Oil ministry weighs $9-bn bank guarantee by RIL against gas price hike

The ministry of petroleum is likely to insist on bank guarantees of up to $9 billion by Reliance Industries Ltd (RIL) in lieu of the government allowing it to sell gas produced from the KG-D6 block off the east coast of India at double the price.

But, with gas production from the once prolific D6 block falling further to 10 million British thermal units from 12 mmBtu last year, the finance ministry is said to have urged caution on the part of the petroleum ministry in allowing RIL a higher gas price.

The petroleum ministry has proposed $9 billion in bank guarantees by RIL for the government to approve a proposal for an increase in the price of natural gas and break the deadlock.

The government had, in June, approved the Rangarajan formula doubling the price of all domestically produced natural gas from April 2014. Under the formula, the base price of natural gas produced in the country will double to $8.6 per mmBtu, from $4.2 per mmBtu at present (See: Chidambaram defends gas price hike decision)

But, amidst criticism from other ministries and several other quarter, the ministry of petroleum had said it would amend the natural gas pricing guidelines. However, it is yet to announce the amended pricing formula for natural gas.

While giving an in-principle nod for the gas price hike proposal, the finance ministry has asked the ministry of petroleum and natural gas to adopt a cautious approach while extending the higher gas price benefit to Reliance Industries against a bank guarantee.

It has asked the petroleum ministry to examine the pros and cons of the price hike in a scenario in which the arbitration case with RIL lingers on and consider the likely course of action if the company fails to fulfil its bank guarantee obligations.

The bank guarantee proposal, however, could dilute the government stand in the arbitration with the RIL, the finance ministry avers.

The bank guarantee proposal was mooted by the company itself as a way out of the deadlock as the price hike plan continued to drag amidst allegations of the company manipulating an artificial fall in gas production.

Petroleum secretary Vivek Rae told reporters on the sidelines of the 12th Petro India conference in Delhi that the petroleum ministry has received comments from the finance ministry on the draft cabinet note floated on the KG-D6 gas pricing issue. He did not elaborate.