Reliance spurts as cabinet okays doubling price for KG-D6 gas

Shares of Reliance Industries gained about 2.7 per cent on the Bombay Stock Exchange in morning trade, after the Cabinet Committee on Economic Affairs (CCEA) on Thursday announced its decision to allow the company to sell gas produced from the KG-D6 block, off India's east coast, at double the current price beginning April 2014.

The CCEA also decided to maintain the gas price formula suggested by the Rangarajan Committee and approved by the cabinet earlier (See: Cabinet okays RIL D6 gas price hike against cash guarantee).

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 $8.4 per mmBtu, from $4.2 per mmBtu at present.

The finance ministry wanted certain changes in the approved formula by excluding liquefied natural gas (LNG) purchases from the spot market, which it said was highly volatile. After excluding spot purchases, the new gas price should be $8.1.

Under the approved price formula, prices of natural gas will be revised every quarter based on the average of the past four quarters, with a gap of one quarter.

The union cabinet on Thursday cleared the petroleum ministry's proposal to allow Reliance Industries to double the price of natural gas from April 2014, upon the firm giving a bank guarantee to cover its liability.

The bank guarantee, which will be equivalent to the incremental revenue that RIL will get from the new gas price, is estimated at around $9 billion.

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 had urged caution on the part of the petroleum ministry in allowing RIL a higher gas price.

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

Government will have the right to encash the bank guarantee if it is proved that the company deliberately suppressed production at the main Dhirubhai-1 and 3 (D1&D3) fields in the KG-D6 block since 2010-11 to profit later.

RIL and its associates, BP and Canada's Niko Resources, will make a bumper profit once they scale up gas production at the KG-D6 block and the government fails to prove RIL deliberately suppressed production or hoarded gas for profiteering.

The finance ministry had also sought to know if government position on reasons for fall in gas output at KG-D6 will be diluted by accepting bank guarantee.

RIL, however, attributes the 80 per cent drop in production at the prolific gas field to non-drilling of committed wells, some geological complexities and lower than anticipated reserves.

The issue in currently under arbitration and may linger for an indefinite period, the finance ministry feels.