Setback for RIL's gas pricing freedom dream

India currently produces around 90 mmscmd of gas, hardly meeting 40 per cent of the needs.

In a setback to Reliance Industries, the government on Friday said the decision to allow market prices for undeveloped gas discoveries will not apply to the company's finds in KG-D6 block unless it withdraws legal suit over gas pricing.

The Cabinet Committee on Economic Affairs chaired by Prime Minister Narendra Modi on Thursday allowed marketing freedom to undeveloped gas discoveries in difficult areas subject to a cap.

This freedom "will be applicable to existing discoveries where arbitration/litigation exists directly on gas price, only after conclusion/withdrawal of such arbitration/litigation," said U P Singh, Additional Secretary in the Oil Ministry in a presentation to media on Cabinet decision.

While he did not elaborate, another ministry official said RIL will have to withdraw arbitration it filed in May 2014 challenging government authority to fix gas price.

"We are not saying that RIL has to withdraw all arbitrations but the one challenging gas pricing guidelines will certainly has to be withdrawn before it can get benefit of the decision," he said.

Besides the arbitration on gas price, RIL has slapped arbitration over disllowance of $2.3 billion as KG-D6 output lagged targets.

Another one challenges ministry's decision to take away 814 square kilometer of eastern offshore KG-D6 area that contained five gas discoveries.

The company had its partners BP Plc of UK and Canada's Niko Resources had in May 2014 initiated an arbitration over delay in implementing the revision of natural gas prices.

Interestingly, BP is not part of the arbitration over taking away of area after ending of contractual deadline.

Asked about the decision, Oil Minister Dharmndra Pradhan said the decision of the Cabinet is very clear.

"Gas discoveries getting the benefit should be unencumbered of any legal case. Either arbitrations or legal cases should have ended or withdrawn for getting the benefit of the decision."

RIL has more than half a dozen undeveloped discoveries with about 3 trillion cubic feet of reserves in KG-D6.

Field development plans for five of them has already been approved and is awaiting start of work.

In the gas price arbitration, RIL said it was entitled to get a new rate from April 1, 2014 after expiry of the five year term of $4.205 per million British thermal units rate.

The previous United Progressive Alliance government had in June 2013 approved a formula linked to global benchmarks, potentially doubling rates to $8.4 per mmBtu from April 1, 2014.

The Election Commission, however, in March 2014 asked government to defer an increase until the completion of Lok Sabha elections.

The new National Democratic Alliance government then put the previous decision of

the UPA government on hold and in October 2014 announced a new gas pricing formula that led to rise in rates to $5.61 per mmBtu in November 2014 but have subsequently dropped to $3.82.

The marketing freedom announced yesterday at current rates would cap the rate at $7.08 per mmBtu.

In a series of decisions aimed at attracting investment in the nation's oil and gas industry, the Cabinet on Thursday approved pricing freedom for undeveloped gas discoveries in difficult areas but with a cap, a move that would result in 85 per cent jump in rates to $7.08 per mmBtu at current prices.

The marketing freedom would be subject to a cap which would be lower of the one-year average cost of imported cost of fuel oil, or landed price of liquefied natural gas or weighted average of imported price of coal, fuel oil and naphtha.

Based on 2015 prices, the lowest of these averages comes to $7.08.

Pradhan said the discoveries to be monetised from the decision can add up to 35 million standard cubic meters per day of gas production for 15 years.

India currently produces around 90 mmscmd of gas, hardly meeting 40 per cent of the needs.   

"The policy guidelines (approved on Thursday) would be applicable to future and existing discoveries which are yet to commence commercial production as on January 1, 2016," Singh said.

The decision was expected to lead to monetisation of 6.75 Tcf of gas reserves valued at $28.35 billion (Rs 1.8 lakh crore).

As many as 28 existing discoveries -- 14 of state-owned Oil and Natural Gas Corporation holding 3.2 Tcf of reserves in two blocks, eight finds holding 2.53 Tcf of RIL in two blocks and six finds totaling 1.015 Tcf of Gujarat State Petroleum Corp.

RIL is the operator of the KG-D6 block with a 60 per cent interest, while BP holds 30 per cent and the remainder is with Niko.