RIL shouldn't profiteer from gas price hike, says finance ministry

It is too early to rejoice for India's explorers over the recent decision to double the price of domestically produced gas, as the finance ministry has sought a temporary cap on the price hike amid widespread criticism of the move.

The union cabinet had approved a doubling of natural gas price in the country to $8.4 per million metric British thermal unit (mmBtu) from April next year; but now has written to the petroleum ministry asking it to hold the decision in abeyance.

In particular, Reliance Industries Ltd, which operates India's biggest gas find in the Krishna-Godavari offshore field, has been asked to continue selling gas from the KG field at the current rate of $4.2 per mmBtu till it reaches the level of production it had promised earlier.

''Once Reliance overcomes the technical difficulties of producing gas at the KG-D6 field, the government must ensure the company delivers the shortfall it still owes at the old price of $4.2 rather than getting the benefit of the new price,'' the finance ministry's letter said.

While this is a blow to producers like RIL and the state-owned Oil & Natural Gas Corp (ONGC) and Oil India Ltd (OIL), it will help fertiliser makers and power producers, who were allocated several million units of gas from the KG D6 fields which have yet to materialise.

The note approved by finance minister P Chidambaram has asked the petroleum ministry to act on concerns about the gas price hike raised in the media. "The issues raised therein, as listed below, may be examined for appropriate action," it said.

Gas output from the K-G D6 block, for which RIL has roped in Britain's BP Plc as junior partner, has fallen below 15 million metric standard cubic metres a day (mmscmd) from a peak of 60 mmscmd achieved in 2010. It was supposed to rise to 80 mmscmd.

Reliance and BP say output dropped because of geological complexity but the oil ministry, when Jaipal Reddy was the minister, said output fell because the company did not drill the required number of wells. This prompted the ministry to block the recovery of part of the development cost of the fields. The matter is now under arbitration.

The finance ministry referred to this dispute in its list of issues raised by the media. "The ongoing issues with Reliance, which will benefit the most from the higher prices now, over cost recovery and penalties for not meeting contracted output levels, need to be taken to their logical conclusion."

The finance ministry also said the demand to put a limit on the gas price under the formula should be examined to prevent unlimited gains for gas producers in case of an upswing in global prices. It also raised the issue of closer regulation of technical issues in gas production and recovery of costs, in an apparent reference to Reliance's dispute.

Gas prices were raised in line with the recommendations of the Rangarajan Committee, which suggested a formula that takes into account international benchmarks in Europe, Japan and the US as well as the cost of LNG being imported by India.

The Rangarajan committee had also recommended an end to the system of oil companies recovering their development costs from the revenue of a field before sharing profits with the government.

The current system is at the heart of the dispute between Reliance and the government.