Govt plans to bolster RIL bank guarantee with supplementary agreement

Faced with rising criticism of the government playing into the hands of the oil industry lobby led by Mukesh Ambani's Reliance Industries Ltd (RIL), the ministry of petroleum and natural gas announced plans to expand the scope for encashment of the bank guarantee that RIL will provide to enjoy the increased price of natural gas through the introduction of a supplementary agreement to the bank guarantee.

The supplement to the bank guarantee extends the scope of the agreement to any ''incidental legal proceedings'', if decided in favour of the government, instead of just restricting it to the ongoing arbitration between RIL and the government.

The move is aimed at fighting criticism that besides disproportionately raising the price of gas for RIL, the government has deliberately been limiting the scope of recovery to favour Reliance Industries despite the latter's failure to reverse or even control the steep decline in output from KG-D6 gas block.

The ministry is getting the revised agreement along with response of Reliance Industries legally vetted to make it fool-proof, according to official sources.

While this may help resist the criticism of the government deliberately trying to lose its fight with RIL, the government has tried to ignore criticism that even the $4.22 per million British thermal units currently being paid for KG-D6 gas is way above the less than $1 RIL spends on the recovery of one mmBtu of natural gas from the gas block.

For the government, the move is aimed at protecting itself from any future political backlash on account of the production profile of the KG-D6 block, but the company fears this creates an unnecessary conflict in an otherwise clear legal contract.

RIL, however, objects to the supplementary agreement over the expansion of its scope and restricting it to the Indian company, and not its partners.

The supplement agreement holds only RIL responsible for the bank guarantee, not its foreign partners in the block - BP and Niko.

For the bank guarantee, the effective rate would be the actual daily output multiplied by the difference between the current price and the new proposed price, effective 1 April.

The current output from D-1 and D-3 fields of the block is 13 million standard cubic metre and the existing price of $4.2 per mmBtu of gas is proposed to be raised to around $8.22 per unit.

Meanwhile, Supreme Court advocate Prashant Bhushan, representing NGO Common Cause, said the government's decision should be stayed at least for a few months so that the new regime after the elections, which will bear the consequences of higher gas prices, can look at the matter afresh.

Bhushan had earlier filed a petition challenging higher gas rates. It was listed for March 4 but it could not be taken up. The case will now be heard on 24 March.

The NGO had said in a statement that RIL had written to the directorate general of hydrocarbons on 22 May 2009 giving its cost calculations which show that the cost of production is less than $1 per mmBtu.