EGoM clears gas pricing formula for KG Block

The Empowered Group of Ministers (EGoM) constituted on 13th August 2007 to examine and decide the issue of gas pricing and commercial utilization of gas under New Exploration & Licensing Policy (NELP) has taken the following decisions, with regard to gas pricing under the Production Sharing Contracts (PSCs), in its meeting held today.

The EGoM observed that it will not be in the country's interest to renege from the contractual provisions under the PSCs entered into in good faith under the New Exploration & Licensing Policy (NELP). Sanctity of the signed, legally binding contracts should be maintained.

The EGoM decided that the price basis / formula submitted by M/s. Reliance Industries Limited (RIL) and Niko Resources Limited (NRL), may be accepted with modifications as per the recommendations of the Prime Minister's Economic Advisory Council (EAC), including denomination of the entire formula in US dollars. For all NELP-I to NELP-VI contracts, for natural gas price calculation, the constant will be pegged at US $ 2.50/MMBTU. The EGoM observed that since 'C' was the only biddable component in the submitted formula, assigning a value of '0' (zero) to this component would also address the transparency aspect of the bidding process. It may be recalled that M/s. RIL had proposed the value of 'C' at Rs.4/MMBTU whereas the fertilizer units had bid a low of Rs.1/MMBTU for 'C'.

The EGoM also decided that the cap for price of crude in the variable portion of the formula would be frozen at US$ 60/barrel instead of US$ 65/barrel, as proposed by M/s. RIL-NRL. This would in turn translate into a lower consumer price by reduction in the ceiling of the crude price.

This price basis / formula will be valid for five years from the date of commencement of first commercial production and supply.

The price discovery process on arms-length basis will be adopted in the future NELP contracts only after the approval of the price basis / formula by the Government. The price discovered through this process would be applicable to all the sectors uniformly.

The decisions taken in today's EGoM meeting will be without prejudice to the NTPC vs. RIL and RNRL vs. RIL Court cases, which are at present sub judice.

The Production Sharing Contract between the Government of India and Reliance Industries Limited (RIL) and Niko Resources Limited (NRL) with respect to contract area identified as block KG-DWN-98/3 was signed on the 12th of April 2000. The application for approval of gas price basis / formula was submitted by RIL on 18th of May 2007. Gas production from this block is likely to commence from July 2008. Initial estimated production is 40 MMSCMD, with projected plateau rate of production at 80 MMSCMD, which will almost double the domestic gas production in the country. The decision of the EGoM will dispose the application submitted by M/s. RIL-NRL regarding approval of their gas price basis / formula.

The EGoM was chaired by the Minister for External Affairs Shri Pranab Mukherjee, and comprised Minister of Power Shri Sushilkumar Shinde, Minister of Chemicals & Fertilizers and Minister of Steel Shri Ram Vilas Paswan, Minister of Finance Shri P. Chidambaram, Minister of Law & Justice Shri H.R. Bharadwaj, Minister of Petroleum and Natural Gas Shri Murli Deora, Minister of Corporate Affairs Shri Prem Chand Gupta and Shri Montek Singh Ahluwalia, Deputy Chairman, Planning Commission.

The above decision of the EGoM will lead to a gas price of US$ 4.20 per MMBTU at delivery point which translates into a price of Rs.172.20 per MMBTU at the prevailing Indian Rupee-US dollar exchange rate. The approved price is 8.32% lower than the price proposed by the contractors.

The EGoM, in the course of its deliberations, considered all relevant materials including the report of the Cabinet Secretary, and the report of the Chairman, Economic Advisory Council (EAC) of the Prime Minister. The EGoM will take up issues relating to commercial utilization of gas under NELP in due course.

MINISTRY OF PETROLEUM AND NATURAL GAS NEW DELHI SEPTEMBER 12, 2007/BHADRAPADA 21, 1929