$5 for RIL gas: Fertilizer sector

Fertilizer sector on Friday sought gas supplies from Reliance Industries's KG-D6 block at no more than 5 dollars per million British thermal unit, even as the power sector nudged the government to take its share of gas in kind.

Ministry of fertilizer in a presentation to the Committee of Secretaries, constituted to resolve the pricing imbroglio, said the price of gas should not be more than 5 dollars per mBtu delivered at any fertilizer plant in the country, officials said.

Reliance has proposed a pricing formula as per which gas would be delivered in Andhra Pradesh, Maharashtra and Gujarat at a price between 5.2 to 6.2 dollars per mBtu depending on the distance from the gas field and taxes.

The fertilizer ministry said if gas is priced at 4.33 dollars per mBtu at the wellhead (as sought by RIL), the incremental fertilizer subsidy would be 7.4 billion dollar. But Oil Ministry disputed the incremental subsidy, saying replacing naphtha (costing 15.31 dollars per mBtu), fuel oil (9.36 dollars per mBtu) and LNG (7.91 dollars per mBtu) in fertilizer plants could alone save Rs 6,400 crore (Rs 64 billion) in subsidy.

It argued that a low gas price of 2.5 dollars would reduce the government's share in gas production from KG-D6 to 1.2 billion dollars and royalty to 1.6 billion dollars. At 4.5 dollars, the profit share jumps to 9.6 billion and royalty to 2.9 billion, enough to meet the incremental subsidy.

Power Ministry said electricity would cost Rs 5.10 per unit at RIL price. But the oil ministry countered this, saying power sector had loaded Rs 2.2 per unit for transmission and distribution cost and losses, which were power sector's inefficiencies being loaded on fuel price.

Oil ministry also said power generation at RIL gas price would be less than Rs 2.50 per unit and not Rs 2.90 as projected by power ministry. The CoS, comprising secretaries of petroleum, power, fertilizer, expenditure and law, will next week call gas producers RIL and Oil and Natural Gas Corp, to make separate presentations on pricing of gas. On demands of government taking its share of output in kind, the oil ministry felt the quantities would vary from year to year depending on the investment made.

Besides, it would require government to make investment in infrastructure facilities synchronous to RIL's facilities. Officials said government's share in gas output will be only 0.4 million standard cubic meters per day out of the initial production of 40 mmscmd in first year. This rises to 23 mmscmd in 5-6 years.

The ministry said it would be very difficult for contractors to tie up markets or consumers as the quantum of gas of both the contractors and the government, if marketed separately, will be more uncertain. Undertaking total sale of the entire quantum of gas helps the contractor to realise better value and stable gas sales contracts due to larger volumes, officials said.

The option to take profit gas in kind by the government may be perceived as unfriendly and may deter inflow of investment in the E&P sector, especially for gas due to governmental interface at the production and sale stages.

As per estimates, there could be wide variation in the government share of profit in petroleum on a year-to-year basis and the government nominee may be forced to sell substantial volume of gas on spot basis leading to sub-optimal realisation of gas price.