Power, fertiliser firms may run dry of KG gas

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RIL may halt supply after March 31 if price not revised in new contracts; govt subsidies to rise

Power, fertiliser firms may run dry of KG gas
Power and fertiliser companies sourcing gas from Reliance Industries (RIL) may face supply disruptions after their existing contracts end on March 31. If that happens, these firms may be forced to go for imported gas at around $13-$14 per million metric British thermal unit (mmBtu), double the price the government has cleared in the recent revision.

This, in turn, will raise the subsidy bill for the government, as the latest guidelines require it to subsidise gas price for fertiliser companies in the initial few years.

An industry official close to the development told Financial Chronicle that RIL might discontinue supply unless the gas price was fixed for the next term under the new norms. “The new gas price has not been notified yet and nothing has been communicated either. If things do not work out by March 31, RIL will discontinue supplies to its clients,” the sources said.

The Mukesh Ambani firm has been fighting allegations of hoarding gas over the past two years, ever since production from its KG-D6 block dropped to around 12 million metric standard cubic metres per day (mmscmd).

The government has slapped penalties on RIL for falling short of target in KG-D6 gas production, but the Ambani firm has gone for arbitration. The oil ministry has sought a legal opinion to ascertain if British energy giant BP and Canada’s Niko — RIL’s partners in the KG block — also are party to the arbitration.

Satish Chander, director-general of Fertiliser Association of India, said the government was in talks with the fertiliser companies to fix the price and decide allocations. “Once that happens, RIL will be asked to allocate gas on a priority basis to the fertiliser, power and other sectors. In case it does not happen by the fixed date, the companies will have to buy gas at the available market price from other sources.”

The fertiliser industry consumes around 54 mmscmd gas at present, of which 31.5 mmscmd flows in from domestic sources and the remaining 23 mmscmd from imports. Large capacities come from GAIL, which sources gas from the US, Europe and Australia.

Shubhranshu Patnaik, senior director with Deloitte in India, said the real issue would be with the fertiliser and power companies while the price has already been market-linked in the case of city gas distribution firms.

“As per the latest guidelines, the gas price for the fertiliser companies will be subsidised by the government in the initial few years. Hence, it will increase the burden on the government as its subsidy bill will go up,” Patnaik said.

RG Rajan, chairman and managing director of Rashtriya Chemicals and Fertilisers (RCF), recently said if the gas price was doubled to $8.4/mmbtu, RCF’s subsidy burden would go up by around Rs 1,400 crore a year. The current outstanding subsidy from the government is Rs 1,500 crore.

The power capacity that relies on gas supplies is around 14,000 mw, but most of the plants are running at 23 per cent of their plant load. Patnaik said he saw reasons in sourcing gas at $8.4 per mmBtu instead of relying on alternative fuels such as diesel and RLNG, which would be costlier.

Some officials in the fertiliser business argued that RIL was making enough netbacks (unit-wise profits multiplied by total sales) from the KG field and recovered the cost it incurred of around $5.8 billion. “Hence there should not be any hike in RIL’s gas price for the KG-D6 block,” said one official.

RIL’s total investment in the field is reported to be $5.8 billion, or Rs 40,000 crore (at the exchange rate of Rs 45 to the dollar). This was meant to support 80 mmscmd gas output and 20 million barrels of oil & NGL or condensate production.

“Even though production has declined since late 2011 to about one-third of planned output, the total netback earned has already reached about $8.1 billion. It appears that the KG-D6 field is still generating enough revenues and netbacks to recover the investments made. Had the output been at the levels originally envisaged, the revenues would have been three times higher, and yielded exceptionally strong returns. The problem for the contractors was that the output was only one-third of what they had invested for,” said the official quoted above. He preferred anonymity.

He pointed out that RIL had also recovered around Rs 32,000 crore by way of selling a 30 per cent stake to BP.

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