CCEA lets RIL hike gas price after bank guarantee

Tags: News
The Union cabinet on Thursday allowed Reliance Industries (RIL) to virtually double its gas price to about $8.2 per million British thermal unit (mBtu) from April 1, 2014 with the rider that the firm gave a bank guarantee to cover its liability if the gas-hoarding charges against it are proved.

The pricing is based on the Rangarajan committee formula. The increase in gas price will in all likelihood lead to a steep increase in power tariffs for customers across the board.

The cabinet committee on economic affairs (CCEA), chaired by prime minister Manmohan Singh, provided a big relief to RIL by not stipulating any upper cap on gas price as per the new formula.

No floor price will be applicable to gas sold from D1 & D3 gas fields in Krishna Godavari (KG) basin under control of RIL.

As per the Rangarajan formula, beginning April 1, all domestic gas will be priced at an average of international hub prices and the cost of LNG imported into India.

The price will change quarterly, based on the previous one-year average. So, the final price charged to consumers could go beyond $8.4 or fall below it based on variations in international prices.

The CCEA rejected the finance ministry proposal that an upper cap be stipulated on gas price to ensure that RIL does not resort to arbitrary price hikes.

The cabinet panel also rejected the finance ministry proposal to exclude liquefied natural gas (LNG) purchases while computing the new gas price formula. Volatility in LNG price globally had been cited as the reason for this exclusion.

RIL has been asked to provide bank guarantees that would be in force till an international court of arbitration gives its final ruling on whether RIL has willfully violated contractual obligations on 80 per cent of committed gas output or resorted to hoarding.

Oil minister Veerappa Moily said there would be no cap on spot price charged by RIL for gas produced from the D1 & D 3 fields of KG basin.

As per the CCEA condition, RIL will have to offer $135 million every quarter as guarantee to charge its customers higher spot price. These guarantees as per finance ministry could go up to $9 billion.

The bank guarantee will cover the difference between the current gas price of $4.2 per million British thermal units and $8.4 per million Btu that will come into effect from April 1.

According to oil ministry officials, the government will work out a supplementary agreement with RIL reflecting the new pricing formula shortly.

The nodal ministry will also notify the new pricing formula immediately allowing ONGC and OIL, the two state-owned companies, to charge higher gas price beginning April 1 next year.

With regard to RIL, the bank guarantee was insisted on as gas production from the D1 and D3 fields fell to less than 10 million standard cubic metres per day from the peak of 54 mmscmd in March 2010.

Production was lower than target since the second half of fiscal 2010-11 and it should have been 80 mmscmd as per the 2006 investment plan.

Output from the MA (Mukesh Ambani) oil and gas field in the KG-D6 block, too, has fallen over 62 per cent. However, the ministry and the oil regulator, Directorate General of Hydrocarbons (DGH), have agreed with RIL’s reasoning of geological complexities that stymied its planned output.

On the bourses, RIL shares settled lower at Rs 854.55, down 0.48 per cent. This was comparatively better than other oil & gas stocks that fell between one per cent and 2.60 per cent for the day. The stock has risen 1.84 per cent year-to-date in comparison with a 0.73 per cent decline in the BSE oil & gas index.

(With inputs from Amit Mudgill)

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