, the price at which RIL currently sells gas from Panna/Mukta and Tapti fields, the government would have got $8.55 billion in royalties and profit petroleum.

At $4.5 per mmbtu, the revenues would have been $7.89 billion, and at $5 per mmbtu, the government would be richer by $9.211 billion.

The petroleum ministry had rejected RIL's proposal to sell gas to Reliance Natural Resources Ltd, saying the sale price of $2.34 per mmbtu was not arrived at arms-length and would have led to a huge loss for the government in form of lower royalty and profit petroleum.