Gas-pricing norm of RIL gets uncertain

The price-discovery exercise undertaken by Reliance Industries (RIL) for its gas from the Krishna-Godavari basin has been pushed into uncertainty following the objections raised by the fertiliser ministry.

RIL's exercise was based on 10 "indicative" bids, of which five were from government-owned fertiliser companies. Their parent ministry has termed these bids as "void".

"We are not aware of any bids made by individual fertiliser companies. If at all bids have been made, they are void," said an official in the department of fertlisers, adding that the bids are void since they do not have the approval of the ministry. The objection of the department of fertilisers has been communicated to the petroleum ministry.

RIL undertook a gas price discovery exercise in early May for its K-G gas, for which it had invited indicative bids from five fertiliser and five power companies. These are typically the largest consumers of gas in the country.

The price, after the 10 bids were opened, worked out to $4.79 per million British thermal unit (mBtu), sources said. This is much higher than the $2.4 per mbtu that the gas-based fertiliser plants are currently paying.

While the department of fertilisers is reluctant to accept a higher price of gas, which would put pressure on fertiliser prices (the fertiliser subsidy bill last year was Rs 21,000 crore), its immediate objection is that the fertiliser companies do not have the permission to change to gas from naphtha as feedstock.

In a letter to Petroleum Secretary MS Srinivasan, Fertiliser Secretary JS Sarma says the price discovery process should be undertaken by the Committee of Secretaries headed by the petroleum secretary and not by any individual company.

Sarma, in his letter, also says that the fertiliser companies "have expressed apprehensions on the various terms and conditions for the supply of gas and the pricing formula forwarded by RIL" to them.

"The fertiliser department has a year left to give permission to the fertiliser companies to bid for the gas, as production will start only in June 2008," said a RIL spokesperson.

The company maintains that it has followed the directive of the gas-pricing committee for discovery of a market price for its gas. "The actual selling price will only be arrived at after negotiations with individual buyers," the RIL spokesperson added.

RIL's peak production from the K-G basin is projected at 80 million standard cubic metres per day (mscmd). Production is slated to start in June 2008 at an initial rate of 40 mscmd.

RIL has 40 mscmd of gas locked with Reliance Natural Resources Ltd and NTPC through a high court order, and it plans to use 6 mscmd of gas internally. Bids were invited for the balance 34 mscmd. The stance of the department of fertilisers means that RIL has effectively received bids for only 17 mscmd.

While some industry experts termed the 10-price bids as a "narrow base", the exclusion of five makes it even narrower.