The price revision could benefit RIL by $8 billion

The PMO's decision to back the demand by Reliance Industries Limited (RIL) for upward revision of KG-D6 gas prices has divided both the government and energy stakeholders, with the Petroleum Ministry and the Association of Power Producers (APP) remaining strongly opposed to the move before the scheduled 2014 deadline.

Any hike in prices before then, the latter say, is likely to benefit the Mukesh Ambani-owned RIL by around $8 billion and sharply increase the government's subsidy bill.

The Prime Minister's Office has referred RIL's demand for gas price revision to the Petroleum and Natural Gas Ministry despite the latter's earlier refusal to tinker with the 2014 date, suggesting that legal opinion on the issue be sought and placed before the Empowered Group of Ministers (EGoM) headed by Finance Minister, Pranab Mukherjee.

``It is very difficult to understand why the PMO should be pitching for private interest instead of the larger public interest. There is clearly a design to benefit the private sector at the cost of the exchequer and the consumers,'' an official in the Petroleum Ministry said. ``It is unfortunate that instead of addressing [the] substantive issues raised by me, the PMO has gone ahead and sought a legal opinion on the gas price revision,'' said Communist Party of India (Marxist) MP Tapan Sen, who has often raised questions about RIL's KG-D6 gas operations in Parliament.

The Petroleum Ministry has frequently gone on record – the latest was in January and March this year -- that there is no case for gas price revision as such a move would put an additional burden of nearly $8 billion on the exchequer and consumers. It has also maintained that the current price of $4.2/mmBtu for KG-D6 gas was valid till February 2014 and would come up for revision only at that time.

“The Petroleum Ministry has communicated to the PMO as well as the Law and Justice Ministry that there are no legal grounds or financial justification for revision of gas prices at this juncture and the matter should be treated as closed. Any revision will drastically impact a number of sectors including fertilizers, power and textiles and result in massive cost escalation for consumers. But the PMO is adamant on [this],'' a senior Ministry official said.

RIL wants the gas price hiked from the current $4.20/mmBtu to $14.20/mmBtu. According to ministry calculations, this would result in an approximately $8 billion increase in revenue for the company in the next two years while the increase in petroleum profit for the Government would only be $0.438 billion. The higher price would also burden the exchequer by $8 billion as power tariffs go up and fertilizers become costlier, inflating the subsidy bill. The current price was fixed by the EGoM in 2007 for a five-year period from the date of commencement of gas supply.

Interestingly, the APP has also warned that RIL's demand for a gas price hike would push up electricity prices by 50 paise per unit for every dollar increase in gas price.

“No consideration should be given for increasing the price of natural gas from the current rate of $4.2 per million British thermal unit (mBtu),'' it has stated in a representation to the Petroleum Ministry and EGoM. “This would make the fuel unaffordable to the power sector,'' APP Director General Ashok Khurana said.