Wants cap on new price formula, moots revenue sharing to curb gold-plating

After having approved a doubling of the existing gas price to $8.4 per mmbtu on June 28, the Finance Ministry has woken up to the fact that private gas producers like Reliance Industries Ltd are likely to reap windfall gains from the new pricing formula.

In a formal note, the ministry has now asked the Petroleum and Natural Gas Ministry to take appropriate steps to ensure that the Mukesh Ambani-owned RIL receives only the old price until such time it delivers the shortfall it was contractually obliged to supply from its KG D6 field but failed to, citing ‘technical difficulties.’

The Finance Ministry note appends two media reports, including The Hindu’s editorial of June 29 (‘A very reliable formula’), which proposed a number of measures to keep Reliance’s windfall gains in check.

Referring to the price for gas from the KG D6 block, the July 5 note of the ministry’s Department of Expenditure, endorses verbatim several of The Hindu’s suggestions: ``Once RIL overcomes the ‘technical difficulty’ of producing gas at the KG D6 field, the government must ensure the company delivers the shortfall it still owes at the old price of $4.2 rather than getting the benefit of the new price.’’

RIL is presently producing 14 mmscmd of gas from its KG D6 field against the contracted production of 80 mmscmd for the current year, adversely impacting power, fertilizer, LPG, piped natural gas and other industrial sectors.

The Finance Ministry has also backed the editorial’s suggestion that there be a cap under the new pricing formula: “It cannot be that gas producers will reap unlimited gains in the case of an upswing in global prices; any upside has to be capped,” its note states. “The government must also subject gas producers to closer regulation, especially on the aspects of cost recovery and technical parameters related to production,” it adds.

Citing the important recommendation of the Rangarajan Committee – of moving to a revenue sharing agreement with gas producers – the Finance Ministry asks the Petroleum Ministry to work in this direction.

In addition, the ministry, with the approval of Finance Minister P. Chidambaram, has told the Petroleum Ministry that the ongoing issues with RIL – which will benefit the most from the new $8.4 per mmbtu price – over cost recovery and penalties for not meeting contracted output levels need to be taken to their logical conclusion.

The government and RIL are locked in arbitration proceedings over the issue. The Petroleum Ministry has been hit by allegations that it was trying to derail the arbitration proceedings against RIL by deliberately going slow on the issue of cost recovery and penalty proceedings. The Petroleum Ministry had slapped a $1.1 billion cost recovery notice on RIL for its failure to complete the works programme and fulfil the contracted quantity of gas production in the KG D6 field during 2011-12 against which RIL had gone into arbitration proceedings.

Setting the agenda for the Petroleum Ministry, the Finance Ministry has asked the former to urgently furnish a copy of its Production Sharing Contracts (PSCs) in respect of blocks/fields from which natural gas is being produced through private contractors; field wise information on the steps taken by the Management Committee (MC) to supervise the issues related to technical parameters of various fields and cost recovery. In respect of the KG D6 field, it has sought year wise information on the production targets set out in annual plans approved by MC while allowing investment approvals (including investments approved till date vis-à-vis output promised/delivered in lieu thereof).

The CCEA, during its June 28 meeting, had approved doubling of gas prices from the present rate of $4.2 mmbtu. However, a few days later, the Petroleum Ministry came out with a gas guidelines note stating that the Rangarajan formula would be followed for gas pricing from April 2014.

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